<PAGE> 1
MERCANTILE MUTUAL FUNDS, INC.
PROSPECTUS
MARCH 31, 1999
MONEY MARKET PORTFOLIOS
Treasury Money Market Portfolio
Money Market Portfolio
Tax-Exempt Money Market Portfolio
TAXABLE BOND PORTFOLIOS
U.S. Government Securities Portfolio
Intermediate Corporate Bond Portfolio
Bond Index Portfolio
Government & Corporate Bond Portfolio
TAX-EXEMPT BOND PORTFOLIOS
Short-Intermediate Municipal Portfolio
Missouri Tax-Exempt Bond Portfolio
National Municipal Bond Portfolio
STOCK PORTFOLIOS
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
Trust Shares and Trust II Shares
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved any shares of these Portfolios or determined if this
prospectus is truthful or complete. Anyone who tells you otherwise is committing
a criminal offense.
<PAGE> 2
<TABLE>
<S> <C> <C>
RISK/RETURN SUMMARY
LOGO
LOGO
3 Overview
5 Treasury Money Market Portfolio
8 Money Market Portfolio
11 Tax-Exempt Money Market Portfolio
14 U.S. Government Securities Portfolio
17 Intermediate Corporate Bond Portfolio
21 Bond Index Portfolio
24 Government & Corporate Bond Portfolio
28 Short-Intermediate Municipal Portfolio
32 Missouri Tax-Exempt Bond Portfolio
36 National Municipal Bond Portfolio
40 Balanced Portfolio
44 Equity Income Portfolio
47 Equity Index Portfolio
50 Growth & Income Equity Portfolio
53 Growth Equity Portfolio
56 Small Cap Equity Portfolio
59 Small Cap Equity Index Portfolio
61 International Equity Portfolio
64 Additional Information on Risk
YOUR ACCOUNT
LOGO
LOGO
65 Explanation of Sales Price
66 How to Buy Shares
67 How to Sell Shares
68 How to Exchange Shares
68 Administrative Services Fees
68 General Transaction Policies
DISTRIBUTIONS AND TAXES
LOGO
LOGO
69 Dividends and Distributions
70 Taxation
MANAGEMENT OF THE FUND
LOGO
LOGO
72 The Adviser
FINANCIAL HIGHLIGHTS
LOGO
LOGO
73 Introduction
74 Financial Highlights
</TABLE>
2
CONTENTS
<PAGE> 3
<TABLE>
<S> <C>
This prospectus describes Trust Shares and Trust II Shares
of eighteen investment portfolios (the "Portfolios") offered
by Mercantile Mutual Funds, Inc. (the "Fund"). The Fund was
formerly known as The ARCH Fund(R), Inc. On the following
pages, you will find important information about each
Portfolio, including:
- A description of the Portfolio's investment objective
(sometimes referred to as its goal);
- The Portfolio's principal investment strategies (the steps
it takes to try to meet its goal);
- The principal risks associated with the Portfolio (factors
that may prevent it from meeting its goal);
- The Portfolio's past performance (how successful it's been
in meeting its goal); and
- The fees and expenses you pay as an investor in the
Portfolio.
WHO MAY WANT TO INVEST IN The Treasury Money Market Portfolio may be appropriate for
THE PORTFOLIOS? investors who want a way to earn money market returns from
U.S. Treasury obligations that are generally exempt from
state and local taxes. The Money Market Portfolio may be
appropriate for investors who want a flexible and convenient
way to manage cash while earning money market returns. The
Tax-Exempt Money Market Portfolio may be appropriate for
investors who want a way to earn money market returns that
are generally exempt from federal income tax.
The Taxable Bond Portfolios may be appropriate for investors
who seek current income from their investments greater than
that normally available from a money market fund and can
accept fluctuations in price and yield. The Portfolios may
NOT be appropriate for investors who are investing for
long-term capital appreciation.
The Tax-Exempt Bond Portfolios may be appropriate for
investors who are looking for income that is exempt from
federal income tax and who can accept fluctuations in price
and yield. The Missouri Tax-Exempt Bond Portfolio is best
suited to Missouri residents who are also looking for income
that is exempt from Missouri state income tax. The
Portfolios, as well as the Tax-Exempt Money Market
Portfolio, are NOT appropriate investments for tax-deferred
retirement accounts, such as IRAs, because their returns
before taxes are generally lower than those of taxable
funds.
</TABLE>
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RISK/RETURN SUMMARY OVERVIEW
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<TABLE>
<S> <C>
The Stock Portfolios may be appropriate for investors who
seek capital growth over the long term and are comfortable
with the risks of stock markets. The Portfolios may NOT be
appropriate for investors who are investing for short-term
goals or are mainly seeking current income.
Before investing in a Portfolio, you should carefully
consider:
- Your own investment goals
- The amount of time you are willing to leave your money
invested
- How much risk you are willing to take.
THE INVESTMENT ADVISER Mississippi Valley Advisors Inc. ("MVA" or the "Adviser")
serves as the investment adviser to each Portfolio. Founded
in 1987, MVA is a subsidiary of Mercantile Bancorporation
Inc., a regional banking and financial services
organization, and has its main office at One Mercantile
Center, Seventh and Washington Streets, St. Louis, Missouri
63101. As of December 31, 1998, MVA had approximately $9.9
billion in assets under management, including the Fund's
assets, which were approximately $4.3 billion.
An investment in the Portfolios is not a Mercantile Bank
deposit and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government
agency. Although each of the Money Market Portfolios seeks
to preserve the value of your investment at $1.00 per share,
it is possible to lose money by investing in the Portfolios.
You could also lose money by investing in one of the Taxable
Bond, Tax-Exempt Bond or Stock Portfolios.
</TABLE>
RISK/RETURN SUMMARY OVERVIEW
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<PAGE> 5
MONEY MARKET
INSTRUMENTS are
short-term obligations
issued by banks,
corporations, the U.S.
Government and state
and local governments.
Money market
instruments purchased
by the Money Market
Portfolios must meet
strict requirements as
to investment quality,
maturity and
diversification. The
Money Market
Portfolios generally
do not invest in
securities with
maturities of more
than 397 days and the
average maturity of
all securities held by
a particular Money
Market Portfolio must
be 90 days or less.
Prior to purchasing a
money market
instrument for one of
the Money Market
Portfolios, the
Adviser must determine
that the instrument
carries very little
credit risk.
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TREASURY MONEY
RISK/RETURN SUMMARY MARKET PORTFOLIO
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to seek a high level
of current income exempt from state income tax consistent
with liquidity and security of principal.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio invests substantially all (but not less than
65%) of its total assets in money market instruments issued
by the U.S. Treasury and certain U.S. Government agencies
and instrumentalities that provide income that is generally
not subject to state income tax.
PRINCIPAL RISK CONSIDERATIONS
The yield paid by the Portfolio will vary with changes in
interest rates.
Although U.S. Government securities, particularly U.S.
Treasury obligations, have historically involved little
risk, if an issuer fails to pay interest or repay principal,
the value of your investment could decline.
The Adviser evaluates the rewards and risks presented by all
securities purchased by the Portfolio and how they may
advance the Portfolio's investment objective. It is
possible, however, that these evaluations will prove to be
inaccurate.
There's no guarantee the Portfolio will be able to preserve
the value of your investment at $1.00 per share.
</TABLE>
5
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RETURN HISTORY
The bar chart and table on
this page show the
Portfolio's annual returns
and long-term performance,
thereby giving some
indication of the risk of
investing in the Portfolio.
The bar chart shows how the
performance of the
Portfolio's Trust Shares
has varied from year to
year. The table shows the
Portfolio's average annual
returns for one year, five
years and since inception.
Both the bar chart and
table assume reinvestment
of all dividends and
distributions. The
Portfolio's past
performance does not
necessarily indicate how it
will perform in the future.
TREASURY MONEY
RISK/RETURN SUMMARY MARKET PORTFOLIO
TRUST SHARES
YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
[STATED IN PERCENTAGES]
<TABLE>
<CAPTION>
TREASURY MONEY MARKET PORTFOLIO
-------------------------------
<S> <C>
'1992' 3.40
'93' 2.67
'94' 3.55
'95' 5.15
'96' 4.61
'97' 4.71
'98' 4.49
</TABLE>
The returns for Trust II Shares would have
differed from the returns shown in the bar
chart because the two classes bear
different expenses.
Best quarter: 1.31% for the
quarter ending
June 30, 1995
Worst quarter: 0.64% for the
quarter ending
June 30, 1993
AVERAGE ANNUAL TOTAL
RETURNS for the periods
ended December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION*
<S> <C> <C> <C>
Trust Shares 4.49% 4.50% 4.03%
Trust II Shares** 4.52% 4.51% 4.04%
</TABLE>
* December 2, 1991.
** Trust II Shares of the Portfolio commenced operations on November 13,
1998. Average annual total returns for prior periods reflect the
performance of the Portfolio's Trust Shares.
To obtain the Portfolio's current 7-day yield, please call 1-800-452-4015.
6
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<PAGE> 7
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then
sell all of your shares at
the end of those periods.
The example also assumes
that your investment has a
5% return each year and the
Portfolio's operating
expenses remain the same.
Although your actual costs
may be higher or lower,
based on these assumptions
your costs would be:
TREASURY MONEY
RISK/RETURN SUMMARY MARKET PORTFOLIO
FEES AND EXPENSES
<TABLE>
<S> <C> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM THE TRUST TRUST II
PORTFOLIO'S ASSETS) SHARES SHARES
The table on the right shows
the fees and expenses that you pay if
you buy and hold Trust Shares or
Trust II Shares of the Treasury Money
Market Portfolio.
Management Fees .40%(1) .40%(1)
Distribution (12b-1) Fees None None
Other Expenses .56%(1) .31%(1)
Total Annual Portfolio Operating Expenses .96%(1) .71%(1)
</TABLE>
(1) Management Fees, Other Expenses and
Total Annual Portfolio Operating
Expenses for the Portfolio's Trust
Shares and Trust II Shares for the
current fiscal year are expected to be
less than the amounts shown above
because certain of the Portfolio's
service providers are voluntarily
waiving a portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers
and/or reimbursements are being made in
order to keep the annual fees and
expenses for the Portfolio's Trust
Shares and Trust II Shares at certain
levels. MANAGEMENT FEES, OTHER EXPENSES
AND TOTAL ANNUAL PORTFOLIO OPERATING
EXPENSES, AFTER TAKING THESE FEE
WAIVERS AND EXPENSE REIMBURSEMENTS INTO
ACCOUNT, ARE EXPECTED TO BE .35%, .45%
AND .80%, RESPECTIVELY, FOR TRUST
SHARES, AND .35%, .20% AND .55%,
RESPECTIVELY, FOR TRUST II SHARES.
These fee waivers and expense
reimbursements may be revised or
cancelled at any time.
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
TRUST SHARES $98 $306 $531 $1,178
TRUST II SHARES $73 $227 $395 $ 883
</TABLE>
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<PAGE> 8
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to seek current
income with liquidity and stability of principal.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio invests substantially all (but not less than
80%) of its total assets in a broad range of money market
instruments, including commercial paper, notes and bonds
issued by U.S. and foreign corporations, obligations issued
by the U.S. Government and its agencies and
instrumentalities, and obligations issued by U.S. and
foreign banks, such as certificates of deposit, letters of
credit, bankers' acceptances and time deposits.
The Portfolio will only buy a money market instrument if it
has the highest short-term rating from at least two
nationally recognized statistical rating organizations, such
as Standard & Poor's Ratings Group or Moody's Investors
Service, Inc., or only one such rating if only one
organization has rated the instrument. If the money market
instrument is not rated, the Adviser must determine that it
is of comparable quality to eligible rated instruments.
PRINCIPAL RISK CONSIDERATIONS
The yield paid by the Portfolio will vary with short-term
interest rates.
Although credit risk is very low because the Portfolio only
invests in high quality obligations, if an issuer fails to
pay interest or repay principal, the value of your
investment could decline.
The Adviser evaluates the rewards and risks presented by all
securities purchased by the Portfolio and how they may
advance the Portfolio's investment objective. It is
possible, however, that these evaluations will prove to be
inaccurate.
There's no guarantee the Portfolio will be able to preserve
the value of your investment at $1.00 per share.
</TABLE>
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MONEY MARKET PORTFOLIO
RISK/RETURN SUMMARY
8
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<PAGE> 9
RETURN HISTORY
The bar chart and table on
this page show the
Portfolio's annual returns
and long-term performance,
thereby giving some
indication of the risk of
investing in the Portfolio.
The bar chart shows how the
performance of the
Portfolio's Trust Shares
has varied from year to
year. The table shows the
Portfolio's average annual
returns for one year, five
years and since inception.
Both the bar chart and
table assume reinvestment
of all dividends and
distributions. The
Portfolio's past
performance does not
necessarily indicate how it
will perform in the future.
RISK/RETURN SUMMARY MONEY MARKET PORTFOLIO
TRUST SHARES
YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
[STATED IN PERCENTAGES]
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO
----------------------
<S> <C>
'1991' 5.67
'92' 3.30
'93' 2.71
'94' 3.76
'95' 5.55
'96' 4.95
'97' 5.09
'98' 5.02
</TABLE>
The returns for Trust II Shares would have
differed from the returns shown in the bar
chart because the two classes bear
different expenses.
Best quarter: 2.36% for the
quarter ending
June 30, 1989
Worst quarter: 0.66% for the
quarter ending
June 30, 1993
AVERAGE ANNUAL TOTAL
RETURNS
for the periods ended
December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION*
<S> <C> <C> <C>
Trust Shares 5.02% 4.87% 5.50%
Trust II Shares** 5.06% 4.88% 5.50%
</TABLE>
* December 1, 1990.
** Trust II Shares of the Portfolio commenced operations on November 10,
1998. Average annual total returns for prior periods reflect the
performance of the Portfolio's Trust Shares.
To obtain the Portfolio's current 7-day yield, please call 1-800-452-4015.
9
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<PAGE> 10
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then
sell all of your shares at
the end of those periods.
The example also assumes
that your investment has a
5% return each year and the
Portfolio's operating
expenses remain the same.
Although your actual costs
may be higher or lower,
based on these assumptions
your costs would be:
RISK/RETURN SUMMARY MONEY MARKET PORTFOLIO
FEES AND EXPENSES
<TABLE>
<S> <C> <C> <C>
ANNUAL PORTFOLIO OPERATING
EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM TRUST TRUST II
THE PORTFOLIO'S ASSETS) SHARES SHARES
The table on the right shows
the fees and expenses that you pay
if you buy and hold Trust Shares or
Trust II Shares of the Money
Market Portfolio.
Management Fees .40%(1) .40%(1)
Distribution (12b-1) Fees None None
Other Expenses .53%(1) .31%(1)
Total Annual Portfolio Operating
Expenses .93%(1) .71%(1)
</TABLE>
(1) Management Fees, Other Expenses and
Total Annual Portfolio Operating
Expenses for the Portfolio's Trust
Shares and Trust II Shares for the
current fiscal year are expected to be
less than the amounts shown above
because certain of the Portfolio's
service providers are voluntarily
waiving a portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers
and/or reimbursements are being made in
order to keep the annual fees and
expenses for the Portfolio's Trust
Shares and Trust II Shares at certain
levels. MANAGEMENT FEES, OTHER EXPENSES
AND TOTAL ANNUAL PORTFOLIO OPERATING
EXPENSES, AFTER TAKING THESE FEE
WAIVERS AND EXPENSE REIMBURSEMENTS INTO
ACCOUNT, ARE EXPECTED TO BE .35%, .44%
AND .79%, RESPECTIVELY, FOR TRUST
SHARES AND .35%, .19% AND .54%,
RESPECTIVELY, FOR TRUST II SHARES.
These fee waivers and expense
reimbursements may be revised or
cancelled at any time.
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
TRUST SHARES $95 $296 $515 $1,143
TRUST II SHARES $73 $227 $395 $ 883
</TABLE>
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<PAGE> 11
WHAT ARE MUNICIPAL
SECURITIES?
State and local
governments issue
municipal securities
to raise money to
finance public works,
to repay outstanding
obligations, to raise
funds for general
operating expenses and
to make loans to other
public institutions.
Some municipal
securities, known as
private activity
bonds, are backed by
private entities and
are used to finance
various non-public
projects. Municipal
securities, which can
be issued as bonds,
notes or commercial
paper, usually have
fixed interest rates,
although some have
interest rates that
change from time to
time.
logo
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TAX-EXEMPT MONEY
MARKET PORTFOLIO
RISK/RETURN SUMMARY
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to seek as high a
level of current interest income exempt from federal income
tax as is consistent with liquidity and stability of
principal.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio normally invests at least 80% of its total
assets in short-term municipal securities that pay interest
which is exempt from federal income tax. Municipal
securities purchased by the Portfolio may include general
obligation securities, revenue securities and private
activity bonds. General obligation securities are secured by
the issuer's full faith, credit and taxing power. Revenue
securities are usually payable only from revenues derived
from specific facilities or revenue sources. Private
activity bonds are usually revenue obligations since they
are typically payable by the private user of the facilities
financed by the bonds. The interest on private activity
bonds may be subject to the federal alternative minimum tax.
Investments in private activity bonds will not be treated as
investments in municipal securities for purposes of the 80%
requirement stated above.
The Portfolio will only buy a municipal security if it has
the highest short-term rating from at least two nationally
recognized statistical rating organizations, such as
Standard & Poor's Ratings Group or Moody's Investors
Service, Inc., or one such rating if only one organization
has rated the security. If the security is not rated, it
must be determined by the Adviser to be of comparable
quality.
PRINCIPAL RISK CONSIDERATIONS
The yield paid by the Portfolio will vary with changes in
interest rates.
Although credit risk is very low because the Portfolio only
invests in high quality obligations, if an issuer fails to
pay interest or repay principal, the value of your
investment could decline. The ability of a state or local
government issuer to make payments can be affected by many
factors, including economic conditions, the flow of tax
revenues and changes in the level of federal, state or local
aid. Some municipal securities are payable only from limited
revenue sources or by private entities.
The Portfolio is not diversified, which means that it can
invest a large percentage of its assets in a small number of
issuers. As a result, a change in the value of any one
investment held by the Portfolio may affect the overall
value of the Portfolio more than it would affect a
diversified portfolio.
The Adviser evaluates the rewards and risks presented by all
securities purchased by the Portfolio and how they may
advance the Portfolio's investment objective. It is
possible, however, that these evaluations will prove to be
inaccurate.
There's no guarantee the Portfolio will be able to preserve
the value of your investment at $1.00 per share.
</TABLE>
11
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<PAGE> 12
RETURN HISTORY+
The bar chart and table on
this page show the
Portfolio's annual returns
and long-term performance,
thereby giving some
indication of the risk of
investing in the Portfolio.
The bar chart shows how the
performance of the
Portfolio's Trust Shares
has varied from year to
year. The table shows the
Portfolio's average annual
returns for one year, five
years and since inception.
Both the bar chart and
table assume reinvestment
of all dividends and
distributions. The
Portfolio's past
performance does not
necessarily indicate how it
will perform in the future.
TAX-EXEMPT MONEY
MARKET PORTFOLIO
RISK/RETURN SUMMARY
TRUST SHARES
YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
[STATED IN PERCENTAGES]
<TABLE>
<CAPTION>
TAX-EXEMPT MONEY MARKET PORTFOLIO
---------------------------------
<S> <C>
'1991' 4.05
'92' 2.51
'93' 1.98
'94' 2.37
'95' 3.27
'96' 3.00
'97' 3.09
'98' 2.86
</TABLE>
The returns for Trust II Shares would have
differed from the returns shown in the bar
chart because the two classes bear
different expenses.
Best quarter: 1.38% for the
quarter ending
December 31, 1990
Worst quarter: 0.45% for the
quarter ending
March 31, 1994
AVERAGE ANNUAL TOTAL
RETURNS
for the periods ended
December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION*
<S> <C> <C> <C>
Trust Shares 2.86% 2.92% 3.60%
Trust II Shares** 2.89% 2.93% 3.60%
</TABLE>
+ The Portfolio commenced operations on July 10, 1986 as a separate
investment portfolio (the "Predecessor Portfolio") of The ARCH Tax-Exempt
Trust. On October 2, 1995, the Predecessor Portfolio was reorganized as a
new portfolio of the Fund. Prior to the reorganization, the Predecessor
Portfolio offered and sold shares that were similar to the Fund's Trust
Shares. Total returns for periods prior to October 2, 1995 reflect the
performance of the Predecessor Portfolio.
* September 28, 1990.
** Trust II Shares of the Portfolio commenced operations on November 16,
1998. Average annual total returns for prior periods reflect the
performance of the Portfolio's Trust Shares.
To obtain the Portfolio's current 7-day yield, please call 1-800-452-4015.
12
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<PAGE> 13
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then
sell all of your shares at
the end of those periods.
The example also assumes
that your investment has a
5% return each year and the
Portfolio's operating
expenses remain the same.
Although your actual costs
may be higher or lower,
based on these assumptions
your costs would be:
TAX-EXEMPT MONEY
MARKET PORTFOLIO
RISK/RETURN SUMMARY
FEES AND EXPENSES
<TABLE>
<S> <C> <C> <C>
ANNUAL PORTFOLIO OPERATING
EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM TRUST TRUST II
THE PORTFOLIO'S ASSETS) SHARES SHARES
The table on the right shows
the fees and expenses that you pay
if you buy and hold Trust Shares or
Trust II Shares of the Tax-Exempt
Money Market Portfolio.
Management Fees .40%(1) .40%(1)
Distribution (12b-1) Fees None None
Other Expenses .44% .22%(1)
Total Annual Portfolio Operating
Expenses .84%(1) .62%(1)
</TABLE>
(1) Management Fees and Total Annual
Portfolio Operating Expenses for the
Portfolio's Trust Shares and Management
Fees, Other Expenses and Total Annual
Portfolio Operating Expenses for the
Portfolio's Trust II Shares for the
current fiscal year are expected to be
less than the amounts shown above
because certain of the Portfolio's
service providers are voluntarily
waiving a portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers
and/or reimbursements are being made in
order to keep the annual fees and
expenses for the Portfolio's Trust
Shares and Trust II Shares at certain
levels. MANAGEMENT FEES AND TOTAL
ANNUAL PORTFOLIO OPERATING EXPENSES,
AFTER TAKING THESE FEE WAIVERS AND
EXPENSE REIMBURSEMENTS INTO ACCOUNT,
ARE EXPECTED TO BE .35% AND .79%,
RESPECTIVELY, FOR TRUST SHARES.
MANAGEMENT FEES, OTHER EXPENSES AND
TOTAL ANNUAL PORTFOLIO OPERATING
EXPENSES, AFTER TAKING THESE FEE
WAIVERS AND EXPENSE REIMBURSEMENTS INTO
ACCOUNT, ARE EXPECTED TO BE .35%, .19%
AND .54%, RESPECTIVELY, FOR TRUST II
SHARES. These fee waivers and expense
reimbursements may be revised or
cancelled at any time.
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
TRUST SHARES $86 $268 $466 $1,037
TRUST II SHARES $63 $199 $346 $ 774
</TABLE>
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<PAGE> 14
REPURCHASE AGREEMENTS
are transactions in
which a Portfolio buys
securities from a
seller (usually a bank
or broker-dealer) who
agrees to buy them
back from the
Portfolio on a certain
date and at a certain
price.
MORTGAGE-BACKED
SECURITIES are
certificates
representing ownership
interests in a pool of
mortgage loans, and
include those issued
by the Government
National Mortgage
Association ("Ginnie
Maes"), the Federal
National Mortgage
Association ("Fannie
Maes") and the Federal
Home Loan Mortgage
Corporation ("Freddie
Macs").
PORTFOLIO MANAGER
David A. Bethke is the
person primarily
responsible for the
day-to-day management
of the Portfolio. Mr.
Bethke, Senior
Associate, joined MVA
in 1987 and has eight
years of prior
investment experience.
He has managed the
Portfolio since it
commenced operations
in 1988.
logo
logo Q
U.S. GOVERNMENT
SECURITIES PORTFOLIO
RISK/RETURN SUMMARY
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to seek a high rate
of current income that is consistent with relative stability
of principal.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio normally invests at least 65% of its total
assets in debt obligations issued or guaranteed by the U.S.
Government and its agencies, including U.S. Treasury bonds,
notes and bills, as well as in repurchase agreements backed
by such obligations. The Portfolio also invests in
mortgage-backed securities issued by U.S. Government-
sponsored entities such as Ginnie Maes, Fannie Maes and
Freddie Macs. The remaining maturity (i.e., length of time
until an obligation must be repaid) of the obligations held
by the Portfolio will vary from 1 to 30 years.
PRINCIPAL RISK CONSIDERATIONS
The prices of debt securities tend to move in the opposite
direction to interest rates. When rates are rising, the
prices of debt securities tend to fall. When rates are
falling, the prices of debt securities tend to rise.
Generally, the longer the time until maturity, the more
sensitive the price of a debt security is to interest rate
changes. Changes in interest rates may also cause certain
debt securities held by the Portfolio, including
mortgage-backed securities, to be paid off much sooner or
later than expected. In the event that a security is paid
off sooner than expected because of a decline in interest
rates, the Portfolio may be unable to recoup all of its
initial investment and may also suffer from having to
reinvest in lower-yielding securities. In the event of a
later than expected payment because of a rise in interest
rates, the value of the obligation will decrease, and the
Portfolio may suffer from the inability to invest in
higher-yielding securities.
The value of debt securities also depends on the ability of
issuers to make principal and interest payments. If an
issuer can't meet its payment obligations, the value of its
debt securities will fall. Securities issued or guaranteed
by the U.S. Government and its agencies have historically
involved little risk of loss of principal if held to
maturity. Certain U.S. Government securities, such as Ginnie
Maes, are supported by the full faith and credit of the U.S.
Treasury. Others, such as Freddie Macs, are supported by the
right of the issuer to borrow from the U.S. Treasury. Other
securities, such as Fannie Maes, are supported by the
discretionary authority of the U.S. Government to purchase
certain obligations of the issuer, and still others are
supported by the issuer's own credit.
Repurchase agreements carry the risk that the other party
may not fulfill its obligations under the agreement.
The Adviser evaluates the rewards and risks presented by all
securities purchased by the Portfolio and how they may
advance the Portfolio's investment objective. It is
possible, however, that these evaluations will prove to be
inaccurate.
</TABLE>
14
- -
<PAGE> 15
RETURN HISTORY
The bar chart and table on
this page show the
Portfolio's annual returns
and long-term performance,
thereby giving some
indication of the risk of
investing in the Portfolio.
The bar chart shows how the
performance of the
Portfolio's Trust Shares
has varied from year to
year. The table shows how
the Portfolio's average
annual returns for one
year, five years and since
inception compare to those
of a broad-based market
index. Both the bar chart
and table assume
reinvestment of all
dividends and
distributions. The
Portfolio's past
performance does not
necessarily indicate how it
will perform in the future.
KNOW YOUR INDEX
THE LEHMAN BROTHERS
INTERMEDIATE GOVERNMENT
BOND INDEX is an unmanaged
index which tracks the
performance of
intermediate-term U.S.
Government bonds.
U.S. GOVERNMENT
SECURITIES PORTFOLIO
RISK/RETURN SUMMARY
TRUST SHARES
YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
[STATED IN PERCENTAGES]
<TABLE>
<CAPTION>
U.S. GOVERNMENT SECURITIES PORTFOLIO
------------------------------------
<S> <C>
'1992' 14.27
'93' 9.10
'94' -2.44
'95' 15.29
'96' 3.32
'97' 6.68
'98' 6.75
</TABLE>
Best quarter: 5.48% for the
quarter ending
September 30, 1991
Worst quarter: -2.52% for the
quarter ending
March 31, 1994
AVERAGE ANNUAL TOTAL
RETURNS
for the periods ended
December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION*
<S> <C> <C> <C>
Trust Shares 6.75% 5.76% 7.76%
Lehman Brothers Intermediate Government Bond Index 8.49% 6.45% 8.25%
</TABLE>
* February 1, 1991 for Trust Shares; January 31, 1991 for the Lehman Brothers
Intermediate Government Bond Index.
15
- -
<PAGE> 16
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then
sell all of your shares at
the end of those periods.
The example also assumes
that your investment has a
5% return each year and the
Portfolio's operating
expenses remain the same.
Although your actual costs
may be higher or lower,
based on these assumptions
your costs would be:
U.S. GOVERNMENT
SECURITIES PORTFOLIO
RISK/RETURN SUMMARY
FEES AND EXPENSES
<TABLE>
<S> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS) TRUST SHARES
The table on the right shows
the fees and expenses that you pay
if you buy and hold Trust Shares
of the U.S. Government Securities
Portfolio.
Management Fees .45%
Distribution (12b-1) Fees None
Other Expenses .62%(1)
Total Annual Portfolio Operating Expenses 1.07%(1)
</TABLE>
(1) Other Expenses and Total Annual
Portfolio Operating Expenses for the
Portfolio's Trust Shares for the
current fiscal year are expected to be
less than the amounts shown above
because certain of the Portfolio's
service providers are voluntarily
waiving a portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers
and/or reimbursements are being made in
order to keep the annual fees and
expenses for the Portfolio's Trust
Shares at a certain level. OTHER
EXPENSES AND TOTAL ANNUAL PORTFOLIO
OPERATING EXPENSES, AFTER TAKING THESE
FEE WAIVERS AND EXPENSE REIMBURSEMENTS
INTO ACCOUNT, ARE EXPECTED TO BE .22%
AND .67%, RESPECTIVELY, FOR TRUST
SHARES. These fee waivers and expense
reimbursements may be revised or
cancelled at any time.
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
TRUST SHARES $109 $340 $590 $1,306
</TABLE>
16
- -
<PAGE> 17
INVESTMENT GRADE DEBT
SECURITIES are those
of medium credit
quality or better as
determined by a
national rating
agency, such as
Standard & Poor's
Ratings Group (debt
securities rated in
the four highest
rating categories,
i.e. BBB or higher)
and Moody's Investors
Service, Inc. (debt
securities rated in
the four highest
rating categories,
i.e. Baa or higher).
The higher the credit
rating, the less
likely it is that the
issuer of the
securities will
default on its
principal and interest
payments.
AVERAGE WEIGHTED
MATURITY gives you the
average time until all
debt securities in a
Portfolio come due or
mature. It is
calculated by
averaging the time to
maturity of all debt
securities held by a
Portfolio with each
maturity "weighted"
according to the
percentage of assets
it represents.
logo
logo Q
INTERMEDIATE CORPORATE
BOND PORTFOLIO
RISK/RETURN SUMMARY
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to seek as high a
level of current income as is consistent with preservation
of capital.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio normally invests at least 65% of its total
assets in corporate debt obligations. These include
obligations that are issued by U.S. and foreign business
corporations and obligations issued by agencies,
instrumentalities or authorities that are organized as
corporations by the U.S., by states or political
subdivisions of the U.S., or by foreign governments or
political subdivisions. The Portfolio also invests in
obligations issued or guaranteed by U.S. or foreign
governments, their agencies and instrumentalities and in
mortgage-backed securities, including Ginnie Maes, Fannie
Maes and Freddie Macs.
The Portfolio may only purchase investment grade debt
obligations. Under normal market conditions, however, the
Portfolio intends to invest at least 65% of its total assets
in debt obligations rated in one of the three highest rating
categories. Unrated debt obligations will be purchased only
if they are determined by the Adviser to be at least
comparable in quality at the time of purchase to eligible
rated securities. 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. Adviser will attempt to
dispose of the security in an orderly manner, normally
within 30 to 60 days.
In making investment decisions, the Adviser will consider a
number of factors including current yield, maturity, yield
to maturity, anticipated changes in interest rates, and the
overall quality of the investment. The Portfolio's average
weighted maturity will generally be between three and ten
years.
</TABLE>
17
- -
<PAGE> 18
<TABLE>
<S> <C>
PRINCIPAL RISK CONSIDERATIONS
The prices of debt securities tend to move in the opposite
direction to interest rates. When rates are rising, the
prices of debt securities tend to fall. When rates are
falling, the prices of debt securities tend to rise.
Generally, the longer the time until maturity, the more
sensitive the price of a debt security is to interest rate
changes. Changes in interest rates also may cause certain
debt securities held by the Portfolio, including callable
securities and mortgage-backed securities, to be paid off
much sooner or later than expected. In the event that a
security is paid off sooner than expected because of a
decline in interest rates, the Portfolio may be unable to
recoup all of its initial investment and may also suffer
from having to reinvest in lower-yielding securities. In the
event of a later than expected payment because of a rise in
interest rates, the value of the obligation will decrease,
and the Portfolio may suffer from the inability to invest in
higher-yielding securities.
The value of debt securities also depends on the ability of
issuers to make principal and interest payments. If an
issuer can't meet its payment obligations or if its credit
rating is lowered, the value of its debt securities will
fall.
Foreign investments may be riskier than U.S. investments
because of currency exchange rate volatility, government
restrictions, different accounting standards and political
instability.
The Adviser evaluates the rewards and risks presented by all
securities purchased by the Portfolio and how they may
advance the Portfolio's investment objective. It is
possible, however, that these evaluations will prove to be
inaccurate.
</TABLE>
PORTFOLIO MANAGER
David A. Bethke is the
person primarily
responsible for the
day-to-day management
of the Portfolio. Mr.
Bethke, Senior
Associate, joined MVA
in 1987 and has eight
years of prior
investment experience.
He has managed the
Portfolio since it
commenced operations
in 1997.
INTERMEDIATE CORPORATE
BOND PORTFOLIO
RISK/RETURN SUMMARY
18
- -
<PAGE> 19
RETURN HISTORY
The bar chart and table on
this page show the
Portfolio's annual returns
and long-term performance,
thereby giving some
indication of the risk of
investing in the Portfolio.
The bar chart shows the
performance of the
Portfolio's Trust Shares
during the last calendar
year. The table shows how
the Portfolio's average
annual returns for one year
and since inception compare
to those of a broad-based
market index. Both the bar
chart and table assume
reinvestment of all
dividends and
distributions. The
Portfolio's past
performance does not
necessarily indicate how it
will perform in the future.
KNOW YOUR INDEX
THE LEHMAN BROTHERS
INTERMEDIATE
CORPORATE BOND INDEX is an
unmanaged index which
tracks the
performance of
intermediate-term
U.S. corporate bonds.
INTERMEDIATE CORPORATE
RISK/RETURN SUMMARY BOND PORTFOLIO
TRUST SHARES
YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
[STATED IN PERCENTAGES]
<TABLE>
<CAPTION>
INTERMEDIATE CORPORATE BOND PORTFOLIO
-------------------------------------
<S> <C>
'1998' 9.01
</TABLE>
<TABLE>
<S> <C>
Best quarter: 5.33% for the quarter ending
September 30, 1998
Worst quarter: -0.13% for the quarter ending
December 31, 1998
</TABLE>
AVERAGE ANNUAL TOTAL
RETURNS
for the periods ended
December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION*
<S> <C> <C>
Trust Shares 9.01% 8.88%
Lehman Brothers Intermediate Corporate Bond Index 8.29% 8.67%
</TABLE>
* February 10, 1997 for Trust Shares; January 31, 1997 for the Lehman
Brothers Intermediate Corporate Bond Index.
19
- -
<PAGE> 20
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then
sell all of your shares at
the end of those periods.
The example also assumes
that your investment has a
5% return each year and the
Portfolio's operating
expenses remain the same.
Although your actual costs
may be higher or lower,
based on these assumptions
your costs would be:
INTERMEDIATE CORPORATE
BOND PORTFOLIO
RISK/RETURN SUMMARY
FEES AND EXPENSES
<TABLE>
<S> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS) TRUST SHARES
The table on the right shows the fees
and expenses that you pay if you buy
and hold Trust Shares of the Intermediate
Corporate Bond Portfolio.
Management Fees .55%
Distribution (12b-1) Fees None
Other Expenses .64%(1)
Total Annual Portfolio Operating Expenses 1.19%(1)
</TABLE>
(1) Other Expenses and Total Annual
Portfolio Operating Expenses for the
Portfolio's Trust Shares for the
current fiscal year are expected to be
less than the amounts shown above
because certain of the Portfolio's
service providers are voluntarily
waiving a portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers
and/or reimbursements are being made in
order to keep the annual fees and
expenses for the Portfolio's Trust
Shares at a certain level. OTHER
EXPENSES AND TOTAL ANNUAL PORTFOLIO
OPERATING EXPENSES, AFTER TAKING THESE
FEE WAIVERS AND EXPENSE REIMBURSEMENTS
INTO ACCOUNT, ARE EXPECTED TO BE .24%
AND .79%, RESPECTIVELY, FOR TRUST
SHARES. These fee waivers and expense
reimbursements may be revised or
cancelled at any time.
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
TRUST SHARES $121 $378 $654 $1,443
</TABLE>
20
- -
<PAGE> 21
INDEXING is a strategy
whereby a Portfolio
attempts to weight its
securities to match
those of a broadly-
based securities index
in an attempt to
approximate the
index's performance.
THE LEHMAN BROTHERS
AGGREGATE BOND INDEX
is an unmanaged index
made up of Lehman
Brothers'
Government/Corporate
Bond Index, its
Mortgage Backed
Securities Index and
its Asset Backed
Securities Index.
logo
logo Q
BOND INDEX
PORTFOLIO
RISK/RETURN SUMMARY
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to seek to provide
investment results that, before deduction of operating
expenses, approximate the price and yield performance of
U.S. Government, mortgage-backed, asset-backed and corporate
debt securities as represented by the Lehman Brothers
Aggregate Bond Index (the "Lehman Aggregate").
The Portfolio's investment objective can be changed by the
Fund's Board of Directors without shareholder approval.
Shareholders will be given at least 30 days' written notice
before any such change occurs.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio uses an "indexing" strategy through the use of
computer models to approximate the investment performance of
the Lehman Aggregate. The Adviser generally selects
securities for the Portfolio on the basis of their
weightings in the Lehman Aggregate and will only purchase a
security for the Portfolio that is included in the Lehman
Aggregate at the time of such purchase. Because of the large
number of securities listed in the Lehman Aggregate, the
Portfolio cannot invest in all of them. Instead, the
Portfolio holds a representative sample of approximately 100
of the securities in the Lehman Aggregate, selecting one or
two securities to represent an entire "class" or type of
security in the Lehman Aggregate. The Portfolio will invest
substantially all (but not less than 80%) of its total
assets in securities listed in the Lehman Aggregate.
PRINCIPAL RISK CONSIDERATIONS
The prices of debt securities tend to move in the opposite
direction to interest rates. When rates are rising, the
prices of debt securities tend to fall. When rates are
falling, the prices of debt securities tend to rise.
Generally, the longer the time until maturity, the more
sensitive the price of a debt security is to interest rate
changes. Changes in interest rates also may cause certain
debt securities held by the Portfolio, including callable
securities and mortgage-backed securities, to be paid off
much sooner or later than expected. In the event that a
security is paid off sooner than expected because of a
decline in interest rates, the Portfolio may be unable to
recoup all of its initial investment and may also suffer
from having to reinvest in lower-yielding securities. In the
event of a later than expected payment because of a rise in
interest rates, the value of the obligation will decrease,
and the Portfolio may suffer from the inability to invest in
higher-yielding securities.
The value of debt securities also depends on the ability of
issuers to make principal and interest payments. If an
issuer can't meet its payment obligations or if its credit
rating is lowered, the value of its debt securities will
fall.
There is the additional risk that the Portfolio will fail to
match the investment results of the Lehman Aggregate.
</TABLE>
21
- -
<PAGE> 22
RETURN HISTORY
The bar chart and table on
this page show the
Portfolio's annual returns
and long-term performance,
thereby giving some
indication of the risk of
investing in the Portfolio.
The bar chart shows the
performance of the
Portfolio's Trust Shares
during the last calendar
year. The table shows how
the Portfolio's average
annual returns for one year
and since inception compare
to the Lehman Aggregate.
Both the bar chart and
table assume reinvestment
of all dividends and
distributions. The
Portfolio's past
performance does not
necessarily indicate how it
will perform in the future.
BOND INDEX
PORTFOLIO
RISK/RETURN SUMMARY
TRUST SHARES
YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
[STATED IN PERCENTAGES]
<TABLE>
<CAPTION>
BOND INDEX PORTFOLIO
--------------------
<S> <C>
'1998' 8.93
</TABLE>
Best quarter: 6.98% for the
quarter ending
June 30, 1989
Worst quarter: 0.13% for the
quarter ending
December 31, 1998
AVERAGE ANNUAL TOTAL
RETURNS
for the periods ended
December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION*
<S> <C> <C>
Trust Shares 8.93% 9.11%
Lehman Brothers Aggregate Bond Index 8.69% 9.67%
</TABLE>
* February 10, 1997 for Trust Shares; January 31, 1997 for the Lehman
Brothers Aggregate Bond Index.
22
- -
<PAGE> 23
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then
sell all of your shares at
the end of those periods.
The example also assumes
that your investment has a
5% return each year and the
Portfolio's operating
expenses remain the same.
Although your actual costs
may be higher or lower,
based on these assumptions
your costs would be:
BOND INDEX
PORTFOLIO
RISK/RETURN SUMMARY
FEES AND EXPENSES
<TABLE>
<S> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS) TRUST SHARES
The table on the right shows the fees
and expenses that you pay if you buy
and hold Trust Shares of the
Bond Index Portfolio.
Management Fees .30%
Distribution (12b-1) Fees None
Other Expenses .63%(1)
Total Annual Portfolio Operating Expenses .93%(1)
</TABLE>
(1) Other Expenses and Total Annual
Portfolio Operating Expenses for the
Portfolio's Trust Shares for the
current fiscal year are expected to be
less than the amounts shown above
because certain of the Portfolio's
service providers are voluntarily
waiving a portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers
and/or reimbursements are being made in
order to keep the annual fees and
expenses for the Portfolio's Trust
Shares at a certain level. OTHER
EXPENSES AND TOTAL ANNUAL PORTFOLIO
OPERATING EXPENSES, AFTER TAKING THESE
FEE WAIVERS AND EXPENSE REIMBURSEMENTS
INTO ACCOUNT, ARE EXPECTED TO BE .22%
AND .52%, RESPECTIVELY, FOR TRUST
SHARES. These fee waivers and expense
reimbursements may be revised or
terminated at any time.
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
TRUST SHARES $95 $296 $515 $1,143
</TABLE>
23
- -
<PAGE> 24
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to seek the highest
level of current income consistent with conservation of
capital.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio invests substantially all of its assets in a
broad range of debt obligations, including corporate
obligations and U.S. Government obligations. Corporate
obligations may include bonds, notes and debentures. U.S.
Government obligations may include U.S. Treasury obligations
and obligations of certain U.S. Government agencies. The
Portfolio also invests in mortgage-backed securities,
including Ginnie Maes, Fannie Maes and Freddie Macs.
Although the Portfolio invests primarily in the debt
obligations of U.S. issuers, it may from time to time invest
in U.S. dollar-denominated debt obligations of foreign
corporations and governments.
The Portfolio may only purchase investment grade debt
obligations, which are those rated in one of the four
highest rating categories by one or more national rating
agencies, such as Standard & Poor's Ratings Group or Moody's
Investors Service, Inc. Under normal market conditions,
however, the Portfolio intends to invest at least 65% of its
total assets in debt obligations rated in one of the three
highest rating categories. Unrated debt obligations will be
purchased only if they are determined by the Adviser to be
at least comparable in quality at the time of purchase to
eligible rated securities. 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.
In making investment decisions, the Adviser considers a
number of factors including credit quality, the price of the
security relative to that of other securities in its sector,
current yield, maturity, yield to maturity, anticipated
changes in interest rates and other economic factors,
liquidity and the overall quality of the investment. The
Portfolio's average weighted maturity will vary from time to
time depending on current market and economic conditions and
the Adviser's assessment of probable changes in interest
rates.
</TABLE>
logo
logo Q
GOVERNMENT & CORPORATE
BOND PORTFOLIO
RISK/RETURN SUMMARY
24
- -
<PAGE> 25
<TABLE>
<S> <C>
PRINCIPAL RISK CONSIDERATIONS
The prices of debt securities tend to move in the opposite
direction to interest rates. When rates are rising, the
prices of debt securities tend to fall. When rates are
falling, the prices of debt securities tend to rise.
Generally, the longer the time until maturity, the more
sensitive the price of a debt security is to interest rate
changes. Changes in interest rates also may cause certain
debt securities held by the Portfolio, including callable
securities and mortgage-backed securities, to be paid off
much sooner or later than expected. In the event that a
security is paid off sooner than expected because of a
decline in interest rates, the Portfolio may be unable to
recoup all of its initial investment, and may also suffer
from having to reinvest in lower-yielding securities. In the
event of a later than expected payment because of a rise in
interest rates, the value of the obligation will decrease,
and the Portfolio may suffer from the inability to invest in
higher-yielding securities.
The value of debt securities also depends on the ability of
issuers to make principal and interest payments. If an
issuer can't meet its payment obligations or if its credit
rating is lowered, the value of its debt securities will
fall.
Foreign investments may be riskier than U.S. investments
because of currency exchange rate volatility, government
restrictions, different accounting standards and political
instability.
The Adviser evaluates the rewards and risks presented by all
securities purchased by the Portfolio and how they may
advance the Portfolio's investment objective. It is
possible, however, that these evaluations will prove to be
inaccurate.
</TABLE>
PORTFOLIO MANAGER
George J. Schupp is the
person primarily
responsible for the
day-to-day management
of the Portfolio. Mr.
Schupp, MVA's Director
of Fixed Income
Management, joined MVA
in 1983 and has 7 years
of prior investment
experience. He has
managed the Portfolio
since February 1998.
logo
logo Q
GOVERNMENT & CORPORATE
BOND PORTFOLIO
RISK/RETURN SUMMARY
25
- -
<PAGE> 26
RETURN HISTORY
The bar chart and table on
this page show the
Portfolio's annual returns
and long-term performance,
thereby giving some
indication of the risk of
investing in the Portfolio.
The bar chart shows how the
performance of the
Portfolio's Trust Shares
has varied from year to
year. The table shows how
the Portfolio's average
annual returns for one
year, five years and since
inception compare to those
of a broad-based market
index. Both the bar chart
and table assume
reinvestment of all
dividends and
distributions. The
Portfolio's past
performance does not
necessarily indicate how it
will perform in the future.
KNOW YOUR INDEX
THE LEHMAN BROTHERS
AGGREGATE BOND INDEX is an
unmanaged index made up of
Lehman Brothers'
Government/Corporate Bond
Index, its Mortgage Backed
Securities Index and its
Asset Backed Securities
Index.
GOVERNMENT & CORPORATE
RISK/RETURN SUMMARY BOND PORTFOLIO
TRUST SHARES
YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
[STATED IN PERCENTAGES]
<TABLE>
<CAPTION>
GOVERNMENT & CORPORATE BOND PORTFOLIO
-------------------------------------
<S> <C>
'1992' 6.10
'93' 9.39
'94' -2.52
'95' 16.93
'96' 2.14
'97' 8.56
'98' 8.99
</TABLE>
Best quarter: 6.98% for the
quarter ending
June 30, 1989
Worst quarter: -2.71% for the
quarter ending
March 31, 1996
AVERAGE ANNUAL TOTAL
RETURNS for the periods
ended December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION*
<S> <C> <C> <C>
Trust Shares 8.99% 6.61% 7.98%
Lehman Brothers Aggregate Bond Index 8.69% 7.27% 9.08%
</TABLE>
* February 1, 1991 for Trust Shares; January 31, 1991 for the Lehman Brothers
Aggregate Bond Index.
26
- -
<PAGE> 27
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then
sell all of your shares at
the end of those periods.
The example also assumes
that your investment has a
5% return each year and the
Portfolio's operating
expenses remain the same.
Although your actual costs
may be higher or lower,
based on these assumptions
your costs would be:
GOVERNMENT & CORPORATE
RISK/RETURN SUMMARY BOND PORTFOLIO
FEES AND EXPENSES
<TABLE>
<S> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS) TRUST SHARES
The table on the right shows the fees
and expenses that you pay if you buy
and hold Trust Shares of the
Government & Corporate Bond
Portfolio.
Management Fees .45%
Distribution (12b-1) Fees None
Other Expenses .61%(1)
Total Annual Portfolio Operating Expenses 1.06%(1)
</TABLE>
(1) Other Expenses and Total Annual
Portfolio Operating Expenses for the
Portfolio's Trust Shares for the
current fiscal year are expected to be
less than the amounts shown above
because certain of the Portfolio's
service providers are voluntarily
waiving a portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers
and/or reimbursements are being made in
order to keep the annual fees and
expenses for the Portfolio's Trust
Shares at a certain level. OTHER
EXPENSES AND TOTAL ANNUAL PORTFOLIO
OPERATING EXPENSES, AFTER TAKING THESE
FEE WAIVERS AND EXPENSE REIMBURSEMENTS
INTO ACCOUNT, ARE EXPECTED TO BE .21%
AND .66%, RESPECTIVELY, FOR TRUST
SHARES. These fee waivers and expense
reimbursements may be revised or
cancelled at any time.
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
TRUST SHARES $108 $337 $585 $1,294
</TABLE>
27
- -
<PAGE> 28
WHAT ARE MUNICIPAL
SECURITIES?
State and local
governments issue
municipal securities
to raise money to
finance public works,
to repay outstanding
obligations, to raise
funds for general
operating expenses and
to make loans to other
public institutions.
Some municipal
securities, known as
private activity
bonds, are backed by
private entities and
are used to finance
various non-public
projects. Municipal
securities, which can
be issued as bonds,
notes or commercial
paper, usually have
fixed interest rates,
although some have
interest rates that
change from time to
time.
AVERAGE WEIGHTED
MATURITY gives you the
average time until all
debt obligations,
including municipal
securities, in a
Portfolio come due or
mature. It is
calculated by
averaging the time to
maturity of all debt
obligations held by a
Portfolio with each
maturity "weighted"
according to the
percentage of assets
which it represents.
logo
logo Q
SHORT-INTERMEDIATE
RISK/RETURN SUMMARY MUNICIPAL PORTFOLIO
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to seek as high a
level of current income, exempt from regular federal income
tax, as is consistent with preservation of capital.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio normally invests at least 80% of its total
assets in municipal securities that pay interest which is
exempt from federal income tax. Municipal securities
purchased by the Portfolio may include general obligation
securities, revenue securities and private activity bonds.
General obligation securities are secured by the issuer's
full faith, credit and taxing power. Revenue securities are
usually payable only from revenues derived from specific
facilities or revenue sources. Private activity bonds are
usually revenue obligations since they are typically payable
by the private user of the facilities financed by the bonds.
The interest on private activity bonds may be subject to the
federal alternative minimum tax. Investments in private
activity bonds will not be treated as investments in
municipal securities for purposes of the 80% requirement
stated above.
In selecting municipal securities for the Portfolio, the
Adviser favors those sectors of the municipal market that
offer the most favorable returns. The Adviser emphasizes
municipal securities that offer both a high credit quality
rating and a high degree of liquidity. The Adviser also
attempts to maintain a broad geographic diversification for
the Portfolio, with emphasis on no particular state.
The Portfolio will invest only in investment grade municipal
securities. These are securities which have one of the four
highest ratings assigned by a national rating agency, such
as Standard & Poor's Ratings Group or Moody's Investors
Service, Inc., or are unrated securities determined by the
Adviser to be of comparable quality. Short-term municipal
securities purchased by the Portfolio, such as municipal
notes and tax-exempt commercial paper, will have one of the
two highest ratings assigned by a national rating agency or
will be unrated securities that the Adviser has determined
to be of comparable quality. Occasionally, the rating of a
security held by the Portfolio may be downgraded below the
minimum required rating. 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 Portfolio's average weighted maturity will generally be
between two and five years.
</TABLE>
28
<PAGE> 29
<TABLE>
<S> <C>
PRINCIPAL RISK CONSIDERATIONS
The prices of debt securities, including municipal
securities, tend to move in the opposite direction to
interest rates. When rates are rising, the prices of debt
securities tend to fall. When rates are falling, the prices
of debt securities tend to rise. Generally, the longer the
time until maturity, the more sensitive the price of a debt
security is to interest rate changes. Changes in interest
rates may cause certain municipal securities held by the
Portfolio to be paid off much sooner or later than expected.
In the event that a security is paid off sooner than
expected because of a decline in interest rates, the
Portfolio may be unable to recoup all of its initial
investment and may also suffer from having to reinvest in
lower-yielding securities. In the event of a later than
expected payment because of a rise in interest rates, the
value of the obligation will decrease, and the Portfolio may
suffer from the inability to invest in higher-yielding
securities.
The value of debt securities also depends on the ability of
issuers to make principal and interest payments. If an
issuer can't meet its payment obligations or if its credit
rating is lowered, the value of its debt securities will
fall. The ability of a state or local government issuer to
make payments can be affected by many factors, including
economic conditions, the flow of tax revenues and changes in
the level of federal, state or local aid. Some municipal
securities are payable only from limited revenue sources or
by private entities.
The Adviser evaluates the rewards and risks presented by all
securities purchased by the Portfolio and how they may
advance the Portfolio's investment objective. It is
possible, however, that these evaluations will prove to be
inaccurate.
</TABLE>
PORTFOLIO MANAGER
Peter Merzian is the
person primarily
responsible for the
day-to-day management
of the Portfolio. Mr.
Merzian, a Senior
Associate, has been
with MVA since 1993 and
has served as portfolio
manager of the
Portfolio since it
commenced operations in
1995.
SHORT-INTERMEDIATE
MUNICIPAL PORTFOLIO
RISK/RETURN SUMMARY
29
- -
<PAGE> 30
RETURN HISTORY
The bar chart and table on
this page show the
Portfolio's annual returns
and long-term performance,
thereby giving some
indication of the risk of
investing in the Portfolio.
The bar chart shows how the
performance of the
Portfolio's Trust Shares
has varied from year to
year. The table shows how
the Portfolio's average
annual returns for one year
and since inception compare
to those of a broad-based
market index. Both the bar
chart and table assume
reinvestment of all
dividends and
distributions. The
Portfolio's past
performance does not
necessarily indicate how it
will perform in the future.
KNOW YOUR INDEX
THE LEHMAN BROTHERS
MUNICIPAL BOND INDEX -- 3
YEAR is an unmanaged index
that tracks the performance
of municipal bonds with
remaining maturities of
three years or less.
SHORT-INTERMEDIATE
MUNICIPAL PORTFOLIO
RISK/RETURN SUMMARY
TRUST SHARES
YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
[STATED IN PERCENTAGES]
<TABLE>
<CAPTION>
SHORT-INTERMEDIATE MUNICIPAL PORTFOLIO
--------------------------------------
<S> <C>
'1996' 3.62
'97' 5.22
'98' 4.85
</TABLE>
Best quarter: 2.31% for the
quarter ending
September 30, 1998
Worst quarter: 0.01% for the
quarter ending
March 31, 1996
AVERAGE ANNUAL TOTAL
RETURNS
for the periods ended
December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION*
<S> <C> <C>
Trust Shares 4.85% 4.69%
Lehman Brothers Municipal Bond Index -- 3 Year 5.21% 5.39%
</TABLE>
* July 10, 1995 for Trust Shares; June 30, 1995 for the Lehman Brothers
Municipal Bond Index - 3 Year.
30
- -
<PAGE> 31
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then
sell all of your shares at
the end of those periods.
The example also assumes
that your investment has a
5% return each year and the
Portfolio's operating
expenses remain the same.
Although your actual costs
may be higher or lower,
based on these assumptions
your costs would be:
SHORT-INTERMEDIATE
MUNICIPAL PORTFOLIO
RISK/RETURN SUMMARY
FEES AND EXPENSES
<TABLE>
<S> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS) TRUST SHARES
The table on the right shows the fees
and expenses that you pay if you buy
and hold Trust Shares of the
Short-Intermediate Municipal
Portfolio.
Management Fees .55%
Distribution (12b-1) Fees None
Other Expenses .65%(1)
Total Annual Portfolio Operating Expenses 1.20%(1)
</TABLE>
(1) Other Expenses and Total Annual
Portfolio Operating Expenses for the
Portfolio's Trust Shares for the
current fiscal year are expected to be
less than the amounts shown above
because certain of the Portfolio's
service providers are voluntarily
waiving a portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers
and/or reimbursements are being made in
order to keep the annual fees and
expenses for the Portfolio's Trust
Shares at a certain level. OTHER
EXPENSES AND TOTAL ANNUAL PORTFOLIO
OPERATING EXPENSES, AFTER TAKING THESE
FEE WAIVERS AND EXPENSE REIMBURSEMENTS
INTO ACCOUNT, ARE EXPECTED TO BE .22%
AND .77%, RESPECTIVELY, FOR TRUST
SHARES. These fee waivers and expense
reimbursements may be revised or
cancelled at any time.
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
TRUST SHARES $122 $381 $660 $1,455
</TABLE>
31
- -
<PAGE> 32
WHAT ARE MUNICIPAL
SECURITIES?
State and local
governments issue
municipal securities
to raise money to
finance public works,
to repay outstanding
obligations, to raise
funds for general
operating expenses and
to make loans to other
public institutions.
Some municipal
securities, known as
private activity
bonds, are backed by
private entities and
are used to finance
various non-public
projects. Municipal
securities, which can
be issued as bonds,
notes or commercial
paper, usually have
fixed interest rates,
although some have
interest rates that
change from time to
time.
AVERAGE WEIGHTED
MATURITY gives you the
average time until all
debt obligations,
including municipal
securities, in a
Portfolio come due or
mature. It is
calculated by
averaging the time to
maturity of all debt
obligations held by a
Portfolio with each
maturity "weighted"
according to the
percentage of assets
which it represents.
logo
logo Q
MISSOURI TAX-EXEMPT
BOND PORTFOLIO
RISK/RETURN SUMMARY
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to seek as high a
level of interest income exempt from federal income tax as
is consistent with conservation of capital.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio normally invests at least 80% of its total
assets in municipal securities that pay interest that is
exempt from federal income tax, and at least 65% of its
total assets in Missouri municipal securities, which are
securities issued by the State of Missouri and other
government issuers and that pay interest which is exempt
from both federal income tax and Missouri state income tax.
Municipal securities purchased by the Portfolio may include
general obligation securities, revenue securities and
private activity bonds. General obligation securities are
secured by the issuer's full faith, credit and taxing power.
Revenue securities are usually payable only from revenues
derived from specific facilities or revenue sources. Private
activity bonds are usually revenue obligations since they
are typically payable by the private user of the facilities
financed by the bonds. The interest on private activity
bonds may be subject to the federal alternative minimum tax.
Investments in private activity bonds will not be treated as
investments in municipal securities for purposes of the 80%
requirement stated above.
In selecting municipal securities for the Portfolio, the
Adviser favors those sectors of the municipal market that
offer the most favorable returns. The Adviser emphasizes
municipal securities that offer both a high credit quality
rating and a high degree of liquidity.
The Portfolio will invest only in investment grade municipal
securities. These are securities which have one of the four
highest ratings assigned by a national rating agency, such
as Standard & Poor's Ratings Group or Moody's Investors
Service, Inc., or are unrated securities determined by the
Adviser to be of comparable quality. Short-term municipal
securities purchased by the Portfolio, such as municipal
notes and tax-exempt commercial paper, will have one of the
two highest ratings assigned by a national rating agency or
will be unrated securities that the Adviser has determined
to be of comparable quality. Occasionally, the rating of a
security held by the Portfolio may be downgraded below the
minimum required rating. 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 Portfolio's average weighted maturity will vary from
time to time depending on current economic and market
conditions and the Adviser's assessment of probable changes
in interest rates.
</TABLE>
32
<PAGE> 33
PORTFOLIO MANAGER
Peter Merzian is the
person primarily
responsible for the
day-to-day management
of the Portfolio. Mr.
Merzian, a Senior
Associate, has been
with MVA since 1993
and has managed the
Portfolio since that
time.
MISSOURI TAX-EXEMPT
BOND PORTFOLIO
RISK/RETURN SUMMARY
<TABLE>
<S> <C>
PRINCIPAL RISK CONSIDERATIONS
The prices of debt securities, including municipal
securities, tend to move in the opposite direction to
interest rates. When rates are rising, the prices of debt
securities tend to fall. When rates are falling, the prices
of debt securities tend to rise. Generally, the longer the
time until maturity, the more sensitive the price of a debt
security is to interest rate changes. Changes in interest
rates also may cause certain municipal securities held by
the Portfolio to be paid off much sooner or later than
expected. In the event that a security is paid off sooner
than expected because of a decline in interest rates, the
Portfolio may be unable to recoup all of its initial
investment and may also suffer from having to reinvest in
lower-yielding securities. In the event of a later than
expected payment because of a rise in interest rates, the
value of the obligation will decrease, and the Portfolio may
suffer from the inability to invest in higher-yielding
securities.
The value of debt securities also depends on the ability of
issuers to make principal and interest payments. If an
issuer can't meet its payment obligations or if its credit
rating is lowered, the value of its debt securities will
fall. The ability of a state or local government issuer to
make payments can be affected by many factors, including
economic conditions, the flow of tax revenues and changes in
the level of federal, state or local aid. Some municipal
securities are payable only from limited revenue sources or
by private entities.
The Portfolio is not diversified, which means that it can
invest a large percentage of its assets in a small number of
issuers. As a result, a change in the value of any one
investment held by the Portfolio may affect the overall
value of the Portfolio more than it would affect a
diversified portfolio that holds more investments. Because
the Portfolio invests primarily in Missouri municipal
securities, it also is likely to be especially susceptible
to economic, political and regulatory events that affect
Missouri.
The Adviser evaluates the rewards and risks presented by all
securities purchased by the Portfolio and how they may
advance the Portfolio's investment objective. It is
possible, however, that these evaluations will prove to be
inaccurate.
</TABLE>
33
- -
<PAGE> 34
RETURN HISTORY+
The bar chart and table on
this page show the
Portfolio's annual returns
and long-term performance,
thereby giving some
indication of the risk of
investing in the Portfolio.
The bar chart shows how the
performance of the
Portfolio's Trust Shares
has varied from year to
year. The table shows how
the Portfolio's average
annual returns for one
year, five years, ten years
and since inception compare
to those of a broad-based
market index. Both the bar
chart and table assume
reinvestment of all
dividends and
distributions. The
Portfolio's past
performance does not
necessarily indicate how it
will perform in the future.
KNOW YOUR INDEX
THE LEHMAN BROTHERS
MUNICIPAL BOND INDEX is an
unmanaged index that tracks
the performance of
municipal bonds.
MISSOURI TAX-EXEMPT
BOND PORTFOLIO
RISK/RETURN SUMMARY
TRUST SHARES
YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
[STATED IN PERCENTAGES]
<TABLE>
<CAPTION>
MISSOURI TAX-EXEMPT BOND PORTFOLIO
----------------------------------
<S> <C>
'91' 11.66
'92' 8.93
'93' 11.86
'94' -5.59
'95' 17.01
'96' 3.19
'97' 8.29
'98' 5.41
</TABLE>
Best quarter: 7.58% for the
quarter ending
March 31, 1995
Worst quarter: -5.57% for the
quarter ending
March 31, 1994
AVERAGE ANNUAL TOTAL
RETURNS
for the periods ended
December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS 10 YEARS INCEPTION*
<S> <C> <C> <C> <C>
Trust Shares 5.41% 5.40% 7.39% 7.77%
Lehman Brothers Municipal Bond
Index 6.48% 6.35% 8.22% 8.26%
</TABLE>
+ The Portfolio commenced operations on July 15, 1988 as a separate
investment portfolio (the "Predecessor Portfolio") of The ARCH Tax-Exempt
Trust. On October 2, 1995, the Predecessor Portfolio was reorganized as a
new portfolio of the Fund. Prior to the reorganization, the Predecessor
Portfolio offered and sold shares that were similar to the Fund's Trust
Shares. Total returns for periods prior to October 2, 1995 reflect the
performance of the Predecessor Portfolio.
* July 15, 1988 for Trust Shares; June 30, 1988 for the Lehman Brothers
Municipal Bond Index.
34
- -
<PAGE> 35
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then
sell all of your shares at
the end of those periods.
The example also assumes
that your investment has a
5% return each year and the
Portfolio's operating
expenses remain the same.
Although your actual costs
may be higher or lower,
based on these assumptions
your costs would be:
MISSOURI TAX-EXEMPT
BOND PORTFOLIO
RISK/RETURN SUMMARY
FEES AND EXPENSES
<TABLE>
<S> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM THE TRUST
PORTFOLIO'S ASSETS) SHARES
The table on the right shows the
fees and expenses that you pay
if you buy and hold Trust Shares of
the Missouri Tax-Exempt Bond
Portfolio.
Management Fees .45%
Distribution (12b-1) Fees None
Other Expenses .61%(1)
Total Annual Portfolio Operating Expenses 1.06%(1)
</TABLE>
(1) Other Expenses and Total Annual
Portfolio Operating Expenses for the
Portfolio's Trust Shares for the
current fiscal year are expected to be
less than the amounts shown above
because certain of the Portfolio's
service providers are voluntarily
waiving a portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers
and/or reimbursements are being made in
order to keep the annual fees and
expenses for the Portfolio's Trust
Shares at a certain level. OTHER
EXPENSES AND TOTAL ANNUAL PORTFOLIO
OPERATING EXPENSES, AFTER TAKING THESE
FEE WAIVERS AND EXPENSE REIMBURSEMENTS
INTO ACCOUNT, ARE EXPECTED TO BE .21%
AND .66%, RESPECTIVELY, FOR TRUST
SHARES. These fee waivers and expense
reimbursements may be revised or
cancelled at any time.
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
TRUST SHARES $108 $337 $585 $1,294
</TABLE>
35
- -
<PAGE> 36
WHAT ARE MUNICIPAL
SECURITIES?
State and local
governments issue
municipal securities
to raise money to
finance public works,
to repay outstanding
obligations, to raise
funds for general
operating expenses and
to make loans to other
public institutions.
Some municipal
securities, known as
private activity
bonds, are backed by
private entities and
are used to finance
various non-public
projects. Municipal
securities, which can
be issued as bonds,
notes or commercial
paper, usually have
fixed interest rates,
although some have
interest rates that
change from time to
time.
logo
logo Q
NATIONAL MUNICIPAL
BOND PORTFOLIO
RISK/RETURN SUMMARY
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to seek as high a
level of current income exempt from regular federal income
tax as is consistent with conservation of capital.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio normally invests at least 80% of its total
assets in municipal securities that pay interest which is
exempt from federal income tax. Municipal securities
purchased by the Portfolio may include general obligation
securities, revenue securities and private activity bonds.
General obligation securities are secured by the issuer's
full faith, credit and taxing power. Revenue securities are
usually payable only from revenues derived from specific
facilities or revenue sources. Private activity bonds are
usually revenue obligations since they are typically payable
by the private user of the facilities financed by the bonds.
The interest on private activity bonds may be subject to the
federal alternative minimum tax. Investments in private
activity bonds will not be treated as investments in
municipal securities for purposes of the 80% requirement
stated above.
In selecting municipal securities for the Portfolio, the
Adviser favors those sectors of the municipal market that
offer the most favorable returns. The Adviser emphasizes
municipal securities that offer both a high credit quality
rating and a high degree of liquidity. The Adviser also
attempts to maintain a broad geographic diversification for
the Portfolio, with emphasis on no particular state.
The Portfolio will invest only in investment grade municipal
securities. These are securities which have one of the four
highest ratings assigned by a national rating agency, such
as Standard & Poor's Ratings Group or Moody's Investors
Service, Inc., or are unrated securities determined by the
Adviser to be of comparable quality. Short-term municipal
securities purchased by the Portfolio, such as municipal
notes and tax-exempt commercial paper, will have one of the
two highest ratings assigned by a national rating agency or
will be unrated securities that the Adviser has determined
to be of comparable quality. Occasionally, the rating of a
security held by the Portfolio may be downgraded below the
minimum required rating. 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 Portfolio's average weighted maturity will vary from
time to time depending on current economic and market
conditions and the Adviser's assessment of probable changes
in interest rates. The Portfolio's average weighted maturity
generally will be longer (10 years or less) than that of the
Short-Intermediate Municipal Portfolio.
</TABLE>
36
- -
<PAGE> 37
<TABLE>
<S> <C>
PRINCIPAL RISK CONSIDERATIONS
The prices of debt securities, including municipal securities, tend to move in
the opposite direction to interest rates. When rates are rising, the prices of
debt securities tend to fall. When rates are falling, the prices of debt
securities tend to rise. Generally, the longer the time until maturity, the
more sensitive the price of a debt security is to interest rate changes.
Changes in interest rates also may cause certain municipal securities held by
the Portfolio to be paid off much sooner or later than expected. In the event
that a security is paid off sooner than expected because of a decline in
interest rates, the Portfolio may be unable to recoup all of its initial
investment and may also suffer from having to reinvest in lower-yielding
securities. In the event of a later than expected payment because of a rise in
interest rates, the value of the obligation will decrease, and the Portfolio
may suffer from the inability to invest in higher-yielding securities.
The value of debt securities also depends on the ability of issuers to make
principal and interest payments. If an issuer can't meet its payment
obligations or if its credit rating is lowered, the value of its debt
securities will fall. The ability of a state or local government issuer to
make payments can be affected by many factors, including economic conditions,
the flow of tax revenues and changes in the level of federal, state or local
aid. Some municipal securities are payable only from limited revenue sources
or by private entities.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolio and how they may advance the Portfolio's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
</TABLE>
PORTFOLIO MANAGER
Peter Merzian is the
person primarily
responsible for the
day-to-day management
of the Portfolio. Mr.
Merzian, a Senior
Associate, has been
with MVA since 1993 and
has served as portfolio
manager of the
Portfolio since it
commenced operations in
1996.
NATIONAL MUNICIPAL
BOND PORTFOLIO
RISK/RETURN SUMMARY
37
- -
<PAGE> 38
RETURN HISTORY
The bar chart and table on
this page show the
Portfolio's annual returns
and long-term performance,
thereby giving some
indication of the risk of
investing in the Portfolio.
The bar chart shows how the
performance of the
Portfolio's Trust Shares
has varied from year to
year. The table shows how
the Portfolio's average
annual returns for one year
and since inception compare
to those of a broad-based
market index. Both the bar
chart and table assume
reinvestment of all
dividends and
distributions. The
Portfolio's past
performance does not
necessarily indicate how it
will perform in the future.
KNOW YOUR INDEX
THE LEHMAN BROTHERS
MUNICIPAL BOND INDEX -- 10
YEAR is an unmanaged index
that tracks the performance
of municipal bonds with
remaining maturities of 10
years or less.
NATIONAL MUNICIPAL
BOND PORTFOLIO
RISK/RETURN SUMMARY
TRUST SHARES
YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
[STATED IN PERCENTAGES]
<TABLE>
<CAPTION>
NATIONAL MUNICIPAL BOND PORTFOLIO
---------------------------------
<S> <C>
'1997' 10.29
'98' 6.15
</TABLE>
Best quarter: 3.77% for the
quarter ending
September 30, 1997
Worst quarter: -0.33% for the
quarter ending
March 31, 1997
AVERAGE ANNUAL TOTAL
RETURNS
for the periods ended
December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION*
<S> <C> <C>
Trust Shares 6.15% 7.94%
Lehman Brothers Municipal Bond Index -- 10 Year 6.76% 7.44%
</TABLE>
* November 18, 1996 for Trust Shares; November 30, 1997 for the Lehman
Brothers Municipal Bond Index -- 10 Year.
38
- -
<PAGE> 39
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then
sell all of your shares at
the end of those periods.
The example also assumes
that your investment has a
5% return each year and the
Portfolio's operating
expenses remain the same.
Although your actual costs
may be higher or lower,
based on these assumptions
your costs would be:
NATIONAL MUNICIPAL
BOND PORTFOLIO
RISK/RETURN SUMMARY
FEES AND EXPENSES
<TABLE>
<S> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS) TRUST SHARES
The table on the right shows the
fees and expenses that you pay
if you buy and hold Trust Shares
of the National Municipal Bond
Portfolio.
Management Fees .55%
Distribution (12b-1) Fees None
Other Expenses .61%(1)
Total Annual Portfolio Operating Expenses 1.16%(1)
</TABLE>
(1) Other Expenses and Total Annual
Portfolio Operating Expenses for the
Portfolio's Trust Shares for the
current fiscal year are expected to be
less than the amounts shown above
because certain of the Portfolio's
service providers are voluntarily
waiving a portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers
and/or reimbursements are being made in
order to keep the annual fees and
expenses for the Portfolio's Trust
Shares at a certain level. OTHER
EXPENSES AND TOTAL ANNUAL PORTFOLIO
OPERATING EXPENSES, AFTER TAKING THESE
FEE WAIVERS AND EXPENSE REIMBURSEMENTS
INTO ACCOUNT, ARE EXPECTED TO BE .20%
AND .75%, RESPECTIVELY, FOR TRUST
SHARES. These fee waivers and expense
reimbursements may be revised or
cancelled at any time.
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
TRUST SHARES $118 $368 $638 $1,409
</TABLE>
39
- -
<PAGE> 40
TOTAL RETURN consists
of net income
(dividend and/or
interest income from
Portfolio securities,
less expenses of the
Portfolio) and capital
gains and losses, both
realized and
unrealized, from
Portfolio securities.
INVESTMENT GRADE BONDS
are those of medium
credit quality or
better, as determined
by a national rating
agency such as
Standard & Poor's
Ratings Group (bonds
rated BBB or higher)
and Moody's Investors
Service, Inc. (bonds
rated Baa or higher).
The higher the credit
rating, the less
likely it is that the
bond issuer will
default on its
principal and interest
payments.
logo
logo Q
BALANCED
PORTFOLIO
RISK/RETURN SUMMARY
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to maximize total
return through a combination of growth of capital and
current income consistent with the preservation of capital.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio invests in a combination of equity securities
(such as stocks), fixed-income securities (such as bonds)
and money market instruments in weightings the Adviser
believes will offer attractive total returns over time. In
making asset allocation decisions, the Adviser evaluates
forecasts for inflation, interest rates and long-term
corporate earnings growth. The Adviser then examines the
potential effect of these factors on each asset group over a
one- to three-year time period using its own dynamic
computer models. These models show the statistical impact of
the Adviser's economic outlook upon the future returns of
each asset group. The Adviser periodically will increase or
decrease the Portfolio's allocations to equities and
fixed-income securities based on which class appears
relatively more attractive than the other. For example, if
the Adviser expects more rapid economic growth leading to
better corporate earnings, it will increase the Portfolio's
holdings of equity securities and reduce its holdings of
fixed-income securities and money market instruments.
In selecting equity securities, the Adviser considers
historical and projected earnings, the price/earnings
relationship and company growth and asset value. In
selecting fixed-income securities, the Adviser seeks those
issues representing the best value among various sectors,
and also considers credit quality, prevailing interest rates
and liquidity.
Under normal market conditions, the Portfolio invests at
least 25% of its total assets in fixed-income securities and
no more than 75% of its total assets in equity securities.
The actual percentages will vary from time to time based on
the Adviser's economic and market outlooks. The Portfolio's
equity securities will consist mainly of common stocks, and
its fixed-income securities will consist mainly of
investment grade bonds, including U.S. Government
securities. Occasionally, the rating of a security held by
the Portfolio may be downgraded below investment grade. If
that happens, the Portfolio doesn't have to sell the
security unless the Adviser determines that under the
circumstances the security is no longer an appropriate
investment for the Portfolio.
</TABLE>
40
- -
<PAGE> 41
<TABLE>
<S> <C>
PRINCIPAL RISK CONSIDERATIONS
The Portfolio invests in stocks and other equity securities, which may decline
in value over short or extended periods of time. Equity markets tend to be
cyclical; there are times when stock prices generally increase, and other
times when they generally decrease. This could cause the value of your
investment in the Portfolio to fluctuate.
The Portfolio also invests in fixed-income securities, which lose value when
interest rates increase (but increase in value when interest rates decline).
Longer-term fixed-income securities are more susceptible to these fluctuations
in interest rates than short-term fixed-income securities. Changes in interest
rates may cause certain fixed-income securities, such as callable securities
and mortgage-backed securities, to be paid off much sooner or later than
expected. In the event that a security is paid off sooner than expected
because of a decline in interest rates, the Portfolio may be unable to recoup
all of its initial investment and may also suffer from having to reinvest in
lower-yielding securities. In the event of a later than expected payment
because of a rise in interest rates, the value of the obligation will
decrease, and the Portfolio may suffer from the inability to invest in
higher-yielding securities. Fixed-income securities are subject to other
risks, including the risk that the issuer will be unable to make payments of
principal and interest.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolio and how they may advance the Portfolio's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
</TABLE>
PORTFOLIO MANAGER
Peter Merzian, a
senior associate of
MVA, is responsible
for the day-to-day
management of the
Portfolio. He has been
with MVA since 1993
and has managed the
Portfolio since May
1996. He also manages
the Fund's three
municipal bond
portfolios.
BALANCED
PORTFOLIO
RISK/RETURN SUMMARY
41
- -
<PAGE> 42
RETURN HISTORY
The bar chart and table on
this page show the
Portfolio's annual returns
and long-term performance,
thereby giving some
indication of the risk of
investing in the Portfolio.
The bar chart shows how the
performance of the
Portfolio's Trust Shares
has varied from year to
year. The table shows how
the Portfolio's average
annual returns for one
year, five years and since
inception compare to those
of broad-based market
indexes. Both the bar chart
and table assume
reinvestment of all
dividends and
distributions. The
Portfolio's past
performance does not
necessarily indicate how it
will perform in the future.
KNOW YOUR INDEX
THE S&P 500 INDEX is an
unmanaged index comprised
of 500 widely held common
stocks listed on the New
York Stock Exchange, the
American Stock Exchange
and NASDAQ.
THE LEHMAN BROTHERS
AGGREGATE BOND INDEX is an
unmanaged index made up of
Lehman Brothers'
Government/Corporate Bond
Index, its Mortgage Backed
Securities Index and its
Asset Backed Securities
Index.
BALANCED
PORTFOLIO
RISK/RETURN SUMMARY
TRUST SHARES
YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
[STATED IN PERCENTAGES]
<TABLE>
<CAPTION>
BALANCED PORTFOLIO
------------------
<S> <C>
'1994' -1.25
'95' 26.28
'96' 12.29
'97' 18.47
'98' 11.44
</TABLE>
Best quarter: 10.95% for the
quarter ending
December 31, 1998
Worst quarter: -7.40% for the
quarter ending
September 30, 1998
AVERAGE ANNUAL TOTAL
RETURNS for the periods
ended December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION*
<S> <C> <C> <C>
Trust Shares 11.44% 13.07% 12.03%
S&P 500 Index 28.60% 24.05% 21.73%
Lehman Brothers Aggregate Bond Index 8.69% 7.27% 7.27%
</TABLE>
* April 1, 1993 for Trust Shares: March 31, 1993 for the S&P 500 Index and
the Lehman Brothers Aggregate Bond Index.
42
- -
<PAGE> 43
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then
sell all of your shares at
the end of those periods.
The example also assumes
that your investment has a
5% return each year and the
Portfolio's operating
expenses remain the same.
Although your actual costs
may be higher or lower,
based on these assumptions
your costs would be:
BALANCED
PORTFOLIO
RISK/RETURN SUMMARY
FEES AND EXPENSES
<TABLE>
<S> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS) TRUST SHARES
The table on the right shows the
fees and expenses that you pay if
you buy and hold Trust Shares
of the Balanced Portfolio.
Management Fees .75%
Distribution (12b-1) Fees None
Other Expenses .61%(1)
Total Annual Portfolio Operating Expenses 1.36%(1)
</TABLE>
(1) Other Expenses and Total Annual
Portfolio Operating Expenses for the
Portfolio's Trust Shares for the
current fiscal year are expected to be
less than the amounts shown above
because certain of the Portfolio's
service providers are voluntarily
waiving a portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers
and/or reimbursements are being made in
order to keep the annual fees and
expenses for the Portfolio's Trust
Shares at a certain level. OTHER
EXPENSES AND TOTAL ANNUAL PORTFOLIO
OPERATING EXPENSES, AFTER TAKING THESE
FEE WAIVERS AND EXPENSE REIMBURSEMENTS
INTO ACCOUNT, ARE EXPECTED TO BE .22%
AND .97%, RESPECTIVELY, FOR TRUST
SHARES. These fee waivers and expense
reimbursements may be revised or
cancelled at any time.
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
TRUST SHARES $138 $431 $745 $1,635
</TABLE>
43
- -
<PAGE> 44
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to seek to provide
an above-average level of income consistent with long-term
capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio invests primarily in the common stocks of
value companies with large market capitalizations
(generally, $5 billion or higher). In selecting these
stocks, the Adviser evaluates a number of quantitative
factors, including dividend yield, current and future
earnings potential compared to stock prices and total return
potential. The Adviser also examines other measures of
valuation, including cash flow, asset value and book value.
Under normal market conditions, the Portfolio invests at
least 65% of its total assets in income-producing
(dividend-paying) equity securities, primarily common
stocks. These stocks generally will be listed on a national
stock exchange or will be unlisted stocks with established
over-the-counter markets. Many such stocks may offer
above-average levels of income as compared to the S&P 500
Index.
PRINCIPAL RISK CONSIDERATIONS
The Portfolio invests in stocks and other equity securities,
which may decline in value over short or extended periods of
time. Equity markets tend to be cyclical; there are times
when stock prices generally increase, and other times when
they generally decrease. This could cause the value of your
investment in the Portfolio to fluctuate. In addition, the
Portfolio is subject to the additional risk that the value
stocks it typically holds may not perform as well as other
types of stocks, such as growth stocks.
The Adviser evaluates the rewards and risks presented by all
securities purchased by the Portfolio and how they may
advance the Portfolio's investment objective. It is
possible, however, that these evaluations will prove to be
inaccurate.
MARKET CAPITALIZATION is a
common measure of the size
of a company. It is the
market price of a share of
the company's stock
multiplied by the number of
outstanding shares.
VALUE STOCKS are those that
appear to be underpriced
based on valuation measures,
such as lower price-to-
earnings and price-to-book
value ratios.
PORTFOLIO MANAGER
MVA's Equity Committee is
responsible for the
day-to-day management of the
Portfolio. The Committee has
managed the Portfolio since
1998.
</TABLE>
logo
logo Q
RISK/RETURN SUMMARY EQUITY INCOME PORTFOLIO
44
- -
<PAGE> 45
RETURN HISTORY
The bar chart and table on
this page show the
Portfolio's annual returns
and long-term performance,
thereby giving some
indication of the risk of
investing in the Portfolio.
The bar chart shows the
performance of the
Portfolio's Trust Shares
during the last calendar
year. The table shows how
the Portfolio's average
annual returns for one year
and since inception compare
to those of a broad-based
market index. Both the bar
chart and table assume
reinvestment of all
dividends and
distributions. The
Portfolio's past
performance does not
necessarily indicate how it
will perform in the future.
KNOW YOUR INDEX
THE RUSSELL 1000 VALUE
INDEX is an unmanaged index
that measures the
performance of the stocks
in the Russell 1000 Index
with less than average
growth orientation.
Companies in this Index
generally have low price to
book and price/earnings
ratios, higher dividend
yields and lower forecasted
growth values. The Russell
1000 Index consists of the
1,000 largest U.S.
companies as ranked by
total market
capitalization.
EQUITY INCOME PORTFOLIO
RISK/RETURN SUMMARY
TRUST SHARES
YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
[STATED IN PERCENTAGES]
<TABLE>
<CAPTION>
EQUITY INCOME PORTFOLIO
-----------------------
<S> <C>
'1998' 10.39
</TABLE>
Best quarter: 14.33% for the
quarter ending
June 30, 1997
Worst quarter: -8.70% for the
quarter ending
September 30, 1998
AVERAGE ANNUAL TOTAL
RETURNS for the periods
ended December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION*
<S> <C> <C>
Trust Shares 10.39% 17.41%
Russell 1000 Value Index 15.63% 23.26%
</TABLE>
* February 27, 1997 for Trust Shares; February 28, 1997 for the Russell 1000
Value Index.
45
- -
<PAGE> 46
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then
sell all of your shares at
the end of those periods.
The example also assumes
that your investment has a
5% return each year and the
Portfolio's operating
expenses remain the same.
Although your actual costs
may be higher or lower,
based on these assumptions
your costs would be:
RISK/RETURN SUMMARY EQUITY INCOME PORTFOLIO
FEES AND EXPENSES
<TABLE>
<S> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS) TRUST SHARES
The table on the right shows the
fees and expenses that you pay if
you buy and hold Trust Shares
of the Equity Income Portfolio.
Management Fees .75%
Distribution (12b-1) Fees None
Other Expenses .62%(1)
Total Annual Portfolio Operating
Expenses 1.37%(1)
</TABLE>
(1) Other Expenses and Total Annual
Portfolio Operating Expenses for the
Portfolio's Trust Shares for the
current fiscal year are expected to be
less than the amounts shown above
because certain of the Portfolio's
service providers are voluntarily
waiving a portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers
and/or reimbursements are being made in
order to keep the annual fees and
expenses for the Portfolio's Trust
Shares at a certain level. OTHER
EXPENSES AND TOTAL ANNUAL PORTFOLIO
OPERATING EXPENSES, AFTER TAKING THESE
FEE WAIVERS AND EXPENSE REIMBURSEMENTS
INTO ACCOUNT, ARE EXPECTED TO BE .22%
AND .97%, RESPECTIVELY, FOR TRUST
SHARES. These fee waivers and expense
reimbursements may be revised or
cancelled at any time.
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
TRUST SHARES $139 $434 $750 $1,646
</TABLE>
46
- -
<PAGE> 47
INDEXING is a strategy
whereby a Portfolio
attempts to weight its
securities to match
those of a broadly-
based securities index
in an attempt to
approximate the
index's performance.
THE S&P 500 INDEX is
an unmanaged index
comprised of 500
widely held common
stocks listed on the
New York Stock
Exchange, the American
Stock Exchange and
NASDAQ.
logo
logo Q
EQUITY INDEX
RISK/RETURN SUMMARY PORTFOLIO
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to seek to provide
investment results that, before the deduction of operating
expenses, approximate the price and yield performance of
U.S. publicly traded common stocks with large stock market
capitalizations, as represented by the Standard & Poor's 500
Index (the "S&P 500 Index").
The Portfolio's investment objective can be changed by the
Fund's Board of Directors without shareholder approval.
Shareholders will be given at least 30 days' written notice
before any such change occurs.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio uses an "indexing" strategy through the use of
computer models to approximate the investment performance of
the S&P 500 Index. The Portfolio invests substantially all
(at least 80%) of its total assets in securities listed in
the S&P 500 Index and typically will hold all 500 stocks
represented in the Index. In general, each stock's
percentage weighting in the Portfolio is based on its
weighting in the Index. When stocks are removed from or
added to the Index, those changes are reflected in the
Portfolio. The Portfolio periodically "rebalances" its
holdings as dictated by changes in shareholder purchase and
redemption activity and in the composition of the S&P 500
Index.
PRINCIPAL RISK CONSIDERATIONS
The Portfolio invests in stocks and other equity securities,
which may decline in value over short or extended periods of
time. Equity markets tend to be cyclical; there are times
when stock prices generally increase, and other times when
they generally decrease. This could cause the value of your
investment in the Portfolio to fluctuate. In addition, the
Portfolio is subject to the additional risk that the
large-capitalization stocks it typically holds may not
perform as well as other types of stocks, such as
small-capitalization stocks.
There is the additional risk that the Portfolio's investment
results may fail to match those of the S&P 500 Index.
</TABLE>
47
- -
<PAGE> 48
RETURN HISTORY
The bar chart and table
below show the Portfolio's
annual returns and
long-term performance,
thereby giving some
indication of the risk of
investing in the Portfolio.
The bar chart shows the
performance of the
Portfolio's Trust Shares
during the last calendar
year. The table shows how
the Portfolio's average
annual returns for one year
and since inception compare
to those of the S&P 500
Index. Both the bar chart
and table assume
reinvestment of all
dividends and
distributions. The
Portfolio's past
performance does not
necessarily indicate how it
will perform in the future.
EQUITY INDEX
RISK/RETURN SUMMARY PORTFOLIO
TRUST SHARES
YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
[STATED IN PERCENTAGES]
<TABLE>
<CAPTION>
EQUITY INDEX PORTFOLIO
----------------------
<S> <C>
'1998' 28.20
</TABLE>
<TABLE>
<S> <C>
Best quarter: 21.14% for the quarter ending
December 31, 1998
Worst quarter: -9.96% for the quarter ending
September 30, 1998
</TABLE>
AVERAGE ANNUAL TOTAL
RETURNS for the periods
ended December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION*
<S> <C> <C>
Trust Shares 28.20% 31.01%
S&P 500 Index 28.60% 31.31%
</TABLE>
* May 1, 1997 for Trust Shares; April 30, 1997 for the S&P 500 Index.
48
- -
<PAGE> 49
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then
sell all of your shares at
the end of those periods.
The example also assumes
that your investment has a
5% return each year and the
Portfolio's operating
expenses remain the same.
Although your actual costs
may be higher or lower,
based on these assumptions
your costs would be:
EQUITY INDEX
PORTFOLIO
RISK/RETURN SUMMARY
FEES AND EXPENSES
<TABLE>
<S> <C> <C>
TRUST SHARES
ANNUAL PORTFOLIO OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS)
The table on the right shows the
fees and expenses that you pay if
you buy and hold Trust Shares
of the Equity Index Portfolio.
.30%
Management Fees
None
Distribution (12b-1) Fees
.73%(1)
Other Expenses
1.03%(1)
Total Annual Portfolio Operating
Expenses
</TABLE>
(1) Other Expenses and Total Annual
Portfolio Operating Expenses for the
Portfolio's Trust Shares for the
current fiscal year are expected to be
less than the amounts shown above
because certain of the Portfolio's
service providers are voluntarily
waiving a portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers
and/or reimbursements are being made in
order to keep the annual fees and
expenses for the Portfolio's Trust
Shares at a certain level. OTHER
EXPENSES AND TOTAL ANNUAL PORTFOLIO
OPERATING EXPENSES, AFTER TAKING THESE
FEE WAIVERS AND EXPENSE REIMBURSEMENTS
INTO ACCOUNT, ARE EXPECTED TO BE .25%
AND .55%, RESPECTIVELY, FOR TRUST
SHARES. These fee waivers and expense
reimbursements may be revised or
cancelled at any time.
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
TRUST SHARES $105 $328 $569 $1,259
</TABLE>
49
- -
<PAGE> 50
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to provide long-term
capital growth, with income a secondary consideration.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio invests primarily in common stocks. The
Adviser selects stocks based on a number of factors related
to historical and projected earnings and the price/earnings
relationship as well as company growth and asset value,
consistency of earnings growth and earnings quality.
Stocks purchased for the Portfolio generally will be listed
on a national stock exchange or will be unlisted securities
with an established over-the-counter market. These stocks
tend to pay dividends, so many of the Portfolio's
investments may produce some income. Nevertheless, income is
not the primary factor in the stock selection process.
PRINCIPAL RISK CONSIDERATIONS
The Portfolio invests in stocks and other equity securities,
which may decline in value over short or extended periods of
time. Equity markets tend to be cyclical; there are times
when stock prices generally increase, and other times when
they generally decrease. This could cause the value of your
investment in the Portfolio to fluctuate.
The Adviser evaluates the rewards and risks presented by all
securities purchased by the Portfolio and how they may
advance the Portfolio's investment objective. It is
possible, however, that these evaluations will prove to be
inaccurate.
PORTFOLIO MANAGER
MVA's Equity Committee is
responsible for the
day-to-day management of the
Portfolio. The Committee has
managed the Portfolio since
1998.
</TABLE>
logo
logo Q
GROWTH & INCOME
EQUITY PORTFOLIO
RISK/RETURN SUMMARY
50
- -
<PAGE> 51
RETURN HISTORY
The bar chart and table
below show the Portfolio's
annual returns and
long-term performance,
thereby giving some
indication of the risk of
investing in the Portfolio.
The bar chart shows how the
performance of the
Portfolio's Trust Shares
has varied from year to
year. The table shows how
the Portfolio's average
annual returns for one
year, five years and since
inception compare to those
of a broad-based market
index. Both the bar chart
and table assume
reinvestment of all
dividends and
distributions. The
Portfolio's past
performance does not
necessarily indicate how it
will perform in the future.
KNOW YOUR INDEX
THE S&P 500 INDEX is an
unmanaged index comprised
of 500 widely held common
stocks listed on the New
York Stock Exchange, the
American Stock Exchange and
NASDAQ.
GROWTH & INCOME
RISK/RETURN SUMMARY EQUITY PORTFOLIO
TRUST SHARES
YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
[STATED IN PERCENTAGES]
<TABLE>
<CAPTION>
GROWTH & INCOME EQUITY PORTFOLIO
--------------------------------
<S> <C>
'1992' 10.61
'93' 9.61
'94' -0.26
'95' 34.38
'96' 19.40
'97' 27.80
'98' 13.12
</TABLE>
<TABLE>
<S> <C>
Best quarter: 18.19% for the quarter ending
December 31, 1998
Worst quarter: -14.34% for the quarter ending
September 30, 1998
</TABLE>
AVERAGE ANNUAL TOTAL
RETURNS for the periods
ended December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION*
<S> <C> <C> <C>
Trust Shares 13.12% 18.27% 15.76%
S&P 500 Index 28.60% 24.05% 18.93%
</TABLE>
* April 1, 1991 for Trust Shares; March 31, 1991 for the S&P 500 Index.
51
- -
<PAGE> 52
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then
sell all of your shares at
the end of those periods.
The example also assumes
that your investment has a
5% return each year and the
Portfolio's operating
expenses remain the same.
Although your actual costs
may be higher or lower,
based on these assumptions
your costs would be:
GROWTH & INCOME
EQUITY PORTFOLIO
RISK/RETURN SUMMARY
FEES AND EXPENSES
<TABLE>
<S> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS) TRUST SHARES
The table on the right shows the
fees and expenses that you pay if
you buy and hold Trust Shares
of the Growth & Income
Equity Portfolio.
Management Fees .55%
Distribution (12b-1) Fees None
Other Expenses .59%(1)
Total Annual Portfolio Operating
Expenses 1.14%(1)
</TABLE>
(1) Other Expenses and Total Annual
Portfolio Operating Expenses for the
Portfolio's Trust Shares for the
current fiscal year are expected to be
less than the amounts shown above
because certain of the Portfolio's
service providers are voluntarily
waiving a portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers
and/or reimbursements are being made in
order to keep the annual fees and
expenses for the Portfolio's Trust
Shares at a certain level. OTHER
EXPENSES AND TOTAL ANNUAL PORTFOLIO
OPERATING EXPENSES, AFTER TAKING THESE
FEE WAIVERS AND EXPENSE REIMBURSEMENTS
INTO ACCOUNT, ARE EXPECTED TO BE .19%
AND .74%, RESPECTIVELY, FOR TRUST
SHARES. These fee waivers and expense
reimbursements may be revised or
cancelled at any time.
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
TRUST SHARES $116 $362 $628 $1,386
</TABLE>
52
- -
<PAGE> 53
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is capital
appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio invests primarily in the common stocks of
growth companies. In selecting securities for the Portfolio,
the Adviser evaluates a company's earnings history and the
risk and volatility of the company's business. The Adviser
also considers other factors, such as product position and
the ability to increase market share, but the ability to
increase company earnings is the primary consideration.
Under normal market conditions, the Portfolio invests at
least 65% of its total assets in common stocks or other
equity securities, such as preferred stocks, rights and
warrants. Typically, the Portfolio's stocks are those of
large- and medium-capitalization companies that are listed
on the New York Stock Exchange, the American Stock Exchange
or NASDAQ.
PRINCIPAL RISK CONSIDERATIONS
The Portfolio invests in stocks and other equity securities,
which may decline in value over short or extended periods of
time. Equity markets tend to be cyclical; there are times
when stock prices generally increase, and other times when
they generally decrease. This could cause the value of your
investment in the Portfolio to fluctuate. In addition, the
Portfolio is subject to the additional risk that the growth
stocks it typically holds may not perform as well as other
types of stocks, such as value stocks.
The Adviser evaluates the rewards and risks presented by all
securities purchased by the Portfolio and how they may
advance the Portfolio's investment objective. It is
possible, however, that these evaluations will prove to be
inaccurate.
</TABLE>
GROWTH STOCKS offer
strong revenue and
earnings potential and
accompanying capital
growth, with less
dividend income than
value stocks.
PORTFOLIO MANAGER
MVA's Equity Committee
is responsible for the
day-to-day management
of the Portfolio. The
Committee has managed
the Portfolio since
1998.
logo
logo Q
GROWTH EQUITY
RISK/RETURN SUMMARY PORTFOLIO
53
- -
<PAGE> 54
RETURN HISTORY+
The bar chart and table on
this page show the
Portfolio's annual returns
and long-term performance,
thereby giving some
indication of the risk of
investing in the Portfolio.
The bar chart shows the
performance of the
Portfolio's Trust Shares
during the last calendar
year. The table shows how
the Portfolio's average
annual returns for one year
and since inception compare
to those of a broad-based
market index. Both the bar
chart and table assume
reinvestment of dividends
and distributions. The
Portfolio's past
performance does not
necessarily indicate how it
will perform in the future.
KNOW YOUR INDEX
THE S&P 500 INDEX is an
unmanaged index comprised
of 500 widely held common
stocks listed on the New
York Stock Exchange, the
American Stock Exchange and
NASDAQ.
GROWTH EQUITY
RISK/RETURN SUMMARY PORTFOLIO
TRUST SHARES
YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
[STATED IN PERCENTAGES]
<TABLE>
<CAPTION>
GROWTH EQUITY PORTFOLIO
-----------------------
<S> <C>
'1998' 29.88
</TABLE>
Best quarter: 25.20% for the
quarter ending
December 31, 1998
Worst quarter: -11.73% for the
quarter ending
September 30, 1998
AVERAGE ANNUAL TOTAL
RETURNS for the periods
ended December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION*
<S> <C> <C>
Trust Shares 29.88% 18.30%
S&P 500 Index 28.60% 21.60%
</TABLE>
+ The Portfolio commenced operations on January 4, 1993 as the Arrow Equity
Portfolio, a separate investment portfolio (the "Predecessor Portfolio") of
Arrow Funds. On November 21, 1997, the Predecessor Portfolio was
reorganized as a new portfolio of the Fund. Prior to the reorganization,
the Predecessor Portfolio offered and sold shares that were similar to the
Fund's Investor A Shares.
* November 24, 1997 for Trust Shares; November 30, 1997 for the S&P 500
Index.
54
- -
<PAGE> 55
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then
sell all of your shares at
the end of those periods.
The example also assumes
that your investment has a
5% return each year and the
Portfolio's operating
expenses remain the same.
Although your actual costs
may be higher or lower,
based on these assumptions
your costs would be:
GROWTH EQUITY
PORTFOLIO
RISK/RETURN SUMMARY
FEES AND EXPENSES
<TABLE>
<S> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM THE TRUST
PORTFOLIO'S ASSETS) SHARES
The table on the right shows
the fees and expenses that you pay if
you buy and hold Trust Shares of the
Growth Equity Portfolio.
Management Fees .75%
Distribution (12b-1) Fees None
Other Expenses .69%(1)
Total Annual Portfolio Operating Expenses 1.44%(1)
</TABLE>
(1) Other Expenses and Total Annual
Portfolio Operating Expenses for the
Portfolio's Trust Shares for the
current fiscal year are expected to be
less than the amounts shown above
because certain of the Portfolio's
service providers are voluntarily
waiving a portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers
and/or reimbursements are being made in
order to keep the annual fees and
expenses for the Portfolio's Trust
Shares at a certain level. OTHER
EXPENSES AND TOTAL ANNUAL PORTFOLIO
OPERATING EXPENSES, AFTER TAKING THESE
FEE WAIVERS AND EXPENSE REIMBURSEMENTS
INTO ACCOUNT, ARE EXPECTED TO BE .22%
AND .97%, RESPECTIVELY, FOR TRUST
SHARES. These fee waivers and expense
reimbursements may be revised or
cancelled at any time.
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
TRUST SHARES $147 $456 $787 $1,724
</TABLE>
55
- -
<PAGE> 56
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is capital
appreciation.
PRINCIPAL INVESTMENT STRATEGIES
Under normal conditions, the Portfolio invests at least 65%
of its total assets in the common stocks of small- to
medium-sized companies with market capitalizations from $100
million to $2 billion at the time of purchase and which the
Adviser believes have above-average prospects for capital
appreciation. Stocks purchased by the Portfolio may be
listed on a national securities exchange or may be unlisted
securities with or without an established over-the-counter
market.
The Portfolio also may invest a portion of its assets in
larger companies that the Adviser believes offer improved
growth possibilities because of rejuvenated management,
product changes or other developments likely to stimulate
earnings or asset growth. The Portfolio also may invest in
stocks the Adviser believes are undervalued or in initial
public offerings (IPOs) of new companies that demonstrate
the potential for price appreciation. The Adviser selects
stocks based on a number of factors, including historical
and projected earnings, asset value, potential for price
appreciation and earnings growth, and quality of the
products manufactured or services offered.
PRINCIPAL RISK CONSIDERATIONS
The Portfolio invests in stocks and other equity securities,
which may decline in value over short or extended periods of
time. Equity markets tend to be cyclical; there are times
when stock prices generally increase, and other times when
they generally decrease. This could cause the value of your
investment in the Portfolio to fluctuate.
Compared to larger-capitalization stocks,
small-capitalization stocks tend to carry greater risk and
exhibit greater price volatility because their businesses
may not be well-established. In addition, some smaller
companies may have specialized or limited product lines,
markets or financial resources and may be dependent on
one-person management. All of these factors increase risk
and may result in more significant losses than the other
Mercantile Stock Portfolios. In an effort to reduce the
risks inherent in smaller-company stocks, the Portfolio's
holdings are diversified over a number of companies and
industry groups.
The Adviser evaluates the rewards and risks presented by all
securities purchased by the Portfolio and how they may
advance the Portfolio's investment objective. It is
possible, however, that these evaluations will prove to be
inaccurate.
</TABLE>
logo
logo Q
SMALL CAP
EQUITY PORTFOLIO
RISK/RETURN SUMMARY
- -
<TABLE>
<S> <C>
PORTFOLIO MANAGER
Robert J. Anthony, Senior
Associate at MVA, is
responsible for the
day-to-day management of the
Portfolio. He has been with
MVA for 25 years and has
managed the Portfolio since
its inception in 1992.
</TABLE>
56
<PAGE> 57
RETURN HISTORY
The bar chart and table on
this page show the
Portfolio's annual returns
and long-term performance,
thereby giving some
indication of the risk of
investing in the Portfolio.
The bar chart shows how the
performance of the
Portfolio's Trust Shares
has varied from year to
year. The table shows how
the Portfolio's average
annual returns for one
year, five years and since
inception compare to those
of a broad-based market
index. Both the bar chart
and the table assume
reinvestment of all
dividends and
distributions. The
Portfolio's past
performance does not
necessarily indicate how it
will perform in the future.
KNOW YOUR INDEX
THE RUSSELL 2000 INDEX is
an unmanaged index
comprised of the 2,000
smallest companies of the
3,000 largest U.S. based on
market capitalization.
SMALL CAP
EQUITY PORTFOLIO
RISK/RETURN SUMMARY
TRUST SHARES
YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
[STATED IN PERCENTAGES]
<TABLE>
<S> <C>
1993 23.59
1994 2.52
1995 17.24
1996 10.98
1997 20.79
1998 -7.80
</TABLE>
<TABLE>
<S> <C>
Best quarter: 18.51% for the quarter ending
December 31, 1992
Worst quarter: -24.71% for the quarter
ending September 30, 1998
</TABLE>
AVERAGE ANNUAL TOTAL
RETURNS for the periods
ended December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION*
<S> <C> <C> <C>
Trust Shares (7.80)% 8.24% 12.07%
Russell 2000 Index (2.55)% 11.87% 13.86%
</TABLE>
* May 6, 1992 for Trust Shares; April 30, 1992 for the Russell 2,000 Index.
57
- -
<PAGE> 58
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then
sell all of your shares at
the end of those periods.
The example also assumes
that your investment has a
5% return each year and the
Portfolio's operating
expenses remain the same.
Although your actual costs
may be higher or lower,
based on these assumptions
your costs would be:
SMALL
CAP
EQUITY
RISK/RETURN SUMMARY PORTFOLIO
FEES AND EXPENSES
<TABLE>
<S> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS) TRUST SHARES
The table on the right shows the
fees and expenses that you pay if
you buy and hold Trust Shares of the
Small Cap Equity Portfolio.
Management Fees .75%
Distribution (12b-1) Fees None
Other Expenses .60%(1)
Total Annual Portfolio Operating
Expenses 1.35%(1)
</TABLE>
(1) Other Expenses and Total Annual
Portfolio Operating Expenses for the
Portfolio's Trust Shares for the
current fiscal year are expected to be
less than the amounts shown above
because certain of the Portfolio's
service providers are voluntarily
waiving a portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers
and/or reimbursements are being made in
order to keep the annual fees and
expenses for the Portfolio's Trust
Shares at a certain level. OTHER
EXPENSES AND TOTAL ANNUAL PORTFOLIO
OPERATING EXPENSES, AFTER TAKING THESE
FEE WAIVERS AND EXPENSE REIMBURSEMENTS
INTO ACCOUNT, ARE EXPECTED TO BE .20%
AND .95%, RESPECTIVELY, FOR TRUST
SHARES. These fee waivers and expense
reimbursements may be revised or
cancelled at any time.
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
TRUST SHARES $137 $428 $739 $1,624
</TABLE>
58
- -
<PAGE> 59
INDEXING is a strategy
whereby a Portfolio
attempts to weight its
securities to match
those of a broadly-
based securities index
in an attempt to
approximate the
index's performance.
THE S&P SMALLCAP 600
INDEX is an unmanaged
index that tracks the
performance of 600
domestic companies
traded on the New York
Stock Exchange, the
American Stock
Exchange and NASDAQ.
The S&P SmallCap Index
is heavily weighted
with the stocks of
small companies.
logo
logo Q
SMALL CAP EQUITY
INDEX PORTFOLIO
RISK/RETURN SUMMARY
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to provide
investment results that, before deduction of operating
expenses, approximate the price and yield performance of
U.S. common stocks with smaller stock market
capitalizations, as represented by the S&P SmallCap 600
Index.
The Portfolio's investment objective can be changed by the
Fund's Board of Directors without shareholder approval.
Shareholders will be given at least 30 days' written notice
before any such change occurs.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio uses an "indexing" strategy through the use of
computer models to approximate the investment performance of
the S&P SmallCap 600 Index. The Portfolio will invest at
least 80% of its total assets in securities listed in the
S&P SmallCap 600 Index and typically will hold all 600
stocks represented in the Index. Under certain
circumstances, however, the Portfolio may not hold all 600
stocks in the Index because of shareholder activity or
changes in the Index. In general, each stock's percentage
weighting in the Portfolio is based on its weighting in the
S&P SmallCap 600 Index. When stocks are removed from or
added to the Index, those changes are reflected in the
Portfolio. The Portfolio periodically "rebalances" its
holdings as dictated by changes in shareholder purchase and
redemption activity and in the composition of the S&P
SmallCap 600 Index.
PRINCIPAL RISK CONSIDERATIONS
The Portfolio invests in stocks and other equity securities,
which may decline in value over short or extended periods of
time. Equity markets tend to be cyclical; there are times
when stock prices generally increase, and other times when
they generally decrease. This could cause the value of your
investment in the Portfolio to fluctuate.
In addition, the Portfolio is subject to the additional risk
that the small-capitalization stocks that it holds may not
perform as well as other types of stocks. Compared to
larger-capitalization stocks, small-capitalization stocks
tend to carry greater risk and exhibit greater price
volatility because their businesses may not be
well-established. In addition, some smaller companies may
have specialized or limited product lines, markets or
financial resources and may be dependent on one-person
management. All of these factors increase risk and may
result in more significant losses than the other Mercantile
Stock Portfolios. By typically investing in all 600 stocks
in the Index, the Portfolio remains broadly diversified,
which may reduce some of this risk. There is the additional
risk that the Portfolio's investment results may fail to
match those of the S&P SmallCap 600 Index.
RETURN HISTORY
The Portfolio does not have a long-term performance record
because it has been in operation for less than one calendar
year.
</TABLE>
59
- -
<PAGE> 60
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then
sell all of your shares at
the end of those periods.
The example also assumes
that your investment has a
5% return each year and the
Portfolio's operating
expenses remain the same.
Although your actual costs
may be higher or lower,
based on these assumptions
your costs would be:
SMALL CAP EQUITY
INDEX PORTFOLIO
RISK/RETURN SUMMARY
FEES AND EXPENSES
<TABLE>
<S> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS) TRUST SHARES
The table on the right shows the fees and
expenses that you pay if you buy and hold
Trust Shares of the Small Cap Equity Index
Portfolio.
Management Fees .40%
Distribution (12b-1) Fees None
Other Expenses .79%(1)
Total Annual Portfolio Operating
Expenses 1.19%(1)
</TABLE>
(1) Other Expenses and Total Annual
Portfolio Operating Expenses for the
Portfolio's Trust Shares for the
current fiscal year are estimated to be
less than the amounts shown above
because certain of the Portfolio's
service providers are voluntarily
waiving a portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers
and/or reimbursements are being made in
order to keep the annual fees and
expenses for the Portfolio's Trust
Shares at a certain level. OTHER
EXPENSES AND TOTAL ANNUAL PORTFOLIO
OPERATING EXPENSES, AFTER TAKING THESE
FEE WAIVERS AND EXPENSE REIMBURSEMENTS
INTO ACCOUNT, ARE ESTIMATED TO BE .32%
AND .72%, RESPECTIVELY, FOR TRUST
SHARES. These fee waivers and expense
reimbursements may be revised or
cancelled at any time.
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
TRUST SHARES $121 $378 $654 $1,443
</TABLE>
60
- -
<PAGE> 61
SUB-ADVISER/ PORTFOLIO
MANAGER
MVA has appointed Clay
Finlay, Inc. ("Clay
Finlay" or the
"Sub-Adviser") as sub-
adviser to assist in
the day-to- day
management of the
Portfolio. Frances
Dakers, a principal
and senior portfolio
manager of Clay
Finlay, is responsible
for the management of
the Portfolio. Ms.
Dakers has been with
Clay Finlay since
January 1982 and has
managed the Portfolio
since it began
operations in 1994.
logo
logo
INTERNATIONAL EQUITY
PORTFOLIO
RISK/RETURN SUMMARY
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to provide capital
growth consistent with reasonable investment risk.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio invests primarily in foreign common stocks,
most of which will be denominated in foreign currencies.
During normal market conditions, the Portfolio will invest
substantially all (at least 80%) of its total assets in the
securities of companies that derive more than 50% of their
gross revenues outside the United States or have more than
50% of their assets outside the United States. Under normal
market conditions, the Portfolio invests in equity
securities from at least three foreign countries. Generally,
at least 50% of the Portfolio's total assets will be
invested in securities of companies located either in the
developed countries of Western Europe or in Japan. The
Portfolio also may invest in other developed countries and
in countries with emerging markets or economies.
By investing in various foreign stocks, the Portfolio
attempts to achieve broad diversification and to take
advantage of differences between economic trends and the
performance of securities markets in different countries,
regions and geographic areas. In selecting stocks, the Sub-
Adviser uses a screening tool to determine which companies
represent the best values relative to their long-term growth
prospects and local markets. The Sub-Adviser also uses
fundamental analysis by evaluating balance sheets, market
share and strength of management.
PRINCIPAL RISK CONSIDERATIONS
Investing in foreign companies involves different risks than
investing in U.S. companies due to such factors as currency
exchange rate volatility, government restrictions, different
accounting standards and political instability. The
multinational character of the Portfolio's investments
should reduce the effect that events in any one country or
geographic area will have on overall performance. However,
negative results from one foreign market may offset gains
from another market or may negatively affect other foreign
markets. The risks associated with foreign investments are
heightened when investing in emerging markets. The
governments and economies of emerging market countries
feature greater instability than those of more developed
countries. Such investments tend to fluctuate in price more
widely and to be less liquid than other foreign investments.
As with U.S. equity markets, foreign equity markets tend to
be cyclical. There are times when stock prices generally
increase, and other times when they generally decrease.
The Adviser evaluates the rewards and risks presented by all
securities purchased by the Portfolio and how they may
advance the Portfolio's investment objective. It is
possible, however, that these evaluations will prove to be
inaccurate.
</TABLE>
61
- -
<PAGE> 62
RETURN HISTORY
The bar chart and table on
this page show the
Portfolio's annual returns
and long-term performance,
thereby giving some
indication of risk of
investing in the Portfolio.
The bar chart shows how the
performance of the
Portfolio's Trust Shares
has varied from year to
year. The table shows how
the Portfolio's average
annual returns for one year
and since inception compare
to those of a broad-based
market index. Both the bar
chart and table assume
reinvestment of all
dividends and
distributions. The
Portfolio's past
performance does not
necessarily indicate how it
will perform in the future.
KNOW YOUR INDEX
THE MORGAN STANLEY CAPITAL
INTERNATIONAL EUROPE,
AUSTRALASIA AND FAR EAST
INDEX, OR EAFE INDEX, is an
unmanaged index consisting
of companies in Australia,
New Zealand, Europe and the
Far East.
INTERNATIONAL EQUITY
PORTFOLIO
RISK/RETURN SUMMARY
TRUST SHARES
YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
[STATED IN PERCENTAGES]
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY PORTFOLIO
------------------------------
<S> <C>
'1995' 9.56
'96' 10.36
'97' 4.88
'98' 17.85
</TABLE>
<TABLE>
<S> <C>
Best quarter: 19.42% for the quarter ending
December 31, 1998
Worst quarter: -16.98% for the quarter ending
September 30, 1998
</TABLE>
AVERAGE ANNUAL TOTAL
RETURNS for the periods
ending December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION*
<S> <C> <C>
Trust Shares 17.85% 8.91%
EAFE Index 18.23% 7.25%
</TABLE>
* April 4, 1994 for Trust Shares; March 31, 1994 for the EAFE Index.
62
- -
<PAGE> 63
FEES AND EXPENSES
<TABLE>
<S> <C> <C>
The table on the right shows the fees and
expenses that you pay if you buy and hold ANNUAL PORTFOLIO OPERATING EXPENSES
Trust Shares of the International Equity (EXPENSES THAT ARE DEDUCTED FROM THE
Portfolio. PORTFOLIO'S ASSETS) TRUST SHARES
Management Fees 1.00%
Distribution (12b-1) Fees None
Other Expenses .75%(1)
Total Annual Portfolio Operating Expenses 1.75%(1)
</TABLE>
(1) Other Expenses and Total Annual
Portfolio Operating Expenses for the
Portfolio's Trust Shares for the
current fiscal year are expected to be
less than the amounts shown above
because certain of the Portfolio's
service providers are voluntarily
waiving a portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers
and/or reimbursements are being made in
order to keep the annual fees and
expenses for the Portfolio's Trust
Shares at a certain level. OTHER
EXPENSES AND TOTAL ANNUAL PORTFOLIO
OPERATING EXPENSES, AFTER TAKING THESE
FEE WAIVERS AND EXPENSE REIMBURSEMENTS
INTO ACCOUNT, ARE EXPECTED TO BE .28%
AND 1.28% RESPECTIVELY, FOR TRUST
SHARES. These fee waivers and expense
reimbursements may be revised or
cancelled at any time.
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then sell
all of your shares at the
end of those periods. The
example also assumes that
your investment has a 5%
return each year and the
Portfolio's operating
expenses remain the same.
Although your actual costs
may be higher or lower,
based on these assumptions
your costs would be:
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
TRUST SHARES $178 $551 $949 $2,062
</TABLE>
INTERNATIONAL EQUITY
PORTFOLIO
RISK/RETURN SUMMARY
63
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<PAGE> 64
The principal risks of investing in each Portfolio are described on the
previous pages. The following supplements that discussion.
SECURITIES LENDING
To obtain interest income, each Portfolio (except the Tax-Exempt Money Market
and Missouri Tax-Exempt Bond Portfolios) may lend their securities to
broker-dealers, banks or institutional borrowers pursuant to agreements
requiring that the loans be continuously secured by collateral equal at all
times in value to at least the market value of the securities loaned. There
is the risk that, when lending portfolio securities, the securities may not
be available to the Portfolio on a timely basis. Therefore, the Portfolio may
lose the opportunity to sell the securities at a desirable price.
Additionally, in the event that a borrower of securities would file for
bankruptcy or become insolvent, disposition of the securities may be delayed
pending court action.
TEMPORARY DEFENSIVE POSITIONS
Each Portfolio may temporarily hold investments that are not part of its main
investment strategy to try to avoid losses during unfavorable market
conditions. These investments may include cash (which will not earn any
income). In addition, the Tax-Exempt Money Market Portfolio may hold
short-term taxable money market investments not to exceed 20% of the
Portfolio's assets, each of the Taxable Bond, Tax-Exempt Bond and Stock
Portfolios may hold money market instruments, including short-term debt
securities issued or guaranteed by the U.S. Government or its agencies, and
the International Equity Portfolio may hold debt obligations of U.S.
companies having their principal business activities in the U.S. This
strategy could prevent a Portfolio from achieving its investment objective
and, if utilized by a Stock Portfolio, could reduce the Portfolio's return
and affect its performance during a market upswing.
OTHER TYPES OF INVESTMENTS
This prospectus describes each Portfolio's principal investment strategies
and the particular types of securities in which each Portfolio principally
invests. Each Portfolio may, from time to time, make other types of
investments and pursue other investment strategies in support of its overall
investment goal. These supplemental investment strategies -- and the risks
involved -- are described in detail in the Statement of Additional
Information ("SAI"), which is referred to on the back cover of this
prospectus.
YEAR 2000 RISKS
As with other mutual funds, financial and business organizations and
individuals around the world, the Portfolios could be adversely affected if
the computer systems used by the Adviser and the Portfolios' other service
providers do not properly process and calculate date-related information and
data from and after January 1, 2000. This possibility is commonly known as
the Year 2000 or "Y2K" problem. The Adviser is taking steps to address the
Y2K problem with respect to the computer systems that it uses and to obtain
assurances that comparable steps are being taken by the Portfolios' other
major service providers. At this time, however, there can be no assurance
that these steps will be sufficient to avoid any adverse impact on the
Portfolios. The Y2K problem could have a negative impact on the issuers of
securities in which the Portfolios invest, which could hurt the Portfolios'
investment returns.
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RISK/RETURN SUMMARY ADDITIONAL INFORMATION ON RISK
64
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<PAGE> 65
BUSINESS DAYS DEFINED
A business day is any
day that both the New
York Stock Exchange
and the Federal
Reserve Bank of St.
Louis are open for
business. Currently,
the Fund observes the
following holidays:
New Year's Day, Martin
Luther King Jr. Day,
Presidents' Day, Good
Friday, Memorial Day
(observed),
Independence Day
(observed), Labor Day,
Columbus Day,
Veterans' Day,
Thanksgiving and
Christmas.
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YOUR ACCOUNT EXPLANATION OF SALES PRICE
<TABLE>
<S> <C>
Trust Shares and Trust II Shares of a Portfolio are sold at
their net asset value (NAV). The NAV for each class of
shares of a Money Market Portfolio is determined as of 12:00
noon (Eastern time) and as of the close of regular trading
on the New York Stock Exchange (currently 4:00 p.m., Eastern
time) on every business day. The NAV for each class of
shares of a Taxable Bond, Tax-Exempt Bond or Stock Portfolio
is determined as of the close of regular trading on the New
York Stock Exchange (currently 4:00 p.m., Eastern time) on
every business day.
The NAV for a class of shares is determined by adding the
value of a Portfolio's investments, cash and other assets
attributable to a particular share class, subtracting the
Portfolio's liabilities attributable to that class and then
dividing the result by the total number of shares in the
class that are outstanding.
- The investments of each of the Money Market Portfolios are
valued at amortized cost, which is approximately equal to
market value.
- The investments of each of the Taxable Bond, Tax-Exempt
Bond and Stock Portfolios are valued according to market
value. When a market quote is not readily available, the
security's value is based on "fair value" as determined by
MVA (or Clay Finlay, with respect to the International
Equity Portfolio) under the supervision of the Fund's
Board of Directors. Foreign securities acquired by the
International Equity Portfolio may be valued in foreign
markets on days when the Portfolio's NAV is not
calculated. In such cases, the NAV of the Portfolio's
shares may be significantly affected on days when
investors cannot buy and sell Portfolio shares.
- A properly placed purchase order (see p. 66) that is
delivered to the Fund by 12:00 noon (Eastern time) on any
business day with respect to the Treasury Money Market
Portfolio and Tax-Exempt Money Market Portfolio or by 3:00
p.m. (Eastern time) on any business day with respect to
the Money Market Portfolio receives the share price next
determined if the Fund receives payment in federal funds
or other immediately available funds by 4:00 p.m. (Eastern
time) that day. If payment is not received by that time,
the order will be cancelled. A properly placed purchase
order that is delivered to the Fund after 12:00 noon
(Eastern time) with respect to the Treasury Money Market
Portfolio and Tax-Exempt Money Market Portfolio or after
3:00 p.m. (Eastern time) with respect to the Money Market
Portfolio will be placed the following business day.
- A properly placed purchase order (see p. 66) for one of
the Taxable Bond, Tax-Exempt Bond or Stock Portfolios that
is delivered to the Fund before 4:00 p.m. (Eastern time)
on any business day receives the share price determined as
of 4:00 p.m. that day. If the order is received after 4:00
p.m., it will receive the price determined on the next
business day. Your financial institution must forward your
payment to the Fund no later than 4:00 p.m. the next
business day after placing the order, or the order will be
cancelled.
</TABLE>
65
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<PAGE> 66
Trust Shares of the Portfolios are sold to financial institutions, such as
banks, trust companies, thrift institutions and mutual funds, that are
purchasing shares 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 are also sold to financial
institutions that are purchasing shares on behalf of accounts for which they
provide cash management services.
Trust II Shares of the Money Market Portfolios are sold to financial
institutions that are purchasing shares on their own behalf or on behalf of
certain qualified accounts. Contact your financial institution for
information as to which types of accounts are eligible to purchase Trust II
Shares.
If you are purchasing Trust Shares or Trust II Shares through a financial
institution, you must follow the procedures established by your institution.
Your financial institution is responsible for sending your purchase order to
the Fund's distributor and wiring payment to the Fund's custodian. Your
financial institution holds the shares in your name and receives all
confirmations of purchases and sales. Financial institutions placing orders
for themselves or on behalf of their customers should call the Fund at
1-800-452-2724.
The Fund does not have any minimum investment requirement for Trust Shares or
Trust II Shares, but your financial institution may do so. They may also
charge transaction fees and require you to maintain a minimum account
balance.
YOUR ACCOUNT HOW TO BUY SHARES
66
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<PAGE> 67
Orders to sell or "redeem" Trust Shares or Trust II Shares should be placed
with the same financial institution that placed the original purchase order
in accordance with the procedures established by that institution. Your
financial institution is responsible for sending your order to the Fund's
distributor and for crediting your account with the proceeds. The Fund does
not currently charge for wiring the proceeds, but your financial institution
may do so.
If the shares being sold are represented by share certificates, then the
order to sell must be made in writing and mailed to: Mercantile Mutual Funds,
Inc., P.O. Box 78069 -- Tram 001/128/41-6, St. Louis, Missouri 63178. The
order must be accompanied by the share certificates, properly endorsed for
transfer. Additional documents may be required for certain types of
shareholders, such as corporations, partnerships, executors, trustees,
administrators or guardians.
The Fund's transfer agent may require a signature guarantee unless the
redemption proceeds are payable to the shareholder of record and the proceeds
are either mailed to the shareholder's address of record or electronically
transferred to the account designated on the original account application. A
signature guarantee helps prevent fraud, and you may obtain one from most
banks and broker-dealers. Contact the Fund for more information on signature
guarantees.
Trust Shares and Trust II Shares will be sold at the NAV next determined
after the Fund accepts an order (see above). If the order to sell is received
and accepted by the Fund before 12:00 noon (Eastern time) on a business day
with respect to the Treasury Money Market Portfolio and Tax-Exempt Money
Market Portfolio or before 3:00 p.m. (Eastern time) on a business day with
respect to the Money Market Portfolio, the proceeds are sent electronically
the same day to the financial institution that placed the order. If the order
to sell is received and accepted by the Fund after 12:00 noon (Eastern time)
on a business day with respect to the Treasury Money Market Portfolio and
Tax-Exempt Money Market Portfolio or after 3:00 p.m. (Eastern time) on a
business day with respect to the Money Market Portfolio, or on a non-business
day, the proceeds normally are sent electronically to the financial
institution on the next business day.
Proceeds from redemptions from the Taxable Bond, Tax-Exempt Bond and Stock
Portfolios ordinarily are sent electronically to your financial institution
the next business day as long as the Fund receives your order by 4:00 p.m.
(Eastern time) on a business day.
YOUR ACCOUNT HOW TO SELL SHARES
67
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<PAGE> 68
HOW TO EXCHANGE SHARES
The exchange privilege enables shareholders to exchange Trust Shares of one
Portfolio for Trust Shares of another Portfolio, and Trust II Shares of one
Money Market Portfolio for Trust II Shares of another Money Market Portfolio.
In addition, you may be able to exchange Trust Shares of a Portfolio for
Investor A Shares of the same Portfolio if it involves the distribution of
assets from certain types of accounts held at Mercantile Trust Company
National Association or any of its affiliates. Contact your financial
institution or the Fund's distributor for additional information on the
exchange privilege. The exchange privilege may be exercised only in those
states where Trust Shares or Trust II Shares, as applicable, of the Portfolio
being acquired may be legally sold.
ADMINISTRATIVE SERVICES FEES
Trust Shares of the Portfolios pay administrative services fees at an annual
rate of up to 0.25% of each Money Market Portfolio's and up to 0.30% of each
Taxable Bond, Tax-Exempt Bond and Stock Portfolio's Trust Share assets. These
fees are paid to financial institutions that provide certain administrative
services to their customers who own Trust Shares. No administrative services
fees are payable with respect to Trust II Shares of the Money Market
Portfolios.
GENERAL TRANSACTION POLICIES
The Fund reserves the right to:
- Refuse any order to buy shares.
- Reject any exchange request.
- Redeem all shares in an account if the balance falls below $500. If,
within 60 days of the Fund's written request, the account balance has
not been increased, a shareholder may be required to redeem all
shares. The Fund will not require a shareholder to redeem shares if
the value of the account drops below $500 due to fluctuations in net
asset value.
- Send redemption proceeds within seven days after receiving a request,
if an earlier payment could adversely affect a Portfolio.
- Modify or terminate the exchange privilege after 60 days' written
notice to shareholders.
- Make a "redemption in kind." Under abnormal conditions that may make
payment in cash unwise, the Fund may offer partial or complete payment
in portfolio securities rather than cash at such securities'
then-market-value equal to the redemption price. In such cases, a
shareholder may incur brokerage costs in converting these securities
to cash.
Shareholders may be responsible for any fraudulent telephone orders as long
as the Fund has taken reasonable precautions to verify the shareholder's
identity. Shareholders who experience difficulty getting through to the Fund
by telephone because of unusual market conditions should consider selling or
exchanging their shares by mail.
YOUR ACCOUNT
68
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<PAGE> 69
DIVIDENDS AND DISTRIBUTIONS
- MONEY MARKET PORTFOLIOS
Each Money Market Portfolio declares dividends from net investment income
daily and pays them monthly. Although the Portfolios do not expect to
realize net long-term capital gains, any capital gains realized would be
distributed at least annually.
- TAXABLE BOND AND TAX-EXEMPT BOND PORTFOLIOS
Each Taxable Bond and Tax-Exempt Bond Portfolio declares dividends from
net investment income daily and pays them monthly. Capital gains, if any,
are distributed at least once a year. It's expected that each Portfolio's
annual distribution will be primarily income dividends.
- STOCK PORTFOLIOS
The Balanced, Equity Income, Equity Index, Growth & Income Equity and
Growth Equity Portfolios declare and pay dividends from net investment
income monthly. The Small Cap Equity, Small Cap Equity Index and
International Equity Portfolios declare and pay dividends from net
investment income quarterly. Capital gains for all of the Portfolios are
distributed at least once a year. It's expected that each Portfolio's
annual distributions will normally -- but not always -- consist primarily
of capital gains and not ordinary income.
- ALL PORTFOLIOS
Dividends on each share class of a Portfolio are determined in the same
manner and are paid in the same amount. However, each share class bears
all expenses associated with that particular class.
All of your dividends and capital gains distributions with respect to a
particular Portfolio will be reinvested in additional shares of the same
class unless you or your financial institution instruct otherwise on your
account application or have redeemed all shares you held in the Portfolio.
In such cases, dividends and distributions will be paid in cash.
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DISTRIBUTIONS AND TAXES
69
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<PAGE> 70
DISTRIBUTIONS AND TAXES
TAXATION
As with any investment, you should consider the tax implications of an
investment in the Portfolios. The following is only a brief summary of some
of the important tax considerations generally affecting the Portfolios and
their shareholders under current law, which may be subject to change in the
future. Consult your tax adviser with specific reference to your own tax
situation.
- TREASURY MONEY MARKET, MONEY MARKET, TAXABLE BOND AND STOCK PORTFOLIOS
The Portfolios' distributions generally will be taxable to shareholders as
ordinary income and capital gains (which may be taxable at different rates
depending on the length of time each Portfolio held the relevant assets).
You will be subject to income tax on these distributions whether they are
paid in cash or reinvested in additional shares.
If you purchase shares just prior to a distribution, the purchase price
will reflect the amount of the upcoming distribution, but you will be taxed
on the entire amount of the distribution received even though, as an
economic matter, the distribution simply constitutes a return of capital.
This is known as "buying into a dividend."
You will recognize a taxable gain or loss on a sale, exchange or redemption
of your shares, including an exchange for shares of another Portfolio,
based on the difference between your tax basis in the shares and the amount
you receive for them. Any loss realized on shares held for six months or
less will be treated as a long-term capital loss to the extent that any
capital gains distributions were received on the shares.
Distributions on, and sales, exchanges and redemptions of, shares held in
an IRA or other tax-qualified plan will not be currently taxable.
The International Equity Portfolio is expected to be subject to foreign
withholding taxes with respect to dividends or interest received from
sources in foreign countries. The International Equity Portfolio may make
an election to treat a proportionate amount of such taxes as a distribution
to each shareholder. This would allow each shareholder to either (1) credit
such proportionate amount of taxes against U.S. federal income tax
liability; or (2) take such amount as an itemized deduction.
- TAX-EXEMPT MONEY MARKET AND TAX-EXEMPT BOND PORTFOLIOS
It is expected that the Tax-Exempt Money Market, Short-Intermediate
Municipal, Missouri Tax-Exempt Bond and National Municipal Bond Portfolios
will distribute dividends derived from interest earned on exempt
securities, and these "exempt-interest dividends" will be exempt income for
shareholders for federal income tax purposes. However, distributions, if
any, derived from net capital gains of each Portfolio will generally be
taxable to you as capital gains. Dividends, if any, derived from short-term
capital gain or taxable interest income will be taxable to you as ordinary
income.
If you receive an exempt-interest dividend with respect to any share and
the share is held by you for six months or less, any loss on the sale or
exchange of the share will be disallowed to the extent of such dividend
amount.
You should note that a portion of the exempt-interest dividends paid by
each Portfolio may constitute an item of tax preference for purposes of
determining federal alternative minimum tax liability. Exempt-interest
dividends will also be considered along with other adjusted gross income in
determining whether any Social Security or railroad retirement payments
received by you are subject to federal income taxes.
70
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<PAGE> 71
<TABLE>
<S> <C>
- STATE AND LOCAL TAXES
The Missouri Tax-Exempt Bond Portfolio anticipates that the
dividends that it pays that are attributable to interest
earned by the Portfolio will also be exempt from Missouri
state income taxes. Dividends paid by the Tax-Exempt Money
Market, Short-Intermediate Municipal and National Municipal
Bond Portfolios that are attributable to interest earned by
the Portfolios may be taxable to shareholders under state
or local law.
The Treasury Money Market Portfolio is designed to provide
shareholders, to the extent permitted by federal law, with
income that is exempt or excluded from taxation at the
state or local level. Please consult your tax adviser as to
the status of distributions by the Portfolio in your state.
For more information regarding the taxation of the
Portfolios, consult the SAI under the heading "Additional
Information Concerning Taxes." You also should consult your
tax adviser for information regarding state and local tax
consequences and the applicability of any foreign taxes or
U.S. withholding taxes with respect to your specific
situation.
You will be advised at least
annually regarding the
federal income tax treatment
and, if you own shares of
the Missouri Tax-Exempt Bond
Portfolio, the Missouri
state income tax treatment,
of dividends and
distributions made to you.
You should save your account
statements because they
contain information you will
need to calculate your
capital gains or losses upon
your ultimate sale or
exchange of shares in the
Portfolios.
</TABLE>
DISTRIBUTIONS AND TAXES
71
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<PAGE> 72
THE ADVISER
MVA, subject to the general supervision of the Fund's Board of Directors, is
responsible for the day-to-day management of the Portfolios in accordance
with each Portfolio's respective investment objective and policies. This
includes making investment decisions, buying and selling securities and
overseeing the administration and recordkeeping for each Portfolio.
In exchange for these services, MVA receives an investment advisory fee,
which is calculated daily and paid monthly, according to the average daily
net assets of each Portfolio. For the fiscal year ended November 30, 1998,
the Portfolios paid MVA advisory fees as follows:
<TABLE>
<CAPTION>
INVESTMENT ADVISORY FEES
PORTFOLIO AS A % OF NET ASSETS
<S> <C>
------------------------------
Treasury Money Market Portfolio .35%
------------------------------
Money Market Portfolio .35%
------------------------------
Tax-Exempt Money Market Portfolio .35%
------------------------------
U.S. Government Securities Portfolio .45%
------------------------------
Intermediate Corporate Bond Portfolio .35%
------------------------------
Bond Index Portfolio .24%
------------------------------
Government & Corporate Bond Portfolio .45%
------------------------------
Short-Intermediate Municipal Portfolio .33%
------------------------------
Missouri Tax-Exempt Bond Portfolio .45%
------------------------------
National Municipal Bond Portfolio .34%
------------------------------
Balanced Portfolio .75%
------------------------------
Equity Index Portfolio .23%
------------------------------
Equity Income Portfolio .62%
------------------------------
Growth & Income Equity Portfolio .55%
------------------------------
Growth Equity Portfolio .75%
------------------------------
Small Cap Equity Portfolio .75%
------------------------------
Small Cap Equity Index Portfolio* .40%
------------------------------
International Equity Portfolio 1.00%
-----------------------------------------------------------------------------
</TABLE>
* The Portfolio commenced operations on December 30, 1998 and the fee
shown is that which currently is in effect.
THE SUB-ADVISER
Clay Finlay, Inc., an experienced international investment manager, serves as
sub-adviser to the International Equity Portfolio and is responsible for the
management of the Portfolio's assets. Clay Finlay manages the Portfolio under
the guidance and direction of MVA and according to its sub-advisory agreement
with MVA. For its services, Clay Finlay receives from MVA a monthly fee based
on a percentage of the Portfolio's average daily net assets.
Founded in 1982, Clay Finlay is a registered investment adviser and a
wholly-owned subsidiary of United Asset Management Corporation, a financial
services holding company. Clay Finlay's principal office is located at 200
Park Avenue, 56th Floor, New York, NY 10166.
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MANAGEMENT OF THE FUND
72
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<PAGE> 73
INTRODUCTION
The financial highlights tables presented below are intended to help you
understand the financial performance of each Portfolio's Trust Shares and/or
Trust II Shares for the past five years (or, if shorter, the period since the
Portfolio began operations or the particular shares were first offered).
Certain information reflects financial results for a single Trust Share or
Trust II Share in each Portfolio. The total returns in the tables represent
the rate that an investor would have earned (or lost) on an investment in
Trust Shares or Trust II Shares, assuming reinvestment of all dividends and
distributions. This information has been audited by KPMG LLP, independent
auditors, whose report, along with the Portfolios' financial statements, are
included in the Fund's Annual Report to Shareholders, and are incorporated by
reference into the SAI. The Small Cap Equity Index Portfolio did not conduct
investment operations during the periods covered by the tables.
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FINANCIAL HIGHLIGHTS
73
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<PAGE> 74
<TABLE>
<CAPTION>
TRUST SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
YEAR ENDED NOVEMBER 30,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.045 0.046 0.045 0.050 0.033
------------------------------------------------------------------------------------------------
Total from Investment Activities 0.045 0.046 0.045 0.050 0.033
------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.045) (0.046) (0.045) (0.050) (0.033)
------------------------------------------------------------------------------------------------
Total Distributions (0.045) (0.046) (0.045) (0.050) (0.033)
------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------------------------------------------------------------------------------------------
Total Return 4.56% 4.70% 4.64% 5.12% 3.38%
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000) $ 245,959 $ 283,653 $ 131,322 $ 252,780 $ 242,099
Ratio of expenses to average net
assets 0.65% 0.61% 0.61% 0.60% 0.49%
Ratio of net investment income to
average net assets 4.45% 4.60% 4.55% 5.01% 3.26%
Ratio of expenses to average net
assets* 0.96% 0.92% 0.76% 0.75% 0.94%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
FINANCIAL HIGHLIGHTS TREASURY MONEY MARKET PORTFOLIO
74
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<PAGE> 75
<TABLE>
<CAPTION>
TRUST II SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
NOVEMBER 13, 1998 TO
NOVEMBER 30, 1998(a)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00
-------------------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.002
-------------------------------------------------------------------------------------------------------------
Total from Investment Activities 0.002
-------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.002)
-------------------------------------------------------------------------------------------------------------
Total Distributions (0.002)
-------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.00
-------------------------------------------------------------------------------------------------------------
Total Return 0.20%(b)
RATIOS/SUPPLEMENTARY DATA:
Net assets at end of period (000) $76,995
Ratio of expenses to average net assets 0.55%(c)
Ratio of net investment income to average net assets 4.09%(c)
Ratio of expenses to average net assets* 0.70%(c)
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
FINANCIAL HIGHLIGHTS TREASURY MONEY MARKET PORTFOLIO
75
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<PAGE> 76
<TABLE>
<CAPTION>
TRUST SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
YEAR ENDED NOVEMBER 30,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.050 0.050 0.049 0.054 0.035
---------------------------------------------------------------------------------------------
Total from Investment Activities 0.050 0.050 0.049 0.054 0.035
---------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.050) (0.050) (0.049) (0.054) (0.035)
---------------------------------------------------------------------------------------------
Total Distributions (0.050) (0.050) (0.049) (0.054) (0.035)
---------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------------------------------------------------------------------------------------------
Total Return 5.08% 5.06% 4.99% 5.52% 3.55%
RATIOS/SUPPLEMENTARY DATA:
Net assets at end of period (000) $820,923 $1,042,151 $717,265 $698,131 $544,952
Ratio of expenses to average net
assets 0.66% 0.64% 0.61% 0.59% 0.61%
Ratio of net investment income to
average net assets 4.97% 4.96% 4.88% 5.38% 3.45%
Ratio of expenses to average net
assets* 0.93% 0.92% 0.76% 0.74% 0.93%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
MONEY MARKET PORTFOLIO
FINANCIAL HIGHLIGHTS
76
- -
<PAGE> 77
MONEY MARKET PORTFOLIO
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
TRUST II SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
NOVEMBER 10, 1998 TO
NOVEMBER 30, 1998(a)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00
-------------------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.003
-------------------------------------------------------------------------------------------------------------
Total from Investment Activities 0.003
-------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.003)
-------------------------------------------------------------------------------------------------------------
Total Distributions (0.003)
-------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.00
-------------------------------------------------------------------------------------------------------------
Total Return 0.27%(b)
RATIOS/SUPPLEMENTARY DATA:
Net assets at end of period (000) $490,020
Ratio of expenses to average net assets 0.56%(c)
Ratio of net investment income to average net assets 4.76%(c)
Ratio of expenses to average net assets* 0.71%(c)
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
77
<PAGE> 78
FINANCIAL HIGHLIGHTS TAX-EXEMPT MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
TRUST SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS
ENDED
YEAR ENDED NOVEMBER 30, NOVEMBER 30, YEAR ENDED MAY 31,
1998 1997 1996 1995(c) 1995 1994
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-----------------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.029 0.030 0.030 0.016 0.029 0.020
-----------------------------------------------------------------------------------------------------------
Total from Investment Activities 0.029 0.030 0.030 0.016 0.029 0.020
-----------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.029) (0.030) (0.030) (0.016) (0.029) (0.020)
-----------------------------------------------------------------------------------------------------------
Total Distributions (0.029) (0.030) (0.030) (0.016) (0.029) (0.020)
-----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-----------------------------------------------------------------------------------------------------------
Total Return 2.92% 3.08% 3.06% 1.57%(a) 2.93% 1.97%
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000) $37,541 $143,517 $95,726 $78,031 $85,324 $112,594
Ratio of expenses to average net
assets 0.59% 0.58% 0.53% 0.70%(b) 0.61% 0.52%
Ratio of net investment income to
average net assets 2.88% 3.04% 3.01% 3.01%(b) 2.87% 1.95%
Ratio of expenses to average net
assets* 0.84% 0.83% 0.58% 0.75%(b) 0.70% 0.86%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
(a) Not annualized.
(b) Annualized.
(c) Upon reorganizing as a portfolio of the Fund on October 2, 1995, the
Tax-Exempt Money Market Portfolio changed its fiscal year end from May 31
to November 30.
78
<PAGE> 79
FINANCIAL HIGHLIGHTS TAX-EXEMPT MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
TRUST II SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
NOVEMBER 16, 1998 TO
NOVEMBER 30, 1998(a)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00
-------------------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.001
-------------------------------------------------------------------------------------------------------------
Total from Investment Activities 0.001
-------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.001)
-------------------------------------------------------------------------------------------------------------
Total Distributions (0.001)
-------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.00
-------------------------------------------------------------------------------------------------------------
Total Return 0.11%(b)
RATIOS/SUPPLEMENTARY DATA:
Net assets at end of period (000) $122,110
Ratio of expenses to average net assets 0.57%(c)
Ratio of net investment income to average net assets 2.69%(c)
Ratio of expenses to average net assets* 0.62%(c)
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
79
<PAGE> 80
<TABLE>
<CAPTION>
TRUST SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
YEAR ENDED NOVEMBER 30,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.62 $ 10.67 $ 10.85 $ 10.05 $ 11.20
-------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.60 0.61 0.66 0.67 0.66
Net realized and unrealized gains
(losses) from investments 0.12 (0.05) (0.15) 0.80 (0.97)
-------------------------------------------------------------------------------------------
Total from Investment Activities 0.72 0.56 0.51 1.47 (0.31)
-------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.60) (0.61) (0.66) (0.67) (0.66)
In excess of net realized gains -- -- (0.03) -- (0.18)
-------------------------------------------------------------------------------------------
Total Distributions (0.60) (0.61) (0.69) (0.67) (0.84)
-------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.74 $ 10.62 $ 10.67 $ 10.85 $ 10.05
-------------------------------------------------------------------------------------------
Total Return 6.98% 5.51% 4.88% 15.00% (2.85)%
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000) $93,683 $72,753 $60,079 $45,513 $33,166
Ratio of expenses to average net
assets 0.67% 0.67% 0.67% 0.67% 0.66%
Ratio of net investment income to
average net assets 5.64% 5.84% 6.10% 6.36% 6.25%
Ratio of expenses to average net
assets* 1.07% 1.07% 0.77% 0.77% 1.06%
Portfolio turnover** 54.57% 100.33% 53.76% 93.76% 50.00%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
FINANCIAL HIGHLIGHTS U.S. GOVERNMENT SECURITIES PORTFOLIO
80
- -
<PAGE> 81
FINANCIAL HIGHLIGHTS INTERMEDIATE CORPORATE BOND PORTFOLIO
<TABLE>
<CAPTION>
TRUST SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
YEAR ENDED FEBRUARY 10, 1997 TO
NOVEMBER 30, 1998 NOVEMBER 30, 1997(a)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.11 $ 10.00
--------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.63 0.53
Net realized and unrealized gains from
investments 0.29 0.11
--------------------------------------------------------------------------------------------------
Total from Investment Activities 0.92 0.64
--------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.63) (0.53)
Net realized gains (0.11) --
--------------------------------------------------------------------------------------------------
Total Distributions (0.74) (0.53)
--------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.29 $ 10.11
--------------------------------------------------------------------------------------------------
Total Return 9.53% 6.65%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000) $55,337 $44,443
Ratio of expenses to average net assets 0.60% 0.29%(c)
Ratio of net investment income to average net
assets 6.23% 6.90%(c)
Ratio of expenses to average net assets* 1.19% 1.32%(c)
Portfolio turnover** 9.65% 61.98%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
81
<PAGE> 82
FINANCIAL HIGHLIGHTS BOND INDEX PORTFOLIO
<TABLE>
<CAPTION>
TRUST SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
YEAR ENDED FEBRUARY 10, 1997 TO
NOVEMBER 30, 1998 NOVEMBER 30, 1997(a)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.16 $ 10.00
--------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.65 0.53
Net realized and unrealized gains from
investments 0.30 0.16
--------------------------------------------------------------------------------------------------
Total from Investment Activities 0.95 0.69
--------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.64) (0.53)
Net realized gains (0.03) --
--------------------------------------------------------------------------------------------------
Total Distributions (0.67) (0.53)
--------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.44 $ 10.16
--------------------------------------------------------------------------------------------------
Total Return 9.69% 7.15%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000) $169,388 $138,319
Ratio of expenses to average net assets 0.42% 0.23%(c)
Ratio of net investment income to average net
assets 6.20% 6.92%(c)
Ratio of expenses to average net assets* 0.93% 0.94%(c)
Portfolio turnover** 33.37% 46.16%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
82
<PAGE> 83
<TABLE>
<CAPTION>
TRUST SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
YEAR ENDED NOVEMBER 30,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.37 $ 10.34 $ 10.53 $ 9.64 $ 10.65
-------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.60 0.59 0.67 0.64 0.63
Net realized and unrealized gains
(losses) from investments 0.37 0.03 (0.19) 0.89 (0.94)
-------------------------------------------------------------------------------------------
Total from Investment Activities 0.97 0.62 0.48 1.53 (0.31)
-------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.60) (0.59) (0.67) (0.64) (0.63)
In excess of realized gains -- -- -- -- (0.07)
-------------------------------------------------------------------------------------------
Total Distributions (0.60) (0.59) (0.67) (0.64) (0.70)
-------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.74 $ 10.37 $ 10.34 $ 10.53 $ 9.64
-------------------------------------------------------------------------------------------
Total Return 9.63% 6.32% 4.82% 16.31% (3.03)%
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000) $178,868 $172,637 $141,440 $127,741 $132,577
Ratio of expenses to average net
assets 0.66% 0.65% 0.65% 0.65% 0.65%
Ratio of net investment income to
average net assets 5.71% 5.85% 6.36% 6.32% 6.25%
Ratio of expenses to average net
assets* 1.06% 1.05% 0.75% 0.75% 1.05%
Portfolio turnover** 91.14% 140.72% 149.20% 59.32% 50.00%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
FINANCIAL HIGHLIGHTS GOVERNMENT & CORPORATE BOND PORTFOLIO
83
- -
<PAGE> 84
<TABLE>
<CAPTION>
TRUST SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
YEAR ENDED NOVEMBER 30, JULY 10, 1995 TO
1998 1997 1996 November 30, 1995(a)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.10 $ 10.07 $ 10.07 $ 10.00
-----------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.38 0.40 0.41 0.14
Net realized and unrealized gains
from Investments 0.15 0.03 -- 0.07
-----------------------------------------------------------------------------------------
Total from Investment Activities 0.53 0.43 0.41 0.21
-----------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.38) (0.40) (0.41) (0.14)
-----------------------------------------------------------------------------------------
Total Distributions (0.38) (0.40) (0.41) (0.14)
-----------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.25 $ 10.10 $ 10.07 $ 10.07
-----------------------------------------------------------------------------------------
Total Return 5.36% 4.39% 4.15% 2.15%(b)
RATIOS/SUPPLEMENTARY DATA:
Net assets at end of period (000) $42,862 $30,454 $29,472 $23,754
Ratio of expenses to average net
assets 0.64% 0.38% 0.31% 0.47%(c)
Ratio of net investment income to
average net assets 3.75% 4.00% 4.07% 3.81%(c)
Ratio of expenses to average net
assets* 1.20% 1.33% 0.96% 1.12%(c)
Portfolio turnover** 18.58% 0.00% 0.00% 0.00%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolios turnover is calculated on the basis of the Portfolio as a
whole without distinguishing between classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
SHORT-INTERMEDIATE
FINANCIAL HIGHLIGHTS MUNICIPAL PORTFOLIO
84
- -
<PAGE> 85
<TABLE>
<CAPTION>
TRUST SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED
YEAR ENDED NOVEMBER 30, YEAR ENDED MAY 31,
1998 1997 1996 1995(c) 1995 1994
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.87 $ 11.69 $ 11.74 $ 11.52 $ 11.13 $ 11.54
-----------------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.55 0.56 0.57 0.28 0.57 0.58
Net realized and unrealized gains
(losses) on investments 0.21 0.18 (0.05) 0.22 0.40 (0.37)
-----------------------------------------------------------------------------------------------------------
Total from Investment Activities 0.76 0.74 0.52 0.50 0.97 0.21
-----------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.55) (0.56) (0.57) (0.28) (0.57) (0.58)
Net realized gains -- -- -- -- (0.01) (0.04)
-----------------------------------------------------------------------------------------------------------
Total Distributions (0.55) (0.56) (0.57) (0.28) (0.58) (0.62)
-----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 12.08 $ 11.87 $ 11.69 $ 11.74 $ 11.52 $ 11.13
-----------------------------------------------------------------------------------------------------------
Total Return 6.52% 6.48% 4.62% 4.41%(a) 9.12% 1.73%
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000) $94,402 $75,431 $55,905 $47,773 $44,336 $47,743
Ratio of expenses to average net
assets 0.66% 0.66% 0.65% 0.78%(b) 0.64% 0.45%
Ratio of net investment income to
average net assets 4.57% 4.76% 4.95% 4.83%(b) 5.22% 4.96%
Ratio of expenses to average net
assets* 1.06% 1.06% 0.75% 0.88%(b) 1.16% 1.13%
Portfolio turnover** 6.14% 3.50% 3.66% 1.55% -- 20.00%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between classes of shares issued.
(a) Not annualized.
(b) Annualized.
(c) Upon reorganizing as a portfolio of the Fund on October 2, 1995, the
Missouri Tax-Exempt Bond Portfolio changed its fiscal year end from May
31 to November 30.
FINANCIAL HIGHLIGHTS MISSOURI TAX-EXEMPT BOND PORTFOLIO
85
- -
<PAGE> 86
<TABLE>
<CAPTION>
TRUST SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
NOVEMBER 18, 1996
YEAR ENDED NOVEMBER 30, TO NOVEMBER 30,
1998 1997 1996(a)
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.28 $ 10.05 $ 10.00
-----------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.46 0.54 0.02
Net realized and unrealized gains
from investments 0.30 0.23 0.05
-----------------------------------------------------------------------------------------
Total from Investment Activities 0.76 0.77 0.07
-----------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.46) (0.54) (0.02)
Net realized gains (0.35) -- --
-----------------------------------------------------------------------------------------
Total Distributions (0.81) (0.54) (0.02)
-----------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.23 $ 10.28 $ 10.05
-----------------------------------------------------------------------------------------
Total Return 7.76% 7.97% 0.74%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000) $384,518 $366,889 $310,413
Ratio of expenses to average net
assets 0.56% 0.14% 0.12%(c)
Ratio of net investment income to
average net assets 4.52% 5.38% 5.77%(c)
Ratio of expenses to average net
assets* 1.16% 1.17% 0.82%(c)
Portfolio turnover** 18.30% 83.94% 0.00%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
FINANCIAL HIGHLIGHTS NATIONAL MUNICIPAL BOND PORTFOLIO
86
- -
<PAGE> 87
<TABLE>
<CAPTION>
TRUST SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
YEAR ENDED NOVEMBER 30,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.27 $ 12.58 $ 11.64 $ 9.62 $ 10.22
-------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.32 0.38 0.37 0.34 0.29
Net realized and unrealized gains
(losses) from investments 0.84 1.45 1.34 2.02 (0.47)
-------------------------------------------------------------------------------------------
Total from Investment Activities 1.16 1.83 1.71 2.36 (0.18)
-------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.32) (0.43) (0.35) (0.34) (0.29)
Net realized gains (1.47) (0.71) (0.42) -- --
In excess of net realized gains -- -- -- -- (0.13)
-------------------------------------------------------------------------------------------
Total Distributions (1.79) (1.14) (0.77) (0.34) (0.42)
-------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 12.64 $ 13.27 $ 12.58 $ 11.64 $ 9.62
-------------------------------------------------------------------------------------------
Total Return 9.75% 15.81% 15.56% 24.97% (1.81)%
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000) $43,776 $54,299 $61,821 $72,669 $65,288
Ratio of expenses to average net
assets 0.96% 0.97% 0.97% 0.98% 0.97%
Ratio of net investment income to
average net assets 2.53% 2.87% 3.08% 3.29% 3.04%
Ratio of expenses to average net
assets* 1.36% 1.37% 1.07% 1.08% 1.39%
Portfolio turnover** 47.79% 43.60% 85.16% 58.16% 49.00%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
FINANCIAL HIGHLIGHTS BALANCED PORTFOLIO
87
- -
<PAGE> 88
<TABLE>
<CAPTION>
TRUST SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
YEAR ENDED FEBRUARY 27, 1997 TO
NOVEMBER 30, 1998 NOVEMBER 30, 1997(a)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.56 $ 10.00
--------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.19 0.20
Net realized and unrealized gains from
investments 0.98 1.55
--------------------------------------------------------------------------------------------------
Total from Investment Activities 1.17 1.75
--------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.20) (0.19)
Net realized gains (2.29) --
--------------------------------------------------------------------------------------------------
Total Distributions (2.49) (0.19)
--------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.24 $ 11.56
--------------------------------------------------------------------------------------------------
Total Return 12.00% 17.64%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000) $111,866 $131,919
Ratio of expenses to average net assets 0.71% 0.15%(c)
Ratio of net investment income to average net
assets 1.94% 2.51%(c)
Ratio of expenses to average net assets* 1.37% 1.38%(c)
Portfolio turnover** 98.32% 48.33%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
FINANCIAL HIGHLIGHTS EQUITY INCOME PORTFOLIO
88
- -
<PAGE> 89
<TABLE>
<CAPTION>
TRUST SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
YEAR ENDED MAY 1, 1997 TO
NOVEMBER 30, 1998 NOVEMBER 30, 1997(a)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.94 $ 10.00
--------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.13 0.10
Net realized and unrealized gains from
investments 2.64 1.94
--------------------------------------------------------------------------------------------------
Total from Investment Activities 2.77 2.04
--------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.14) (0.10)
Net realized gains (0.02) --
--------------------------------------------------------------------------------------------------
Total Distributions (0.16) (0.10)
--------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 14.55 $ 11.94
--------------------------------------------------------------------------------------------------
Total Return 23.34% 20.40%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000) $50,232 $31,787
Ratio of expenses to average net assets 0.54% 0.39%(c)
Ratio of net investment income to average net
assets 1.02% 1.48%(c)
Ratio of expenses to average net assets* 1.03% 1.12%(c)
Portfolio turnover** 14.83% 1.66%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
FINANCIAL HIGHLIGHTS EQUITY INDEX PORTFOLIO
89
- -
<PAGE> 90
<TABLE>
<CAPTION>
TRUST SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
YEAR ENDED NOVEMBER 30,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 21.19 $ 18.71 $ 16.32 $ 12.72 $ 14.74
-------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.17 0.23 0.24 0.27 0.22
Net realized and unrealized gains
(losses) from investments 1.59 3.96 3.34 3.74 (0.17)
-------------------------------------------------------------------------------------------
Total from Investment Activities 1.76 4.19 3.58 4.01 0.05
-------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.17) (0.25) (0.24) (0.27) (0.21)
In excess of net investment income -- -- (0.01) -- --
Net realized gains (3.57) (1.46) (0.94) (0.14) (0.18)
In excess of net realized gains -- -- -- -- (1.68)
-------------------------------------------------------------------------------------------
Total Distributions (3.74) (1.71) (1.19) (0.41) (2.07)
-------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 19.21 $ 21.19 $ 18.71 $ 16.32 $ 12.72
-------------------------------------------------------------------------------------------
Total Return 9.67% 24.55% 23.45% 32.27% 0.36%
RATIOS/SUPPLEMENTARY DATA:
Net assets at end of period (000) $299,188 $322,304 $348,183 $286,546 $235,955
Ratio of expenses to average net
assets 0.74% 0.74% 0.75% 0.75% 0.75%
Ratio of net investment income to
average net assets 0.90% 0.91% 1.50% 1.89% 1.72%
Ratio of expenses to average net
assets* 1.14% 1.14% 0.85% 0.85% 1.15%
Portfolio turnover** 91.23% 57.11% 63.90% 58.50% 65.00%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
FINANCIAL HIGHLIGHTS GROWTH & INCOME EQUITY PORTFOLIO
90
- -
<PAGE> 91
<TABLE>
<CAPTION>
TRUST SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
YEAR ENDED NOVEMBER 24,1997 TO
NOVEMBER 30, 1998 NOVEMBER 30, 1997(a)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 16.26 $ 16.44
--------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income (loss) 0.01 (0.01)
Net realized and unrealized gains (losses)
from investments 3.72 (0.17)
--------------------------------------------------------------------------------------------------
Total from Investment Activities 3.73 (0.18)
--------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.01) --
--------------------------------------------------------------------------------------------------
Total Distributions (0.01) --
--------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 19.98 $ 16.26
--------------------------------------------------------------------------------------------------
Total Return 22.94% (1.09)%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000) $80,830 $63,786
Ratio of expenses to average net assets 1.04% 1.24%(c)
Ratio of net investment income (losses) to
average net assets 0.05% (0.15)%(c)
Ratio of expenses to average net assets* 1.44% 1.34%(c)
Portfolio turnover** 54.33% 0.00%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
FINANCIAL HIGHLIGHTS GROWTH EQUITY PORTFOLIO
91
- -
<PAGE> 92
<TABLE>
<CAPTION>
TRUST SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
YEAR ENDED NOVEMBER 30,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 15.17 $ 13.49 $ 13.49 $ 12.01 $ 13.14
---------------------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income (loss) (0.02) 0.01 0.02 0.03 (0.01)
Net realized and unrealized gains
(losses) from investments (1.91) 2.50 1.05 2.36 0.89
---------------------------------------------------------------------------------------------------------------
Total from Investment Activities (1.93) 2.51 1.07 2.39 0.88
---------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income -- (0.01) (0.02) -- --
Net realized gains (1.19) (0.82) (1.05) (0.91) (1.78)
In excess of net realized gains (0.03) -- -- -- (0.23)
---------------------------------------------------------------------------------------------------------------
Total Distributions (1.22) (0.83) (1.07) (0.91) (2.01)
---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 12.02 $ 15.17 $ 13.49 $ 13.49 $ 12.01
---------------------------------------------------------------------------------------------------------------
Total Return (13.90)% 19.77% 8.72% 21.70% 7.56%
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000) $129,591 $211,643 $171,295 $139,681 $77,690
Ratio of expenses to average net
assets 0.95% 0.95% 0.96% 0.96% 0.95%
Ratio of net investment income
(loss) to average net assets (0.16)% 0.01% 0.17% 0.18% (0.16)%
Ratio of expenses to average net
assets* 1.35% 1.35% 1.06% 1.06% 1.36%
Portfolio turnover** 69.72% 80.23% 65.85% 83.13% 85.00%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between classes of shares issued.
FINANCIAL HIGHLIGHTS SMALL CAP EQUITY PORTFOLIO
92
- -
<PAGE> 93
<TABLE>
<CAPTION>
TRUST SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
APRIL 4, 1994
YEAR ENDED NOVEMBER 30, TO NOVEMBER 30,
1998 1997 1996 1995 1994(a)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.09 $ 12.12 $ 10.79 $ 9.92 $ 10.00
----------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.04 0.01 0.06 0.03 0.01
Net realized and unrealized gains
(losses) from investments and
foreign currency 1.80 0.33 1.27 0.86 (0.09)
----------------------------------------------------------------------------------------------
Total from Investment Activities 1.84 0.34 1.33 (0.89) (0.08)
----------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.07) (0.04) -- -- --
In excess of net investment income (0.03) (0.02) -- -- --
Net realized gains (0.43) (0.31) -- (0.01) --
Tax return of capital -- -- -- (0.01) --
----------------------------------------------------------------------------------------------
Total distributions (0.53) (0.37) -- (0.02) --
----------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 13.40 $ 12.09 $ 12.12 $ 10.79 $ 9.92
----------------------------------------------------------------------------------------------
Total Return 15.73% 2.91% 12.33% 8.97% (0.80%)(b)
RATIOS/SUPPLEMENTARY DATA:
Net assets at end of period (000) $60,647 $55,038 $52,181 $36,096 $23,746
Ratio of expenses to average net
assets 1.28% 1.29% 1.14% 1.16% 1.23%(c)
Ratio of net investment income to
average net assets 0.34% 0.09% 0.51% 0.39% 0.23%(c)
Ratio of expenses to average net
assets* 1.75% 1.75% 1.45% 1.46% 1.95%(c)
Portfolio turnover** 88.95% 75.18% 77.63% 62.78% 21.00%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
FINANCIAL HIGHLIGHTS INTERNATIONAL EQUITY PORTFOLIO
93
- -
<PAGE> 94
Trust Shares Prospectus
[Back Cover Page]
Where to find more information
You'll find more information about the Portfolios in the following documents:
Annual and semi-annual reports
The Fund's annual and semi-annual reports contain more information about each
Portfolio and a discussion about the market conditions and investment strategies
that had a significant effect on each Portfolio's performance during the last
fiscal year.
Statement of Additional Information (SAI)
The SAI contains detailed information about the Portfolios and their policies.
By law, it's incorporated by reference into (considered to be part of) this
prospectus.
You can get a free copy of these documents, request other information about the
Portfolios and make shareholder inquiries by calling the Fund at 1-800-452-2724
or by writing to:
Mercantile Mutual Funds, Inc.
P.O. Box 78069
St. Louis, Missouri 63175
If you buy your shares through a broker-dealer or other financial institution,
you may contact your institution for more information.
You can write to the Securities and Exchange Commission (SEC) Public Reference
Section and ask them to mail you information about the Portfolios, including the
SAI. They'll charge you a fee for this service. You can also visit the SEC
Public Reference Room and copy the documents while you're there. For information
about the operation of the Public Reference Room, call the SEC.
Public Reference Section of the SEC
Washington, DC 20549-6009
1-800-SEC-0330
Reports and other information about the Portfolios are also available on the
SEC's website at http://www.sec.gov.
The Fund's Investment Company Act File No. is 811-3567
-94-
<PAGE> 95
Mercantile Mutual Funds, Inc.
PROSPECTUS
MARCH 31, 1999
MONEY MARKET PORTFOLIOS
Treasury Money Market Portfolio
Money Market Portfolio
Tax-Exempt Money Market Portfolio
Trust Shares
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved any shares of these Portfolios or determined if this
prospectus is truthful or complete. Anyone who tells you otherwise is committing
a criminal offense.
<PAGE> 96
CONTENTS
<TABLE>
<S> <C> <C>
RISK/RETURN SUMMARY
LOGO
3 Overview
4 Treasury Money Market Portfolio
7 Money Market Portfolio
10 Tax-Exempt Money Market Portfolio
13 Additional Information on Risk
YOUR ACCOUNT
LOGO
14 Explanation of Sales Price
14 How to Buy Shares
15 How to Sell Shares
16 How to Exchange Shares
16 Administrative Services Fees
16 General Transaction Policies
DISTRIBUTIONS AND TAXES
LOGO
17 Dividends and Distributions
18 Taxation
MANAGEMENT OF THE FUND
LOGO
19 The Adviser
FINANCIAL HIGHLIGHTS
LOGO
20 Introduction
21 Treasury Money Market Portfolio
22 Money Market Portfolio
23 Tax-Exempt Money Market Portfolio
</TABLE>
2
<PAGE> 97
LOGO
RISK/RETURN SUMMARY OVERVIEW
<TABLE>
<S> <C>
This prospectus describes the Money Market Portfolios of
Mercantile Mutual Funds, Inc. (the "Fund"). The Fund was
formerly known as The ARCH Fund(R), Inc. On the following
pages, you will find important information about each
Portfolio, including:
- A description of the Portfolio's investment objective
(sometimes referred to as its goal);
- The Portfolio's principal investment strategies (the steps
it takes to try to meet its goal);
- The principal risks associated with the Portfolio (factors
that may prevent it from meeting its goal);
- The Portfolio's past performance (how successful it's been
in meeting its goal); and
- The fees and expenses you pay as an investor in the
Portfolio.
WHO MAY WANT TO INVEST IN The Treasury Money Market Portfolio may be appropriate for
THE MERCANTILE MONEY MARKET investors who want a way to earn money market returns from
PORTFOLIOS? U.S. Treasury obligations that are generally exempt from
state and local taxes. The Money Market Portfolio may be
appropriate for investors who want a flexible and convenient
way to manage cash while earning money market returns. The
Tax-Exempt Money Market Portfolio may be appropriate for
investors who want a way to earn money market returns that
are generally exempt from federal income tax; however, the
Portfolio is NOT an appropriate investment for tax-deferred
retirement accounts, such as IRAs, because its return before
taxes is generally lower than that of a taxable fund.
Before investing in a Portfolio, you should carefully
consider:
- Your own investment goals
- The amount of time you are willing to leave your money
invested
- How much risk you are willing to take.
THE INVESTMENT ADVISER Mississippi Valley Advisors Inc. ("MVA" or the "Adviser")
serves as the investment adviser to each Portfolio. Founded
in 1987, MVA is a subsidiary of Mercantile Bancorporation
Inc., a regional banking and financial services
organization, and has its main office at One Mercantile
Center, Seventh and Washington Streets, St. Louis, Missouri
63101. As of December 31, 1998, MVA had approximately $9.9
billion in assets under management, including the Fund's
assets, which were approximately $4.3 billion.
An investment in the Portfolios is not a Mercantile Bank
deposit and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government
agency. Although the Money Market Portfolios seek to
preserve the value of your investment at $1.00 per share, it
is possible to lose money by investing in the Portfolios.
</TABLE>
3
- -
<PAGE> 98
LOGO
TREASURY MONEY
MARKET PORTFOLIO
RISK/RETURN SUMMARY
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to seek a high level
of current income exempt from state income tax consistent
with liquidity and security of principal.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio invests substantially all (but not less than
65%) of its total assets in money market instruments issued
by the U.S. Treasury and certain U.S. Government agencies
and instrumentalities that provide income that is generally
not subject to state income tax.
PRINCIPAL RISK CONSIDERATIONS
The yield paid by the Portfolio will vary with changes in
interest rates.
Although U.S. Government securities, particularly U.S.
Treasury obligations, have historically involved little
risk, if an issuer fails to pay interest or repay principal,
the value of your investment could decline.
The Adviser evaluates the rewards and risks presented by all
securities purchased by the Portfolio and how they may
advance the Portfolio's investment objective. It is
possible, however, that these evaluations will prove to be
inaccurate.
There's no guarantee the Portfolio will be able to preserve
the value of your investment at $1.00 per share.
MONEY MARKET INSTRUMENTS
are short-term obligations
issued by banks,
corporations, the U.S.
Government and state and
local governments. Money
market instruments purchased
by the Portfolios must meet
strict requirements as to
investment quality, maturity
and diversification. The
Portfolios generally do not
invest in securities with
maturities of more than 397
days and the average
maturity of all securities
held by a particular
Portfolio must be 90 days or
less. Prior to purchasing a
money market instrument for
one of the Portfolios, the
Adviser must determine that
the instrument carries very
little credit risk.
</TABLE>
4
- -
<PAGE> 99
TREASURY MONEY
MARKET PORTFOLIO
RISK/RETURN SUMMARY
RETURN HISTORY
The bar chart and table on
this page show the
Portfolio's annual returns
and long-term performance,
thereby giving some
indication of the risk of
investing in the Portfolio.
The bar chart shows how the
performance of the
Portfolio's Trust Shares
has varied from year to
year. The table shows the
Portfolio's average annual
returns for one year, five
years and since inception.
Both the bar chart and
table assume reinvestment
of all dividends and
distributions. The
Portfolio's past
performance does not
necessarily indicate how it
will perform in the future.
TRUST SHARES
YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
[STATED IN PERCENTAGES]
<TABLE>
<CAPTION>
TREASURY MONEY MARKET PORTFOLIO
-------------------------------
<S> <C>
'1992' 3.40
'93' 2.67
'94' 3.55
'95' 5.15
'96' 4.61
'97' 4.71
'98' 4.49
</TABLE>
<TABLE>
<S> <C>
Best quarter: 1.31% for the quarter ending
June 30, 1995
Worst quarter: 0.64% for the quarter ending
June 30, 1993
</TABLE>
AVERAGE ANNUAL TOTAL
RETURNS for the periods
ended December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION*
<S> <C> <C> <C>
Trust Shares 4.49% 4.50% 4.03%
</TABLE>
* December 2, 1991.
To obtain the Portfolio's current 7-day yield, please call 1-800-452-4015.
5
- -
<PAGE> 100
TREASURY MONEY
MARKET PORTFOLIO
RISK/RETURN SUMMARY
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then sell
all of your shares at the
end of those periods. The
example also assumes that
your investment has a 5%
return each year and the
Portfolio's operating
expenses remain the same.
Although your actual costs
may be higher or lower,
based on these assumptions
your costs would be:
FEES AND EXPENSES
<TABLE>
<S> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM THE TRUST
PORTFOLIO'S ASSETS) SHARES
The table on the right shows the fees
and expenses that you pay if you buy
and hold Trust Shares of the Treasury
Money Market Portfolio.
Management Fees .40%(1)
Distribution (12b-1) Fees None
Other Expenses .56%(1)
Total Annual Portfolio Operating Expenses .96%(1)
</TABLE>
(1) Management Fees, Other Expenses and
Total Annual Portfolio Operating
Expenses for the Portfolio's Trust
Shares for the current fiscal year are
expected to be less than the amounts
shown above because certain of the
Portfolio's service providers are
voluntarily waiving a portion of their
fees and/or reimbursing the Portfolio
for certain other expenses. These fee
waivers and/or reimbursements are being
made in order to keep the annual fees
and expenses for the Portfolio's Trust
Shares at a certain level. MANAGEMENT
FEES, OTHER EXPENSES AND TOTAL ANNUAL
PORTFOLIO OPERATING EXPENSES, AFTER
TAKING THESE FEE WAIVERS AND EXPENSE
REIMBURSEMENTS INTO ACCOUNT, ARE
EXPECTED TO BE .35%, .45% AND .80%,
RESPECTIVELY, FOR TRUST SHARES. These
fee waivers and expense reimbursements
may be revised or cancelled at any
time.
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
TRUST SHARES $98 $306 $531 $1,178
</TABLE>
6
- -
<PAGE> 101
LOGO
MONEY MARKET
PORTFOLIO
RISK/RETURN SUMMARY
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to seek current
income with liquidity and stability of principal.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio invests substantially all (but not less than
80%) of its total assets in a broad range of money market
instruments, including commercial paper, notes and bonds
issued by U.S. and foreign corporations, obligations issued
by the U.S. Government and its agencies and
instrumentalities, and obligations issued by U.S. and
foreign banks, such as certificates of deposit, letters of
credit, bankers' acceptances and time deposits.
The Portfolio will only buy a money market instrument if it
has the highest short-term rating from at least two
nationally recognized statistical rating organizations, such
as Standard & Poor's Ratings Group or Moody's Investors
Service, Inc., or only one such rating if only one
organization has rated the instrument. If the money market
instrument is not rated, the Adviser must determine that it
is of comparable quality to eligible rated instruments.
PRINCIPAL RISK CONSIDERATIONS
The yield paid by the Portfolio will vary with short-term
interest rates.
Although credit risk is very low because the Portfolio only
invests in high quality obligations, if an issuer fails to
pay interest or repay principal, the value of your
investment could decline.
The Adviser evaluates the rewards and risks presented by all
securities purchased by the Portfolio and how they may
advance the Portfolio's investment objective. It is
possible, however, that these evaluations will prove to be
inaccurate.
There's no guarantee the Portfolio will be able to preserve
the value of your investment at $1.00 per share.
</TABLE>
7
- -
<PAGE> 102
MONEY MARKET
PORTFOLIO
RISK/RETURN SUMMARY
RETURN HISTORY
The bar chart and table on
this page show the
Portfolio's annual returns
and long-term performance,
thereby giving some
indication of the risk of
investing in the Portfolio.
The bar chart shows how the
performance of the
Portfolio's Trust Shares
has varied from year to
year. The table shows the
Portfolio's average annual
returns for one year, five
years and since inception.
Both the bar chart and
table assume reinvestment
of all dividends and
distributions. The
Portfolio's past
performance does not
necessarily indicate how it
will perform in the future.
TRUST SHARES
YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
[STATED IN PERCENTAGES]
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO
----------------------
<S> <C>
'1991' 5.67
'92' 3.30
'93' 2.71
'94' 3.76
'95' 5.55
'96' 4.95
'97' 5.09
'98' 5.02
</TABLE>
<TABLE>
<S> <C>
Best quarter: 1.63% for the quarter ending
March 31, 1991
Worst quarter: 0.66% for the quarter ending
June 30, 1993
</TABLE>
AVERAGE ANNUAL TOTAL
RETURNS
for the periods ended
December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION*
<S> <C> <C> <C>
Trust Shares 5.02% 4.87% 5.50%
</TABLE>
* December 1, 1990.
To obtain the Portfolio's current 7-day yield, please call 1-800-452-4015.
8
- -
<PAGE> 103
MONEY MARKET
PORTFOLIO
RISK/RETURN SUMMARY
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then
sell all of your shares at
the end of those periods.
The example also assumes
that your investment has a
5% return each year and the
Portfolio's operating
expenses remain the same.
Although your actual costs
may be higher or lower,
based on these assumptions
your costs would be:
FEES AND EXPENSES
<TABLE>
<S> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM THE TRUST
PORTFOLIO'S ASSETS) SHARES
The table on the right shows
the fees and expenses that you pay
if you buy and hold Trust Shares of the
Money Market Portfolio.
Management Fees .40%(1)
Distribution (12b-1) Fees None
Other Expenses .53%(1)
Total Annual Portfolio Operating Expenses .93%(1)
</TABLE>
(1) Management Fees, Other Expenses and
Total Annual Portfolio Operating
Expenses for the Portfolio's Trust
Shares for the current fiscal year are
expected to be less than the amounts
shown above because certain of the
Portfolio's service providers are
voluntarily waiving a portion of their
fees and/or reimbursing the Portfolio
for certain other expenses. These fee
waivers and/or reimbursements are
being made in order to keep the annual
fees and expenses for the Portfolio's
Trust Shares at a certain level.
MANAGEMENT FEES, OTHER EXPENSES AND
TOTAL ANNUAL PORTFOLIO OPERATING
EXPENSES, AFTER TAKING THESE FEE
WAIVERS AND EXPENSE REIMBURSEMENTS
INTO ACCOUNT, ARE EXPECTED TO BE .35%,
.44% AND .79%, RESPECTIVELY, FOR TRUST
SHARES. These fee waivers and expense
reimbursements may be revised or
cancelled at any time.
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
TRUST SHARES $95 $296 $515 $1,143
</TABLE>
9
- -
<PAGE> 104
TAX-EXEMPT MONEY
MARKET PORTFOLIO
RISK/RETURN SUMMARY
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to seek as high a
level of current interest income exempt from federal income
tax as is consistent with liquidity and stability of
principal.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio normally invests at least 80% of its total
assets in short-term municipal securities that pay interest
which is exempt from federal income tax. Municipal
securities purchased by the Portfolio may include general
obligation securities, revenue securities and private
activity bonds. General obligation securities are secured by
the issuer's full faith, credit and taxing power. Revenue
obligation securities are usually payable only from revenues
derived from specific facilities or revenue sources. Private
activity bonds are usually revenue obligations since they
are typically payable by the private user of the facilities
financed by the bonds. The interest on private activity
bonds may be subject to the federal alternative minimum tax.
Investments in private activity bonds will not be treated as
investments in municipal securities for purposes of the 80%
requirement stated above.
The Portfolio will only buy a municipal security if it has
the highest short-term rating from at least two nationally
recognized statistical rating organizations, such as
Standard & Poor's Ratings Group or Moody's Investors
Service, Inc., or one such rating if only one organization
has rated the security. If the security is not rated, the
Adviser must determine that it is of comparable quality to
eligible rated securities.
PRINCIPAL RISK CONSIDERATIONS
The yield paid by the Portfolio will vary with changes in
interest rates.
Although credit risk is very low because the Portfolio only
invests in high quality obligations, if an issuer fails to
pay interest or repay principal, the value of your
investment could decline. The ability of a state or local
government issuer to make payments can be affected by many
factors, including economic conditions, the flow of tax
revenues and changes in the level of federal, state or local
aid. Some municipal securities are payable only from limited
revenue sources or by private entities.
The Portfolio is not diversified, which means that it can
invest a large percentage of its assets in a small number of
issuers. As a result, a change in the value of any one
investment held by the Portfolio may affect the overall
value of the Portfolio more than it would affect a
diversified portfolio.
The Adviser evaluates the rewards and risks presented by all
securities purchased by the Portfolio and how they may
advance the Portfolio's investment objective. It is
possible, however, that these evaluations will prove to be
inaccurate.
There's no guarantee the Portfolio will be able to preserve
the value of your investment at $1.00 per share.
</TABLE>
<TABLE>
<S> <C>
WHAT ARE MUNICIPAL
SECURITIES?
State and local governments
issue municipal securities
to raise money to finance
public works, to repay
outstanding obligations, to
raise funds for general
operating expenses and to
make loans to other public
institutions. Some municipal
securities, known as private
activity bonds, are backed
by private entities and are
used to finance various
non-public projects.
Municipal securities, which
can be issued as bonds,
notes or commercial paper,
usually have fixed interest
rates, although some have
interest rates that change
from time to time.
</TABLE>
10
- -
<PAGE> 105
TAX-EXEMPT MONEY
MARKET PORTFOLIO
RISK/RETURN SUMMARY
RETURN HISTORY+
The bar chart and table on
this page show the
Portfolio's annual returns
and long-term performance,
thereby giving some
indication of the risk of
investing in the Portfolio.
The bar chart shows how the
performance of the
Portfolio's Trust Shares
has varied from year to
year. The table shows the
Portfolio's average annual
returns for one year, five
years and since inception.
Both the bar chart and
table assume reinvestment
of all dividends and
distributions. The
Portfolio's past
performance does not
necessarily indicate how it
will perform in the future.
TRUST SHARES
YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
[STATED IN PERCENTAGES]
<TABLE>
<CAPTION>
TAX-EXEMPT MONEY MARKET PORTFOLIO
---------------------------------
<S> <C>
'1991' 4.05
'92' 2.51
'93' 1.98
'94' 2.37
'95' 3.27
'96' 3.00
'97' 3.09
'98' 2.86
</TABLE>
<TABLE>
<S> <C>
Best quarter: 1.38% for the quarter ending
December 30, 1990
Worst quarter: 0.45% for the quarter ending
March 31, 1994
</TABLE>
AVERAGE ANNUAL TOTAL
RETURNS for the periods
ended December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION*
<S> <C> <C> <C>
Trust Shares 2.86% 2.92% 3.60%
</TABLE>
+ The Portfolio commenced operations on July 15, 1988 as a separate
investment portfolio (the "Predecessor Portfolio") of The ARCH Tax-Exempt
Trust. On October 2, 1995, the Predecessor Portfolio was reorganized as a
new portfolio of the Fund. Prior to the reorganization, the Predecessor
Portfolio offered and sold shares that were similar to the Fund's Trust
Shares. Annual returns for periods prior to October 2, 1995 reflect the
performance of the Predecessor Portfolio.
* September 28, 1990.
To obtain the Portfolio's current 7-day yield, please call 1-800-452-4015.
11
- -
<PAGE> 106
TAX-EXEMPT MONEY
MARKET PORTFOLIO
RISK/RETURN SUMMARY
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then sell
all of your shares at the
end of those periods. The
example also assumes that
your investment has a 5%
return each year and the
Portfolio's operating
expenses remain the same.
Although your actual costs
may be higher or lower,
based on these assumptions
your costs would be:
FEES AND EXPENSES
<TABLE>
<S> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM THE TRUST
PORTFOLIO'S ASSETS) SHARES
The table on the right
shows the fees and expenses that
you pay if you buy and hold
Trust Shares of the Tax-Exempt Money
Market Portfolio.
Management Fees .40%(1)
Distribution (12b-1) Fees None
Other Expenses .44%
Total Annual Portfolio Operating Expenses .84%(1)
</TABLE>
(1) Management Fees and Total Annual
Portfolio Operating Expenses for the
Portfolio's Trust Shares for the
current fiscal year are expected to be
less than the amounts shown above
because the Adviser is voluntarily
waiving a portion of its advisory fee.
This fee waiver is being made in order
to keep the annual fees and expenses
for the Portfolio's Trust Shares at a
certain level. MANAGEMENT FEES AND
TOTAL ANNUAL PORTFOLIO OPERATING
EXPENSES, AFTER TAKING THIS FEE WAIVER
INTO ACCOUNT, ARE EXPECTED TO BE .35%
AND .79%, RESPECTIVELY, FOR TRUST
SHARES. This fee waiver may be revised
or cancelled at any time.
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
TRUST SHARES $86 $268 $466 $1,037
</TABLE>
12
- -
<PAGE> 107
LOGO
RISK/RETURN SUMMARY ADDITIONAL INFORMATION ON RISK
The principal risks of investing in each Portfolio are described on the
previous pages. The following supplements that discussion.
SECURITIES LENDING
To obtain interest income, the Treasury Money Market Portfolio and Money
Market Portfolio may lend their securities to broker-dealers, banks or
institutional borrowers pursuant to agreements requiring that the loans be
continuously secured by collateral equal at all times in value to at least
the market value of the securities loaned. There is the risk that, when
lending portfolio securities, the securities may not be available to the
Portfolio on a timely basis. Therefore, the Portfolio may lose the
opportunity to sell the securities at a desirable price. Additionally, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
TEMPORARY DEFENSIVE POSITIONS
Each Portfolio may temporarily hold investments that are not part of its main
investment strategy during unfavorable market conditions. These investments
may include cash (which will not earn any income) and, in the case of the
Tax-Exempt Money Market Portfolio, short-term taxable money market
investments not to exceed 20% of the Portfolio's assets. This strategy could
prevent a Portfolio from achieving its investment objective.
OTHER TYPES OF INVESTMENTS
This prospectus describes each Portfolio's principal investment strategies
and the particular types of securities in which each Portfolio principally
invests. Each Portfolio may, from time to time, make other types of
investments and pursue other investment strategies in support of its overall
investment goal. These supplemental investment strategies -- and the risks
involved -- are described in detail in the Statement of Additional
Information ("SAI"), which is referred to on the back cover of this
prospectus.
YEAR 2000 RISKS
As with other mutual funds, financial and business organizations and
individuals around the world, the Portfolios could be adversely affected if
the computer systems used by the Adviser and the Portfolios' other service
providers do not properly process and calculate date-related information and
data from and after January 1, 2000. This possibility is commonly known as
the Year 2000 or "Y2K" problem. The Adviser is taking steps to address the
Y2K problem with respect to the computer systems that it uses and to obtain
assurances that comparable steps are being taken by the Portfolios' other
major service providers. At this time, however, there can be no assurance
that these steps will be sufficient to avoid any adverse impact on the
Portfolios. The Y2K problem could have a negative impact on the issuers of
securities in which the Portfolios invest, which could hurt the Portfolios'
investment returns.
13
- -
<PAGE> 108
LOGO
YOUR ACCOUNT
BUSINESS DAYS
DEFINED
A business day is
any day that both
the New York Stock
Exchange and the
Federal Reserve
Bank of St. Louis
are open for
business.
Currently, the Fund
observes the
following holidays:
New Year's Day,
Martin Luther King
Jr. Day,
Presidents' Day,
Good Friday,
Memorial Day
(observed),
Independence Day
(observed), Labor
Day, Columbus Day,
Veterans' Day,
Thanksgiving and
Christmas.
EXPLANATION OF SALES PRICE
Trust Shares of each Portfolio are sold at their net
asset value (NAV). The NAV for each class of shares of a
Portfolio is determined as of 12:00 noon (Eastern time)
and as of the close of regular trading on the New York
Stock Exchange (currently 4 p.m., Eastern time) on every
business day. The NAV for a class of shares is determined
by adding the value of a Portfolio's investments, cash
and other assets attributable to a particular share
class, subtracting the Portfolio's liabilities
attributable to that class and then dividing the result
by the total number of shares in the class that are
outstanding.
- Each Portfolio's investments are valued at amortized
cost, which is approximately equal to market value.
- A properly placed purchase order (see "How to Buy
Shares" below) that is delivered to the Fund by 12:00
noon (Eastern time) on any business day with respect to
the Treasury Money Market Portfolio and Tax-Exempt
Money Market Portfolio or by 3:00 p.m. (Eastern time)
on any business day with respect to the Money Market
Portfolio receives the share price next determined if
the Fund receives payment in federal funds or other
immediately available funds by 4:00 p.m. (Eastern time)
that day. If payment is not received by that time, the
order will be cancelled. A properly placed purchase
order that is delivered to the Fund after 12:00 noon
(Eastern time) with respect to the Treasury Money
Market Portfolio and Tax-Exempt Money Market Portfolio
or after 3:00 p.m. (Eastern time) with respect to the
Money Market Portfolio will be placed the following
business day.
HOW TO BUY SHARES
Trust Shares of the Portfolios are sold to financial
institutions, such as banks, trust companies, thrift
institutions and mutual funds, that are purchasing shares
on their own behalf or on behalf of discretionary and
non-discretionary accounts for which they receive
account-level asset-based management fees. Trust Shares
are also sold to financial institutions that are
purchasing shares on behalf of accounts for which they
provide cash management services.
If you are purchasing Trust Shares through a financial
institution, you must follow the procedures established
by your institution. Your financial institution is
responsible for sending your purchase order to the Fund's
distributor and wiring payment to the Fund's custodian.
Your financial institution holds the shares in your name
and receives all confirmations of purchases and sales.
Financial institutions placing orders for themselves or
on behalf of their customers should call the Fund at
1-800-452-2724.
The Fund does not have any minimum investment
requirements for Trust Shares but your financial
institution may do so. They may also charge transaction
fees and require you to maintain a minimum account
balance.
14
<PAGE> 109
YOUR ACCOUNT
HOW TO SELL SHARES
Orders to sell or "redeem" Trust Shares should be placed with the same
financial institution that placed the original purchase order in accordance
with the procedures established by that institution. Your financial
institution is responsible for sending your order to the Fund's distributor
and for crediting your account with the proceeds. The Fund does not currently
charge for wiring the proceeds, but your financial institution may do so.
If the shares being sold are represented by share certificates, then the
order to sell must be made in writing and mailed to: Mercantile Mutual Funds,
Inc., P.O. Box 78069 -- Tram 001/128/41-6, St. Louis, Missouri 63178. The
order must be accompanied by the share certificates, properly endorsed for
transfer. Additional documents may be required for certain types of
shareholders, such as corporations, partnerships, executors, trustees,
administrators or guardians.
The Fund's transfer agent may require a signature guarantee unless the
redemption proceeds are payable to the shareholder of record and the proceeds
are either mailed to the shareholder's address of record or electronically
transferred to the account designated on the original account application. A
signature guarantee helps prevent fraud, and you may obtain one from most
banks and broker-dealers. Contact the Fund for more information on signature
guarantees.
Trust Shares will be sold at the NAV next determined after the Fund accepts
an order (see above). If the order to sell is received and accepted by the
Fund before 12:00 noon (Eastern time) on a business day with respect to the
Treasury Money Market Portfolio and Tax-Exempt Money Market Portfolio or
before 3:00 p.m. (Eastern time) on a business day with respect to the Money
Market Portfolio, the proceeds are sent electronically the same day to the
financial institution that placed the order. If the order to sell is received
and accepted by the Fund after 12:00 noon (Eastern time) on a business day
with respect to the Treasury Money Market Portfolio and Tax-Exempt Money
Market Portfolio or after 3:00 p.m. (Eastern time) on a business day with
respect to the Money Market Portfolio, or on a non-business day, the proceeds
normally are sent electronically to the financial institution on the next
business day.
15
- -
<PAGE> 110
YOUR ACCOUNT
HOW TO EXCHANGE SHARES
The exchange privilege enables shareholders to exchange Trust Shares of one
Portfolio for Trust Shares of another Portfolio. 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 from certain types of accounts
held at Mercantile Trust Company National Association or any of its
affiliates. Contact your financial institution or the Fund's distributor for
additional information on the exchange privilege. The exchange privilege may
be exercised only in those states where Trust Shares of the Portfolio being
acquired may be legally sold.
ADMINISTRATIVE SERVICES FEES
Trust Shares of the Portfolios pay administrative services fees at an annual
rate of up to 0.25% of each Portfolio's respective Trust Share assets. These
fees are paid to financial institutions that provide certain administrative
services to their customers who own Trust Shares.
GENERAL TRANSACTION POLICIES
The Fund reserves the right to:
- Refuse any order to buy shares.
- Reject any exchange request.
- Redeem all shares in an account if the balance falls below $500. If,
within 60 days of the Fund's written request, the account balance has not
been increased, a shareholder may be required to redeem all shares. The
Fund will not require you to redeem shares if the value of the account
drops below $500 due to fluctuations in net asset value.
- Send redemption proceeds within seven days after receiving a request, if
an earlier payment could adversely affect a Portfolio.
- Modify or terminate the exchange privilege after 60 days' written notice
to shareholders.
- Make a "redemption in kind." Under abnormal conditions that may make
payment in cash unwise, the Fund may offer partial or complete payment in
portfolio securities rather than cash at such securities'
then-market-value equal to the redemption price. In such cases, you may
incur brokerage costs in converting these securities to cash.
Shareholders may be responsible for any fraudulent telephone orders as long
as the Fund has taken reasonable precautions to verify the shareholder's
identity. Shareholders who experience difficulty getting through to the Fund
by telephone because of unusual market conditions should consider selling or
exchanging their shares by mail.
16
- -
<PAGE> 111
LOGO
DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Each Portfolio declares dividends from net investment income daily and pays
them monthly. Although the Portfolios do not expect to realize net long-term
capital gains, any capital gains realized would be distributed at least
annually.
Dividends on each share class of the Portfolios are determined in the same
manner and are paid in the same amount. However, each share class bears all
expenses associated with that particular class.
All of your dividends and capital gains distributions with respect to a
particular Portfolio will be reinvested in additional shares of the same
class unless you instruct otherwise on your account application or have
redeemed all shares you held in the Portfolio. In such cases, dividends and
distributions will be paid in cash.
17
- -
<PAGE> 112
DISTRIBUTIONS AND TAXES
You will be advised
at least annually
regarding the
federal income tax
treatment of
dividends and
distributions made
to you. You should
save your account
statements because
they contain
information you
will need to
calculate your
capital gains or
losses upon your
ultimate sale or
exchange of shares
in the Portfolios.
<TABLE>
<S> <C>
TAXATION
As with any investment, you should consider the tax
implications of an investment in the Portfolios. The
following is only a brief summary of some of the important
tax considerations generally affecting the Portfolios and
their shareholders under current law, which may be subject
to change in the future. Consult your tax adviser with
specific reference to your own tax situation.
- TREASURY MONEY MARKET AND MONEY MARKET PORTFOLIOS
Dividends you receive from one of these Portfolios, whether
paid in cash or reinvested in additional shares, are
generally considered taxable. Dividends from a Portfolio's
long-term capital gains are taxable as capital gains.
Dividends from other sources are generally taxable as
ordinary income. It is anticipated that substantially all of
the dividends from the Portfolios will be taxable as
ordinary income and not capital gains.
- TAX-EXEMPT MONEY MARKET PORTFOLIO
The Portfolio intends to meet certain federal tax
requirements so that distributions of the tax-exempt
interest it earns may be treated as "exempt-interest
dividends." However, a portion of exempt-interest dividends
attributable to interest on private activity bonds may
increase certain shareholders' alternative minimum tax.
Dividends from the Portfolio's short-term and long-term
capital gains are taxable.
- STATE AND LOCAL TAXES
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 which, if realized directly, would be exempt
from such taxes.
The Treasury Money Market Portfolio is designed to provide
shareholders, to the extent permitted by federal law, with
income that is exempt or excluded from taxation at the state
or local level. Please consult with a tax adviser as to the
status of distributions by the Portfolio in your state.
For more information regarding the taxation of the
Portfolios, consult the SAI under the heading "Additional
Information Concerning Taxes." You also should consult your
tax adviser for information regarding state and local tax
consequences with respect to your specific situation.
</TABLE>
18
- -
<PAGE> 113
LOGO
MANAGEMENT OF THE FUND
THE ADVISER
MVA, subject to the general supervision of the Fund's Board of Directors, is
responsible for the day-to-day management of the Portfolios in accordance
with each Portfolio's respective investment objective and policies. This
includes making investment decisions, buying and selling securities and
overseeing the administration and recordkeeping for each Portfolio.
In exchange for these services, MVA receives an investment advisory fee,
which is calculated daily and paid monthly, according to the average daily
net assets of each Portfolio. For the fiscal year ended November 30, 1998,
the Money Market Portfolios paid MVA advisory fees as follows:
<TABLE>
<CAPTION>
INVESTMENT ADVISORY FEES
PORTFOLIO AS A % OF NET ASSETS
<S> <C>
------------------------------
Treasury Money Market Portfolio .35%
------------------------------
Money Market Portfolio .35%
------------------------------
Tax-Exempt Money Market Portfolio .35%
---------------------------------------------------------------------
</TABLE>
19
- -
<PAGE> 114
LOGO
FINANCIAL HIGHLIGHTS
INTRODUCTION
The financial highlights tables presented below are intended to help you
understand the financial performance of each Portfolio's Trust Shares for the
past five years. Certain information reflects financial results for a single
Trust Share in each Portfolio. The total returns in the tables represent the
rate that an investor would have earned (or lost) on an investment in Trust
Shares assuming reinvestment of all dividends and distributions. This
information has been audited by KPMG LLP, independent auditors, whose report,
along with the Portfolios' financial statements, are included in the Fund's
Annual Report to Shareholders, and are incorporated by reference into the
SAI.
20
- -
<PAGE> 115
FINANCIAL HIGHLIGHTS TREASURY MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
TRUST SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
YEAR ENDED NOVEMBER 30,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.045 0.046 0.045 0.050 0.033
-------------------------------------------------------------------------------------------
Total from Investment Activities 0.045 0.046 0.045 0.050 0.033
-------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.045) (0.046) (0.045) (0.050) (0.033)
-------------------------------------------------------------------------------------------
Total Distributions (0.045) (0.046) (0.045) (0.050) (0.033)
-------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------------------------------------------------------------------------------------------
Total Return 4.56% 4.70% 4.64% 5.12% 3.38%
RATIOS/SUPPLEMENTARY DATA:
Net assets at end of period (000) $245,959 $283,653 $131,322 $252,780 $242,099
Ratio of expenses to average net
assets 0.65% 0.61% 0.61% 0.60% 0.49%
Ratio of net investment income to
average net assets 4.45% 4.60% 4.55% 5.01% 3.26%
Ratio of expenses to average net
assets* 0.96% 0.92% 0.76% 0.75% 0.94%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
21
- -
<PAGE> 116
FINANCIAL HIGHLIGHTS MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
TRUST SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
YEAR ENDED NOVEMBER 30,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.050 0.050 0.049 0.054 0.035
---------------------------------------------------------------------------------------------
Total from Investment Activities 0.050 0.050 0.049 0.054 0.035
---------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.050) (0.050) (0.049) (0.054) (0.035)
---------------------------------------------------------------------------------------------
Total Distributions (0.050) (0.050) (0.049) (0.054) (0.035)
---------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------------------------------------------------------------------------------------------
Total Return 5.08% 5.06% 4.99% 5.52% 3.55%
RATIOS/SUPPLEMENTARY DATA:
Net assets at end of period (000) $820,923 $1,042,151 $717,265 $698,131 $544,952
Ratio of expenses to average net
assets 0.66% 0.64% 0.61% 0.59% 0.61%
Ratio of net investment income to
average net assets 4.97% 4.96% 4.88% 5.38% 3.45%
Ratio of expenses to average net
assets* 0.93% 0.92% 0.76% 0.74% 0.93%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
22
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<PAGE> 117
FINANCIAL HIGHLIGHTS TAX-EXEMPT MONEY MARKET PORTFOLIO(A)
<TABLE>
<CAPTION>
TRUST SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED
YEAR ENDED NOVEMBER 30, NOVEMBER 30,
1998 1997 1996 1995(a)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
----------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.029 0.030 0.030 0.016
----------------------------------------------------------------------------------------------------
Total from Investment Activities 0.029 0.030 0.030 0.016
----------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.029) (0.030) (0.030) (0.016)
----------------------------------------------------------------------------------------------------
Total Distributions (0.029) (0.030) (0.030) (0.016)
----------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
----------------------------------------------------------------------------------------------------
Total Return 2.92% 3.08% 3.06% 1.57%(b)
RATIOS/SUPPLEMENTARY DATA:
Net assets at end of period (000) $37,541 $143,517 $95,726 $78,031
Ratio of expenses to average net
assets 0.59% 0.58% 0.53% 0.70%(c)
Ratio of net investment income to
average net assets 2.88% 3.04% 3.01% 3.10%(c)
Ratio of expenses to average net
assets* 0.84% 0.83% 0.58% 0.75%(c)
<CAPTION>
TRUST SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
YEAR ENDED MAY 31,
1995 1994
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00
-------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.029 0.020
---------------------------------------------------------------------------------------------
Total from Investment Activities 0.029 0.020
----------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.029) (0.020)
----------------------------------------------------------------------------------------------------
Total Distributions (0.029) (0.020)
----------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00
----------------------------------------------------------------------------------------------------
Total Return 2.93% 1.97%
RATIOS/SUPPLEMENTARY DATA:
Net assets at end of period (000) $85,324 $112,594
Ratio of expenses to average net
assets 0.61% 0.52%
Ratio of net investment income to
average net assets 2.87% 1.95%
Ratio of expenses to average net
assets* 0.70% 0.86%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
(a) Upon its reorganization as a portfolio of the Fund on October 2, 1995,
the Tax-Exempt Money Market Portfolio changed its fiscal year end from
May 31 to November 30.
(b) Not annualized.
(c) Annualized.
23
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<PAGE> 118
[This Page Intentionally Left Blank]
<PAGE> 119
[Back Cover Page]
Where to find more information
You'll find more information about the Mercantile Money Market Portfolios in the
following documents:
Annual and semi-annual reports
The Fund's annual and semi-annual reports contain more information about each
Portfolio and a discussion about the market conditions and investment strategies
that had a significant effect on each Portfolio's performance during the last
fiscal year.
Statement of Additional Information (SAI)
The SAI contains detailed information about the Portfolios and their policies.
By law, it's incorporated by reference into (considered to be part of) this
prospectus.
You can get a free copy of these documents, request other information about the
Portfolios and make shareholder inquiries by calling the Fund at 1-800-452-2724
or by writing to:
Mercantile Mutual Funds, Inc.
P.O. Box 78069
St. Louis, Missouri 63175
If you buy your shares through a broker-dealer or other financial institution,
you may contact your institution for more information.
You can write to the Securities and Exchange Commission (SEC) Public Reference
Section and ask them to mail you information about the Portfolios, including the
SAI. They'll charge you a fee for this service. You can also visit the SEC
Public Reference Room and copy the documents while you're there. For information
about the operation of the Public Reference Room, call the SEC.
Public Reference Section of the SEC
Washington, DC 20549-6009
1-800-SEC-0330
Reports and other information about the Mercantile Money Market Portfolios are
also available on the SEC's website at http://www.sec.gov.
The Fund's Investment Company Act File No. is 811-3567
-24-
<PAGE> 120
MERCANTILE MUTUAL FUNDS, INC.
PROSPECTUS
MARCH 31, 1999
MONEY MARKET PORTFOLIOS
Treasury Money Market Portfolio
Money Market Portfolio
TAXABLE BOND PORTFOLIOS
U.S. Government Securities Portfolio
Intermediate Corporate Bond Portfolio
Bond Index Portfolio
Government & Corporate Bond Portfolio
STOCK 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
International Equity Portfolio
Institutional Shares
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved any shares of these Portfolios or determined if
this prospectus is truthful or complete. Anyone who tells you otherwise
is committing a criminal offense.
<PAGE> 121
<TABLE>
<S> <C> <C> <C>
RISK/RETURN SUMMARY
[Scale
Icon]
3 Overview
5 Treasury Money Market Portfolio
8 Money Market Portfolio
11 U.S. Government Securities Portfolio
14 Intermediate Corporate Bond Portfolio
18 Bond Index Portfolio
21 Government & Corporate Bond Portfolio
25 Balanced Portfolio
29 Equity Income Portfolio
32 Equity Index Portfolio
35 Growth & Income Equity Portfolio
38 Growth Equity Portfolio
41 Small Cap Equity Portfolio
44 Small Cap Equity Index Portfolio
46 International Equity Portfolio
49 Additional Information on Risk
YOUR ACCOUNT
[Magnifying
Glass Icon]
50 Explanation of Sales Price
51 How to Buy Shares
52 How to Sell Shares
53 How to Exchange Shares
53 Administrative Services Fees
53 General Transaction Policies
DISTRIBUTIONS AND TAXES
[Line Graph
Icon]
54 Dividends and Distributions
55 Taxation
MANAGEMENT OF THE FUND
[Open Book
Icon]
56 The Adviser
56 The Sub-Adviser
FINANCIAL HIGHLIGHTS
[Money in
Hand Icon]
57 Introduction
58 Financial Highlights
</TABLE>
2
CONTENTS
<PAGE> 122
<TABLE>
<S> <C>
This prospectus describes Institutional Shares of fourteen
investment portfolios (the "Portfolios") offered by
Mercantile Mutual Funds, Inc. (the "Fund"). The Fund was
formerly known as The ARCH Fund(R), Inc. On the following
pages, you will find important information about each
Portfolio, including:
- A description of the Portfolio's investment objective
(sometimes referred to as its goal);
- The Portfolio's principal investment strategies (the steps
it takes to try to meet its goal);
- The principal risks associated with the Portfolio (factors
that may prevent it from meeting its goal);
- The Portfolio's past performance (how successful it's been
in meeting its goal); and
- The fees and expenses you pay as an investor in the
Portfolio.
WHO MAY WANT TO INVEST IN The Treasury Money Market Portfolio may be appropriate for
THE PORTFOLIOS? investors who want a way to earn money market returns from
U.S. Treasury obligations that are generally exempt from
state and local taxes. The Money Market Portfolio may be
appropriate for investors who want a flexible and convenient
way to manage cash while earning money market returns.
The Taxable Bond Portfolios may be appropriate for investors
who seek current income from their investments greater than
that normally available from a money market fund and can
accept fluctuations in price and yield. The Portfolios may
NOT be appropriate for investors who are investing for
long-term capital appreciation.
The Stock Portfolios may be appropriate for investors who
seek capital growth over the long term and are comfortable
with the risks of stock markets. The Portfolios may NOT be
appropriate for investors who are investing for short-term
goals or are mainly seeking current income.
Before investing in a Portfolio, you should carefully
consider:
- Your own investment goals
- The amount of time you are willing to leave your money
invested
- How much risk you are willing to take.
</TABLE>
logo
logo Q
RISK/RETURN SUMMARY OVERVIEW
3
- -
<PAGE> 123
<TABLE>
<S> <C>
THE INVESTMENT ADVISER Mississippi Valley Advisors Inc. ("MVA" or the "Adviser")
serves as the investment adviser to each Portfolio. Founded
in 1987, MVA is a subsidiary of Mercantile Bancorporation
Inc., a regional banking and financial services
organization, and has its main office at One Mercantile
Center, Seventh and Washington Streets, St. Louis, Missouri
63101. As of December 31, 1998, MVA had approximately $9.9
billion in assets under management, including the Fund's
assets, which were approximately $4.3 billion.
An investment in the Portfolios is not a Mercantile Bank
deposit and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government
agency. Although each of the Money Market Portfolios seeks
to preserve the value of your investment at $1.00 per share,
it is possible to lose money by investing in the Portfolios.
You could also lose money by investing in one of the Taxable
Bond or Stock Portfolios.
</TABLE>
RISK/RETURN SUMMARY OVERVIEW
4
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<PAGE> 124
MONEY MARKET
INSTRUMENTS are
short-term obligations
issued by banks,
corporations, the U.S.
Government and state
and local governments.
Money market
instruments purchased
by the Money Market
Portfolios must meet
strict requirements as
to investment quality,
maturity and
diversification. The
Money Market
Portfolios generally
do not invest in
securities with
maturities of more
than 397 days and the
average maturity of
all securities held by
a particular Money
Market Portfolio must
be 90 days or less.
Prior to purchasing a
money market
instrument for one of
the Money Market
Portfolios, the
Adviser must determine
that the instrument
carries very little
credit risk.
logo
logo Q
TREASURY MONEY
RISK/RETURN SUMMARY MARKET PORTFOLIO
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to seek a high level
of current income exempt from state income tax consistent
with liquidity and security of principal.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio invests substantially all (but not less than
65%) of its total assets in money market instruments issued
by the U.S. Treasury and certain U.S. Government agencies
and instrumentalities that provide income that is generally
not subject to state income tax.
PRINCIPAL RISK CONSIDERATIONS
The yield paid by the Portfolio will vary with changes in
interest rates.
Although U.S. Government securities, particularly U.S.
Treasury obligations, have historically involved little
risk, if an issuer fails to pay interest or repay principal,
the value of your investment could decline.
The Adviser evaluates the rewards and risks presented by all
securities purchased by the Portfolio and how they may
advance the Portfolio's investment objective. It is
possible, however, that these evaluations will prove to be
inaccurate.
There's no guarantee the Portfolio will be able to preserve
the value of your investment at $1.00 per share.
</TABLE>
5
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<PAGE> 125
RETURN HISTORY
The bar chart and table on
this page show the
Portfolio's annual returns
and long-term performance,
thereby giving some
indication of the risk of
investing in the Portfolio.
The bar chart shows how the
performance of the
Portfolio's Institutional
Shares has varied from year
to year. The table shows
the Portfolio's average
annual returns for one
year, five years and since
inception. Both the bar
chart and table assume
reinvestment of all
dividends and
distributions. The
Portfolio's past
performance does not
necessarily indicate how it
will perform in the future.
TREASURY MONEY
RISK/RETURN SUMMARY MARKET PORTFOLIO
INSTITUTIONAL SHARES*
YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
<TABLE>
<S> <C>
[STATED IN PERCENTAGES]
</TABLE>
<TABLE>
<CAPTION>
TREASURY MONEY MARKET PORTFOLIO
-------------------------------
<S> <C>
'1993' 2.43
'94' 3.33
'95' 4.97
'96' 4.43
'97' 4.54
'98' 4.34
</TABLE>
<TABLE>
<S> <C>
Best quarter: 1.26% for the quarter ending
June 30, 1995
Worst quarter: 0.58% for the quarter ending
June 30, 1993
</TABLE>
AVERAGE ANNUAL TOTAL
RETURNS
for the periods ended
December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION**
<S> <C> <C> <C>
Institutional Shares* 4.34% 4.32% 3.84%
</TABLE>
* Institutional Shares of the Portfolio commenced operations on January 26,
1995. Total returns for prior periods reflect the performance of the
Portfolio's Investor A Shares.
** April 20, 1992.
To obtain the Portfolio's current 7-day yield, please call 1-800-452-4015.
6
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<PAGE> 126
TREASURY MONEY
RISK/RETURN SUMMARY MARKET PORTFOLIO
FEES AND EXPENSES
<TABLE>
<S> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM INSTITUTIONAL
THE PORTFOLIO'S ASSETS) SHARES
The table on the right shows the
fees and expenses that you pay if
you buy and hold Institutional
Shares of the Treasury Money
Market Portfolio.
Management Fees .40%(1)
Distribution (12b-1) Fees None
Other Expenses .56%(1)
Total Annual Portfolio Operating Expenses .96%(1)
</TABLE>
(1) Management Fees, Other Expenses and
Total Annual Portfolio Operating
Expenses for the Portfolio's
Institutional Shares for the current
fiscal year are expected to be less
than the amounts shown above because
certain of the Portfolio's service
providers are voluntarily waiving a
portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers
and/or reimbursements are being made in
order to keep the annual fees and
expenses for the Portfolio's
Institutional Shares at a certain
level. MANAGEMENT FEES, OTHER EXPENSES
AND TOTAL ANNUAL PORTFOLIO OPERATING
EXPENSES, AFTER TAKING THESE FEE
WAIVERS AND EXPENSE REIMBURSEMENTS INTO
ACCOUNT, ARE EXPECTED TO BE .35%, .45%
AND .80%, RESPECTIVELY, FOR
INSTITUTIONAL SHARES. These fee waivers
and expense reimbursements may be
revised or cancelled at any time.
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
INSTITUTIONAL SHARES $98 $306 $531 $1,178
</TABLE>
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then sell
all of your shares at the
end of those periods. The
example also assumes that
your investment has a 5%
return each year and the
Portfolio's operating
expenses remain the same.
Although your actual costs
may be higher or lower,
based on these assumptions
your costs would be:
7
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<PAGE> 127
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to seek current
income with liquidity and stability of principal.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio invests substantially all (but not less than
80%) of its total assets in a broad range of money market
instruments, including commercial paper, notes and bonds
issued by U.S. and foreign corporations, obligations issued
by the U.S. Government and its agencies and
instrumentalities, and obligations issued by U.S. and
foreign banks, such as certificates of deposit, letters of
credit, bankers' acceptances and time deposits.
The Portfolio will only buy a money market instrument if it
has the highest short-term rating from at least two
nationally recognized statistical rating organizations, such
as Standard & Poor's Ratings Group or Moody's Investors
Service, Inc., or only one such rating if only one
organization has rated the instrument. If the money market
instrument is not rated, the Adviser must determined that it
is of comparable quality to eligible rated instruments.
PRINCIPAL RISK CONSIDERATIONS
The yield paid by the Portfolio will vary with short-term
interest rates.
Although credit risk is very low because the Portfolio only
invests in high quality obligations, if an issuer fails to
pay interest or repay principal, the value of your
investment could decline.
The Adviser evaluates the rewards and risks presented by all
securities purchased by the Portfolio and how they may
advance the Portfolio's investment objective. It is
possible, however, that these evaluations will prove to be
inaccurate.
There's no guarantee the Portfolio will be able to preserve
the value of your investment at $1.00 per share.
</TABLE>
logo
logo Q
MONEY MARKET
RISK/RETURN SUMMARY PORTFOLIO
8
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<PAGE> 128
<TABLE>
<S> <C>
RETURN HISTORY INSTITUTIONAL SHARES*
The bar chart and table on this page YEAR-BY-YEAR TOTAL RETURNS
show the Portfolio's annual returns and (AS OF DECEMBER 31 EACH YEAR)
long-term performance, thereby giving [STATED IN PERCENTAGES]
some indication of the risk of
investing in the Portfolio. The bar
chart shows how the performance of the
Portfolio's Institutional Shares has
varied from year to year. The table
shows the Portfolio's average annual
returns for one year, five years, ten
years and since inception. Both the bar
chart and table assume reinvestment of
all dividends and distributions. The
Portfolio's past performance does not
necessarily indicate how it will
perform in the future.
</TABLE>
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO
----------------------
<S> <C>
'1989' 9.19
'90' 8.03
'91' 5.45
'92' 3.06
'93' 2.51
'94' 3.55
'95' 5.36
'96' 4.77
'97' 4.96
'98' 4.90
</TABLE>
Best quarter: 2.36% for the
quarter ending
June 30, 1989
Worst quarter: 0.61% for the
quarter ending
June 30, 1993
AVERAGE ANNUAL TOTAL
RETURNS for the periods
ended December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS 10 YEARS INCEPTION**
<S> <C> <C> <C> <C>
Institutional Shares* 4.90% 4.71% 5.16% 5.36%
</TABLE>
* Institutional Shares of the Portfolio commenced operations on January 3,
1994. Total returns for prior periods reflect the performance of the
Portfolio's Investor A Shares.
** March 24, 1983.
To obtain the Portfolio's current 7-day yield, please call 1-800-452-4015.
MONEY MARKET
RISK/RETURN SUMMARY PORTFOLIO
9
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<PAGE> 129
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then
sell all of your shares at
the end of those periods.
The example also assumes
that your investment has a
5% return each year and the
Portfolio's operating
expenses remain the same.
Although your actual costs
may be higher or lower,
based on these assumptions
your costs would be:
MONEY MARKET
RISK/RETURN SUMMARY PORTFOLIO
FEES AND EXPENSES
<TABLE>
<S> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM THE INSTITUTIONAL
PORTFOLIO'S ASSETS) SHARES
The table on the right shows the
fees and expenses that you pay if
you buy and hold Institutional
Shares of the Money Market
Portfolio.
Management Fees .40%(1)
Distribution (12b-1) Fees None
Other Expenses .53%(1)
Total Annual Portfolio Operating Expenses .93%(1)
</TABLE>
(1) Management Fees, Other Expenses and
Total Annual Portfolio Operating
Expenses for the Portfolio's
Institutional Shares for the current
fiscal year are expected to be less
than the amounts shown above because
certain of the Portfolio's service
providers are voluntarily waiving a
portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers
and/or reimbursements are being made in
order to keep the annual fees and
expenses for the Portfolio's
Institutional Shares at a certain
level. MANAGEMENT FEES, OTHER EXPENSES
AND TOTAL ANNUAL PORTFOLIO OPERATING
EXPENSES, AFTER TAKING THESE FEE
WAIVERS AND EXPENSE REIMBURSEMENTS INTO
ACCOUNT, ARE EXPECTED TO BE .35%, .44%
AND .79%, RESPECTIVELY, FOR
INSTITUTIONAL SHARES. These fee waivers
and expense reimbursements may be
revised or cancelled at any time.
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
INSTITUTIONAL SHARES $95 $296 $515 $1,143
</TABLE>
10
- -
<PAGE> 130
REPURCHASE AGREEMENTS
are transactions in
which a Portfolio buys
securities from a
seller (usually a bank
or broker-dealer) who
agrees to buy them
back from the
Portfolio on a certain
date and at a certain
price.
MORTGAGE-BACKED
SECURITIES are
certificates
representing ownership
interests in a pool of
mortgage loans, and
include those issued
by the Government
National Mortgage
Association ("Ginnie
Maes"), the Federal
National Mortgage
Association ("Fannie
Maes") and the Federal
Home Loan Mortgage
Corporation ("Freddie
Macs").
PORTFOLIO MANAGER
David A. Bethke is the
person primarily
responsible for the
day-to-day management
of the Portfolio. Mr.
Bethke, Senior
Associate, joined MVA
in 1987 and has eight
years of prior
investment experience.
He has managed the
Portfolio since it
commenced operations
in 1988.
logo
logo Q
U.S. GOVERNMENT
RISK/RETURN SUMMARY SECURITIES PORTFOLIO
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to seek a high rate
of current income that is consistent with relative stability
of principal.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio normally invests at least 65% of its total
assets in debt obligations issued or guaranteed by the U.S.
Government and its agencies, including U.S. Treasury bonds,
notes and bills, as well as in repurchase agreements backed
by such obligations. The Portfolio also invests in
mortgage-backed securities issued by U.S.
Government-sponsored entities such as Ginnie Maes, Fannie
Maes and Freddie Macs. The remaining maturity (i.e., length
of time until an obligation must be repaid) of the
obligations held by the Portfolio will vary from 1 to 30
years.
PRINCIPAL RISK CONSIDERATIONS
The prices of debt securities tend to move in the opposite
direction to interest rates. When rates are rising, the
prices of debt securities tend to fall. When rates are
falling, the prices of debt securities tend to rise.
Generally, the longer the time until maturity, the more
sensitive the price of a debt security is to interest rate
changes. Changes in interest rates may also cause certain
debt securities held by the Portfolio, including
mortgage-backed securities, to be paid off much sooner or
later than expected. In the event that a security is paid
off sooner than expected because of a decline in interest
rates, the Portfolio may be unable to recoup all of its
initial investment and may also suffer from having to
reinvest in lower-yielding securities. In the event of a
later than expected payment because of a rise in interest
rates, the value of the obligation will decrease, and the
Portfolio may suffer from the inability to invest in
higher-yielding securities.
The value of debt securities also depends on the ability of
issuers to make principal and interest payments. If an
issuer can't meet its payment obligations, the value of its
debt securities will fall. Securities issued or guaranteed
by the U.S. Government and its agencies have historically
involved little risk of loss of principal if held to
maturity. Certain U.S. Government securities, such as Ginnie
Maes, are supported by the full faith and credit of the U.S.
Treasury. Others, such as Freddie Macs, are supported by the
right of the issuer to borrow from the U.S. Treasury. Other
securities, such as Fannie Maes, are supported by the
discretionary authority of the U.S. Government to purchase
certain obligations of the issuers, and still others are
supported by the issuer's own credit.
Repurchase agreements carry the risk that the other party
may not fulfill its obligations under the agreement.
The Adviser evaluates the rewards and risks presented by all
securities purchased by the Portfolio and how they may
advance the Portfolio's investment objective. It is
possible, however, that these evaluations will prove to be
inaccurate.
</TABLE>
11
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<PAGE> 131
KNOW YOUR INDEX
THE LEHMAN BROTHERS
INTERMEDIATE GOVERNMENT
BOND INDEX is an
unmanaged index which
tracks the performance of
intermediate-term U.S.
Government bonds.
U.S. GOVERNMENT
RISK/RETURN SUMMARY SECURITIES PORTFOLIO
<TABLE>
<S> <C>
RETURN HISTORY INSTITUTIONAL SHARES*
The bar chart and table on this page YEAR-BY-YEAR TOTAL RETURNS
show the Portfolio's annual returns and (AS OF DECEMBER 31 EACH YEAR)
long-term performance, thereby giving [STATED IN PERCENTAGES]
some indication of the risk of
investing in the Portfolio. The bar
chart shows how the performance of the
Portfolio's Institutional Shares has
varied from year to year. The table
shows how the Portfolio's average
annual returns for one year, five
years, ten years and since inception
compare to those of a broad-based
market index. Both the bar chart and
table assume reinvestment of all
dividends and distributions. The
Portfolio's past performance does not
necessarily indicate how it will
perform in the future.
</TABLE>
<TABLE>
<CAPTION>
U.S. GOVERNMENT SECURITIES PORTFOLIO
------------------------------------
<S> <C>
'1989' 9.97
'90' 11.04
'91' 13.98
'92' 5.48
'93' 8.77
'94' -3.06
'95' 14.87
'96' 3.09
'97' 6.27
'98' 6.44
</TABLE>
Best quarter: 5.40% for the
quarter ending
September 30, 1991
Worst quarter: -2.60% for the
quarter ending
March 31, 1994
AVERAGE ANNUAL TOTAL
RETURNS for the periods
ended December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS 10 YEARS INCEPTION**
<S> <C> <C> <C> <C>
Institutional Shares* 6.44% 5.36% 7.56% 7.48%
Lehman Brothers Intermediate Government Bond Index 8.49% 6.45% 8.34% 8.25%
</TABLE>
* Institutional Shares of the Portfolio commenced operations on June 7,
1994. Total returns for prior periods reflect the performance of the
Portfolio's Investor A Shares without taking into account the sales charge
payable in connection with purchases of Investor A Shares.
** June 2, 1988 for Investor A Shares; May 31, 1988 for the Lehman Brothers
Intermediate Government Bond Index.
12
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<PAGE> 132
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then
sell all of your shares at
the end of those periods.
The example also assumes
that your investment has a
5% return each year and the
Portfolio's operating
expenses remain the same.
Although your actual costs
may be higher or lower,
based on these assumptions
your costs would be:
U.S. GOVERNMENT
RISK/RETURN SUMMARY SECURITIES PORTFOLIO
FEES AND EXPENSES
<TABLE>
<S> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM THE INSTITUTIONAL
PORTFOLIO'S ASSETS) SHARES
The table on the right shows the
fees and expenses that you pay if
you buy and hold Institutional
Shares of the U.S. Government
Securities Portfolio.
Management Fees .45%
Distribution (12b-1) Fees None
Other Expenses .62%(1)
Total Annual Portfolio Operating Expenses 1.07%(1)
</TABLE>
(1) Other Expenses and Total Annual
Portfolio Operating Expenses for the
Portfolio's Institutional Shares for
the current fiscal year are expected to
be less than the amounts shown above
because certain of the Portfolio's
service providers are voluntarily
waiving a portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers
and/or reimbursements are being made in
order to keep the annual fees and
expenses for the Portfolio's
Institutional Shares at a certain
level. OTHER EXPENSES AND TOTAL ANNUAL
PORTFOLIO OPERATING EXPENSES, AFTER
TAKING THESE FEE WAIVERS AND EXPENSE
REIMBURSEMENTS INTO ACCOUNT, ARE
EXPECTED TO BE .52% AND .97%,
RESPECTIVELY, FOR INSTITUTIONAL SHARES.
These fee waivers and expense
reimbursements may be revised or
cancelled at any time.
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
INSTITUTIONAL SHARES $109 $340 $590 $1,306
</TABLE>
13
- -
<PAGE> 133
INVESTMENT GRADE DEBT
SECURITIES are those
of medium credit
quality or better as
determined by a
national rating
agency, such as
Standard & Poor's
Ratings Group (debt
securities rated in
the four highest
rating categories,
i.e. BBB or higher)
and Moody's Investors
Service, Inc. (debt
securities rated in
the four highest
rating categories,
i.e. Baa or higher).
The higher the credit
rating, the less
likely it is that the
issuer of the
securities will
default on its
principal and interest
payments.
AVERAGE WEIGHTED
MATURITY gives you the
average time until all
debt securities in a
Portfolio come due or
mature. It is
calculated by
averaging the time to
maturity of all debt
securities held by a
Portfolio with each
maturity "weighted"
according to the
percentage of assets
it represents.
logo
logo Q
INTERMEDIATE CORPORATE
RISK/RETURN SUMMARY BOND PORTFOLIO
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to seek as high a
level of current income as is consistent with preservation
of capital.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio normally invests at least 65% of its total
assets in corporate debt obligations. These include
obligations that are issued by U.S. and foreign business
corporations and obligations issued by agencies,
instrumentalities or authorities that are organized as
corporations by the U.S., by states or political
subdivisions of the U.S., or by foreign governments or
political subdivisions. The Portfolio also invests in
obligations issued or guaranteed by U.S. or foreign
governments, their agencies and instrumentalities and in
mortgage-backed securities, including Ginnie Maes, Fannie
Maes and Freddie Macs.
The Portfolio may only purchase investment grade debt
obligations. Under normal market conditions, however, the
Portfolio intends to invest at least 65% of its total assets
in debt obligations rated in one of the three highest rating
categories. Unrated debt obligations will be purchased only
if they are determined by the Adviser to be at least
comparable in quality at the time of purchase to eligible
rated securities. 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.
In making investment decisions, the Adviser will consider a
number of factors including current yield, maturity, yield
to maturity, anticipated changes in interest rates, and the
overall quality of the investment. The Portfolio's average
weighted maturity will generally be between three and ten
years.
</TABLE>
14
- -
<PAGE> 134
<TABLE>
<S> <C>
PRINCIPAL RISK CONSIDERATIONS
The prices of debt securities tend to move in the opposite
direction to interest rates. When rates are rising, the
prices of debt securities tend to fall. When rates are
falling, the prices of debt securities tend to rise.
Generally, the longer the time until maturity, the more
sensitive the price of a debt security is to interest rate
changes. Changes in interest rates also may cause certain
debt securities held by the Portfolio, including callable
securities and mortgage-backed securities, to be paid off
much sooner or later than expected. In the event that a
security is paid off much sooner than expected because of a
decline in interest rates, the Portfolio may be unable to
recoup all of its initial investment and may also suffer
from having to reinvest in lower-yielding securities. In the
event of a later than expected payment because of a rise in
interest rates, the value of the obligation will decrease,
and the Portfolio may suffer from the inability to invest in
higher-yielding securities.
The value of debt securities also depends on the ability of
issuers to make principal and interest payments. If an
issuer can't meet its payment obligations or if its credit
rating is lowered, the value of its debt securities will
fall.
Foreign investments may be riskier than U.S. investments
because of currency exchange rate volatility, government
restrictions, different accounting standards and political
instability.
The Adviser evaluates the rewards and risks presented by all
securities purchased by the Portfolio and how they may
advance the Portfolio's investment objective. It is
possible, however, that these evaluations will prove to be
inaccurate.
</TABLE>
PORTFOLIO MANAGER
David A. Bethke is the
person primarily
responsible for the
day-to-day management
of the Portfolio. Mr.
Bethke, Senior
Associate, joined MVA
in 1987 and has eight
years of prior
investment experience.
He has managed the
Portfolio since it
commenced operations
in 1997.
INTERMEDIATE CORPORATE
RISK/RETURN SUMMARY BOND PORTFOLIO
15
- -
<PAGE> 135
RETURN HISTORY
The bar chart and table on
this page show the
Portfolio's annual returns
and long-term performance,
thereby giving some
indication of the risk of
investing in the Portfolio.
The bar chart shows the
performance of the
Portfolio's Institutional
Shares during the last
calendar year. The table
shows how the Portfolio's
average annual returns for
one year and since
inception compare to those
of a broad-based market
index. Both the bar chart
and table assume
reinvestment of all
dividends and
distributions. The
Portfolio's past
performance does not
necessarily indicate how it
will perform in the future.
KNOW YOUR INDEX
THE LEHMAN BROTHERS
INTERMEDIATE CORPORATE BOND
INDEX is an unmanaged index
which tracks the
performance of
intermediate-term U.S.
corporate bonds.
INTERMEDIATE CORPORATE
RISK/RETURN SUMMARY BOND PORTFOLIO
INSTITUTIONAL SHARES
YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
[STATED IN PERCENTAGES]
<TABLE>
<CAPTION>
INTERMEDIATE CORPORATE BOND PORTFOLIO
-------------------------------------
<S> <C>
'1998' 8.77
</TABLE>
Best quarter: 5.25% for the
quarter ending
September 30, 1998
Worst quarter: -0.21% for the
quarter ending
December 31, 1998
AVERAGE ANNUAL TOTAL
RETURNS for the periods
ended December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION*
<S> <C> <C>
Institutional Shares 8.77% 8.73%
Lehman Brothers Intermediate Corporate Bond Index 8.49% 8.67%
</TABLE>
* February 10, 1997 for Institutional Shares; January 31, 1997 for the Lehman
Brothers Intermediate Corporate Bond Index.
16
- -
<PAGE> 136
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then
sell all of your shares at
the end of those periods.
The example also assumes
that your investment has a
5% return each year and the
Portfolio's operating
expenses remain the same.
Although your actual costs
may be higher or lower,
based on these assumptions
your costs would be:
INTERMEDIATE CORPORATE
RISK/RETURN SUMMARY BOND PORTFOLIO
FEES AND EXPENSES
<TABLE>
<S> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM THE INSTITUTIONAL
PORTFOLIO'S ASSETS) SHARES
The table on the right shows the
fees and expenses that you pay if
you buy and hold Institutional
Shares of the Intermediate
Corporate Bond Portfolio.
Management Fees .55%
Distribution (12b-1) Fees None
Other Expenses .64%(1)
Total Annual Portfolio Operating Expenses 1.19%(1)
</TABLE>
(1) Other Expenses and Total Annual
Portfolio Operating Expenses for the
Portfolio's Institutional Shares for
the current fiscal year are expected to
be less than the amounts shown above
because certain of the Portfolio's
service providers are voluntarily
waiving a portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers
and/or reimbursements are being made in
order to keep the annual fees and
expenses for the Portfolio's
Institutional Shares at a certain
level. OTHER EXPENSES AND TOTAL ANNUAL
PORTFOLIO OPERATING EXPENSES, AFTER
TAKING THESE FEE WAIVERS AND EXPENSE
REIMBURSEMENTS INTO ACCOUNT, ARE
EXPECTED TO BE .54% AND 1.09%,
RESPECTIVELY, FOR INSTITUTIONAL SHARES.
These fee waivers and expense
reimbursements may be revised or
cancelled at any time.
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
INSTITUTIONAL SHARES $121 $378 $654 $1,443
</TABLE>
17
- -
<PAGE> 137
INDEXING is a strategy
whereby a Portfolio
attempts to weight its
securities to match
those of a broadly-
based securities index
in an attempt to
approximate the
index's performance.
THE LEHMAN BROTHERS
AGGREGATE BOND INDEX
is an unmanaged index
made up of Lehman
Brothers'
Government/Corporate
Bond Index, its
Mortgage Backed
Securities Index and
its Asset Backed
Securities Index.
logo
logo Q
BOND INDEX
RISK/RETURN SUMMARY PORTFOLIO
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to seek to provide
investment results that, before deduction of operating
expenses, approximate the price and yield performance of
U.S. Government, mortgage-backed, asset-backed and corporate
debt securities as represented by the Lehman Brothers
Aggregate Bond Index (the "Lehman Aggregate").
The Portfolio's investment objective can be changed by the
Fund's Board of Directors without shareholder approval.
Shareholders will be given at least 30 days' written notice
before any such change occurs.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio uses an "indexing" strategy through the use of
computer models to approximate the investment performance of
the Lehman Aggregate. The Adviser generally selects
securities for the Portfolio on the basis of their
weightings in the Lehman Aggregate and will only purchase a
security for the Portfolio that is included in the Lehman
Aggregate at the time of such purchase. Because of the large
number of securities listed in the Lehman Aggregate, the
Portfolio cannot invest in all of them. Instead, the
Portfolio holds a representative sample of approximately 100
of the securities in the Lehman Aggregate, selecting one or
two securities to represent an entire "class" or type of
security in the Lehman Aggregate. The Portfolio will invest
substantially all (but not less than 80%) of its total
assets in securities listed in the Lehman Aggregate.
PRINCIPAL RISK CONSIDERATIONS
The prices of debt securities tend to move in the opposite
direction to interest rates. When rates are rising, the
prices of debt securities tend to fall. When rates are
falling, the prices of debt securities tend to rise.
Generally, the longer the time until maturity, the more
sensitive the price of a debt security is to interest rate
changes. Changes in interest rates also may cause certain
debt securities held by the Portfolio, including callable
securities and mortgage-backed securities, to be paid off
much sooner or later than expected. In the event that a
security is paid off sooner than expected because of a
decline in interest rates, the Portfolio may be unable to
recoup all of its initial investment and may also suffer
from having to reinvest in lower-yielding securities. In the
event of a later than expected payment because of a rise in
interest rates, the value of the obligation will decrease,
and the Portfolio may suffer from the inability to invest in
higher-yielding securities.
The value of debt securities also depends on the ability of
issuers to make principal and interest payments. If an
issuer can't meet its payment obligations or if its credit
rating is lowered, the value of its debt securities will
fall.
There is the additional risk that the Portfolio will fail to
match the investment results of the Lehman Aggregate.
</TABLE>
18
- -
<PAGE> 138
RETURN HISTORY
The bar chart and table on
this page show the
Portfolio's annual returns
and long-term performance,
thereby giving some
indication of the risk of
investing in the Portfolio.
The bar chart shows the
performance of the
Portfolio's Institutional
Shares during the last
calendar year. The table
shows how the Portfolio's
average annual returns for
one year and since
inception compare to those
of the Lehman Aggregate.
Both the bar chart and
table assume reinvestment
of all dividends and
distributions. The
Portfolio's past
performance does not
necessarily indicate how it
will perform in the future.
BOND INDEX
RISK/RETURN SUMMARY PORTFOLIO
INSTITUTIONAL SHARES
YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
[STATED IN PERCENTAGES]
<TABLE>
<CAPTION>
BOND INDEX PORTFOLIO
--------------------
<S> <C>
'1998' 8.68
</TABLE>
Best quarter: 4.60% for the
quarter ending
September 30, 1998
Worst quarter: 0.05% for the
quarter ending
December 31, 1998
AVERAGE ANNUAL TOTAL
RETURNS for the periods
ended December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION*
<S> <C> <C>
Institutional Shares 8.68% 8.99%
Lehman Brothers Aggregate Bond Index 8.69% 9.67%
</TABLE>
* February 10, 1997 for Institutional Shares; January 31, 1997 for the Lehman
Brothers Aggregate Bond Index.
19
- -
<PAGE> 139
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then
sell all of your shares at
the end of those periods.
The example also assumes
that your investment has a
5% return each year and the
Portfolio's operating
expenses remain the same.
Although your actual costs
may be higher or lower,
based on these assumptions
your costs would be:
BOND INDEX
RISK/RETURN SUMMARY PORTFOLIO
FEES AND EXPENSES
<TABLE>
<S> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM THE INSTITUTIONAL
PORTFOLIO'S ASSETS) SHARES
The table on the right shows the
fees and expenses that you pay if
you buy and hold Institutional
Shares of the Bond Index
Portfolio.
Management Fees .30%
Distribution (12b-1) Fees None
Other Expenses .63%(1)
Total Annual Portfolio Operating Expenses .93%(1)
</TABLE>
(1) Other Expenses and Total Annual
Portfolio Operating Expenses for the
Portfolio's Institutional Shares for
the current fiscal year are expected to
be less than the amounts shown above
because certain of the Portfolio's
service providers are voluntarily
waiving a portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers
and/or reimbursements are being made in
order to keep the annual fees and
expenses for the Portfolio's
Institutional Shares at a certain
level. OTHER EXPENSES AND TOTAL ANNUAL
PORTFOLIO OPERATING EXPENSES, AFTER
TAKING THESE FEE WAIVERS AND EXPENSE
REIMBURSEMENTS INTO ACCOUNT, ARE
EXPECTED TO BE .52% AND .82%,
RESPECTIVELY, FOR INSTITUTIONAL SHARES.
These fee waivers and expense
reimbursements may be revised or
cancelled at any time.
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
INSTITUTIONAL SHARES $95 $296 $515 $1,143
</TABLE>
20
- -
<PAGE> 140
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to seek the highest
level of current income consistent with conservation of
capital.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio invests substantially all of its assets in a
broad range of debt obligations, including corporate
obligations and U.S. Government obligations. Corporate
obligations may include bonds, notes and debentures. U.S.
Government obligations may include U.S. Treasury obligations
and obligations of certain U.S. Government agencies. The
Portfolio also invests in mortgage-backed securities,
including Ginnie Maes, Fannie Maes and Freddie Macs.
Although the Portfolio invests primarily in the debt
obligations of U.S. issuers, it may from time to time invest
in U.S. dollar-denominated debt obligations of foreign
corporations and governments.
The Portfolio may only purchase investment grade debt
obligations, which are those rated in one of the four
highest rating categories by one or more national rating
agencies, such as Standard & Poor's Ratings Group or Moody's
Investors Service, Inc. Under normal market conditions,
however, the Portfolio intends to invest at least 65% of its
total assets in debt obligations rated in one of the three
highest rating categories. Unrated debt obligations will be
purchased only if they are determined by the Adviser to be
at least comparable in quality at the time of purchase to
eligible rated securities. 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.
In making investment decisions, the Adviser considers a
number of factors including credit quality, the price of the
security relative to that of other securities in its sector,
current yield, maturity, yield to maturity, anticipated
changes in interest rates and other economic factors,
liquidity, and the overall quality of the investment. The
Portfolio's average weighted maturity will vary from time to
time depending on current market and economic conditions and
the Adviser's assessment of probable changes in interest
rates.
</TABLE>
logo
logo Q
GOVERNMENT & CORPORATE
RISK/RETURN SUMMARY BOND PORTFOLIO
21
- -
<PAGE> 141
<TABLE>
<S> <C>
PRINCIPAL RISK CONSIDERATIONS
The prices of debt securities tend to move in the opposite
direction to interest rates. When rates are rising, the
prices of debt securities tend to fall. When rates are
falling, the prices of debt securities tend to rise.
Generally, the longer the time until maturity, the more
sensitive the price of a debt security is to interest rate
changes. Changes in interest rates also may cause certain
debt securities held by the Portfolio, including callable
securities and mortgage-backed securities, to be paid off
much sooner or later than expected. In the event that a
security is paid off sooner than expected because of a
decline in interest rates, the Portfolio may be unable to
recoup all of its initial investment and may also suffer
from having to reinvest in lower-yielding securities. In the
event of a later than expected payment because of a rise in
interest rates, the value of the obligation will decrease,
and the Portfolio may suffer from the inability to invest in
higher-yielding securities.
The value of debt securities also depends on the ability of
issuers to make principal and interest payments. If an
issuer can't meet its payment obligations or if its credit
rating is lowered, the value of its debt securities will
fall.
Foreign investments may be riskier than U.S. investments
because of currency exchange rate volatility, government
restrictions, different accounting standards and political
instability.
The Adviser evaluates the rewards and risks presented by all
securities purchased by the Portfolio and how they may
advance the Portfolio's investment objective. It is
possible, however, that these evaluations will prove to be
inaccurate.
</TABLE>
PORTFOLIO MANAGER
George J. Schupp is
the person primarily
responsible for the
day-to-day management
of the Portfolio. Mr.
Schupp, MVA's Director
of Fixed Income
Management, joined MVA
in 1983 and has 7
years of prior
investment experience.
He has managed the
Portfolio since
February 1998.
GOVERNMENT & CORPORATE
RISK/RETURN SUMMARY BOND PORTFOLIO
22
- -
<PAGE> 142
RETURN HISTORY
The bar chart and table on
this page show the
Portfolio's annual returns
and long-term performance,
thereby giving some
indication of the risk of
investing in the Portfolio.
The bar chart shows how the
performance of the
Portfolio's Institutional
Shares has varied from year
to year. The table shows
how the Portfolio's average
annual returns for one
year, five years, ten years
and since inception compare
to those of a broad-based
market index. Both the bar
chart and table assume
reinvestment of all
dividends and
distributions. The
Portfolio's past
performance does not
necessarily indicate how it
will perform in the future.
KNOW YOUR INDEX
THE LEHMAN BROTHERS
AGGREGATE BOND INDEX is an
unmanaged index made up of
Lehman Brothers'
Government/Corporate Bond
Index, its Mortgage Backed
Securities Index and its
Asset Backed Securities
Index.
GOVERNMENT & CORPORATE
RISK/RETURN SUMMARY BOND PORTFOLIO
INSTITUTIONAL SHARES*
YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
[STATED IN PERCENTAGES]
<TABLE>
<CAPTION>
GOVERNMENT & CORPORATE BOND PORTFOLIO
-------------------------------------
<S> <C>
'1989' 11.50
'90' 6.46
'91' 15.23
'92' 5.78
'93' 9.07
'94' -2.82
'95' 16.61
'96' 1.83
'97' 8.24
'98' 8.67
</TABLE>
Best quarter: 6.98% for the
quarter ending June
30, 1989
Worst quarter: -2.79% for the
quarter ending
March 31, 1996
AVERAGE ANNUAL TOTAL
RETURNS for the periods
ended December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS 10 YEARS INCEPTION**
<S> <C> <C> <C> <C>
Institutional Shares* 8.67% 6.30% 7.92% 7.74%
Lehman Brothers Aggregate Bond Index 8.69% 7.27% 9.26% 9.08%
</TABLE>
* Institutional Shares of the Portfolio commenced operations on January 3,
1994. Total returns for prior periods reflect the performance of the
Portfolio's Investor A Shares without taking into account the sales charge
payable in connection with purchases of Investor A Shares.
** June 15, 1988 for Investor A Shares; May 31, 1988 for the Lehman Brothers
Aggregate Bond Index.
23
- -
<PAGE> 143
GOVERNMENT & CORPORATE
RISK/RETURN SUMMARY BOND PORTFOLIO
FEES AND EXPENSES
<TABLE>
<S> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM THE INSTITUTIONAL
PORTFOLIO'S ASSETS) SHARES
The table on the right shows
the fees and expenses that
you pay if you buy and hold
Institutional Shares of the
Government & Corporate
Bond Portfolio.
Management Fees .45%
Distribution (12b-1) Fees None
Other Expenses .61%(1)
Total Annual Portfolio Operating Expenses 1.06%(1)
</TABLE>
(1) Other Expenses and Total Annual
Portfolio Operating Expenses for the
Portfolio's Institutional Shares for
the current fiscal year are expected to
be less than the amounts shown above
because certain of the Portfolio's
service providers are voluntarily
waiving a portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers
and/or reimbursements are being made in
order to keep the annual fees and
expenses for the Portfolio's
Institutional Shares at a certain
level. OTHER EXPENSES AND TOTAL ANNUAL
PORTFOLIO OPERATING EXPENSES, AFTER
TAKING THESE FEE WAIVERS AND EXPENSE
REIMBURSEMENTS INTO ACCOUNT, ARE
EXPECTED TO BE .51% AND .96%,
RESPECTIVELY, FOR INSTITUTIONAL SHARES.
These fee waivers and expense
reimbursements may be revised or
cancelled at any time.
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
INSTITUTIONAL SHARES $108 $337 $585 $1,294
</TABLE>
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then sell
all of your shares at the
end of those periods. The
example also assumes that
your investment has a 5%
return each year and the
Portfolio's operating
expenses remain the same.
Although your actual costs
may be higher or lower,
based on these assumptions
your costs would be:
24
- -
<PAGE> 144
TOTAL RETURN consists
of net income
(dividend and/or
interest income from
Portfolio securities,
less expenses of the
Portfolio) and capital
gains and losses, both
realized and
unrealized, from
Portfolio securities.
INVESTMENT GRADE BONDS
are those of medium
credit quality or
better as determined
by a national rating
agency, such as
Standard & Poor's
Ratings Group (bonds
rated BBB or higher)
and Moody's Investors
Service, Inc. (bonds
rated Baa or higher).
The higher the credit
rating, the less
likely it is that the
bond issuer will
default on its
principal and interest
payments.
logo
logo Q
RISK/RETURN SUMMARY BALANCED PORTFOLIO
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to maximize total
return through a combination of growth of capital and
current income consistent with the preservation of capital.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio invests in a combination of equity securities
(such as stocks), fixed-income securities (such as bonds)
and money market instruments in weightings the Adviser
believes will offer attractive total returns over time. In
making asset allocation decisions, the Adviser evaluates
forecasts for inflation, interest rates and long-term
corporate earnings growth. The Adviser then examines the
potential effect of these factors on each asset group over a
one- to three-year time period using its own dynamic
computer models. These models show the statistical impact of
the Adviser's economic outlook upon the future returns of
each asset group. The Adviser periodically will increase or
decrease the Portfolio's allocations to equities and
fixed-income securities based on which class appears
relatively more attractive than the other. For example, if
the Adviser expects more rapid economic growth leading to
better corporate earnings, it will increase the Portfolio's
holdings of equity securities and reduce its holdings of
fixed-income securities and money market instruments.
In selecting equity securities, the Adviser considers
historical and projected earnings, the price/earnings
relationship and company growth and asset value. In
selecting fixed income securities, the Adviser seeks those
issues representing the best value among various sectors,
and also considers credit quality, prevailing interest rates
and liquidity.
Under normal market conditions, the Portfolio invests at
least 25% of its total assets in fixed-income securities and
no more than 75% of its total assets in equity securities.
The actual percentages will vary from time to time based on
the Adviser's economic and market outlooks. The Portfolio's
equity securities will consist mainly of common stocks, and
its fixed-income securities will consist mainly of
investment grade bonds, including U.S. Government
securities. Occasionally, the rating of a fixed-income
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.
</TABLE>
25
- -
<PAGE> 145
<TABLE>
<S> <C>
PRINCIPAL RISK CONSIDERATIONS
The Portfolio invests in stocks and other equity securities,
which may decline in value over short or extended periods of
time. Equity markets tend to be cyclical; there are times
when stock prices generally increase, and other times when
they generally decrease. This could cause the value of your
investment in the Portfolio to fluctuate.
The Portfolio also invests in fixed-income securities, which
lose value when interest rates increase (but increase in
value when interest rates decline). Longer-term fixed-income
securities are more susceptible to these fluctuations in
interest rates than short-term fixed-income securities.
Changes in interest rates may cause certain fixed-income
securities, such as callable securities and mortgage-backed
securities, to be paid off much sooner or later than
expected. In the event that a security is paid off sooner
than expected because of a decline in interest rates, the
Portfolio may be unable to recoup all of its initial
investment and may also suffer from having to reinvest in
lower-yielding securities. In the event of a later than
expected payment because of a rise in interest rates, the
value of the obligation will decrease, and the Portfolio may
suffer from the inability to invest in higher-yielding
securities. Fixed-income securities are subject to other
risks, including the risk that the issuer will be unable to
make payments of principal and interest.
The Adviser evaluates the rewards and risks presented by all
securities purchased by the Portfolio and how they may
advance the Portfolio's investment objective. It is
possible, however, that these evaluations will prove to be
inaccurate.
</TABLE>
PORTFOLIO MANAGER
Peter Merzian, a
senior associate of
MVA, is responsible
for the day-to-day
management of the
Portfolio. He has been
with MVA since 1993
and has managed the
Portfolio since May
1996. He also manages
the Fund's three
municipal bond
portfolios.
RISK/RETURN SUMMARY BALANCED PORTFOLIO
26
- -
<PAGE> 146
KNOW YOUR INDEX
- THE S&P 500 INDEX is an
unmanaged index comprised
of 500 widely held common
stocks listed on the New
York Stock Exchange, the
American Stock Exchange
and NASDAQ.
- THE LEHMAN BROTHERS
AGGREGATE BOND INDEX is
an unmanaged index made
up of Lehman Brothers'
Government/Corporate Bond
Index, its Mortgage
Backed Securities Index
and its Asset Backed
Securities Index.
RISK/RETURN SUMMARY BALANCED PORTFOLIO
<TABLE>
<S> <C>
RETURN HISTORY INSTITUTIONAL SHARES*
The bar chart and table on this page YEAR-BY-YEAR TOTAL RETURNS
show the Portfolio's annual returns and (AS OF DECEMBER 31 EACH YEAR)
long-term performance, thereby giving
some indication of the risk of
investing in the Portfolio. The bar
chart shows how the performance of the
Portfolio's Institutional Shares has
varied from year to year. The table
shows how the Portfolio's average
annual returns for one year, five years
and since inception compare to those of
broad-based market indexes. Both the
bar chart and table assume reinvestment
of all dividends and distributions. The
Portfolio's past performance does not
necessarily indicate how it will
perform in the future.
</TABLE>
[STATED IN PERCENTAGES]
<TABLE>
<CAPTION>
BALANCED PORTFOLIO
------------------
<S> <C>
'1994' -2.11
'95' 25.99
'96' 11.99
'97' 18.68
'98' 11.06
</TABLE>
Best quarter: 10.82% for the
quarter ending
December 31, 1998
Worst quarter: -7.49% for the
quarter ending
September 30, 1998
AVERAGE ANNUAL TOTAL
RETURNS for the periods
ended December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION**
<S> <C> <C> <C>
Institutional Shares* 11.06% 12.62% 11.75%
S&P 500 Index 28.60% 24.05% 21.73%
Lehman Brothers Aggregate Bond Index 8.69% 7.27% 7.27%
</TABLE>
* Institutional Shares of the Portfolio commenced operations on January 3,
1994. Total returns for prior periods reflect the performance of the
Portfolio's Investor A Shares without taking into account the sales charge
payable in connection with purchases of Investor A Shares.
** April 1, 1993 for Investor A Shares; May 31, 1993 for the S&P 500 Index
and the Lehman Brothers Aggregate Bond Index.
27
- -
<PAGE> 147
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then
sell all of your shares at
the end of those periods.
The example also assumes
that your investment has a
5% return each year and the
Portfolio's operating
expenses remain the same.
Although your actual costs
may be higher or lower,
based on these assumptions
your costs would be:
RISK/RETURN SUMMARY BALANCED PORTFOLIO
FEES AND EXPENSES
<TABLE>
<S> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM THE INSTITUTIONAL
PORTFOLIO'S ASSETS) SHARES
The table on the right shows
the fees and expenses that you pay
if you buy and hold Institutional
Shares of the Balanced Portfolio.
Management Fees .75%
Distribution (12b-1) Fees None
Other Expenses .61%(1)
Total Annual Portfolio Operating Expenses 1.36%(1)
</TABLE>
(1) Other Expenses and Total Annual
Portfolio Operating Expenses for the
Portfolio's Institutional Shares for
the current fiscal year are expected to
be less than the amounts shown above
because certain of the Portfolio's
service providers are voluntarily
waiving a portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers
and/or reimbursements are being made in
order to keep the annual fees and
expenses for the Portfolio's
Institutional Shares at a certain
level. OTHER EXPENSES AND TOTAL ANNUAL
PORTFOLIO OPERATING EXPENSES, AFTER
TAKING THESE FEE WAIVERS AND EXPENSE
REIMBURSEMENTS INTO ACCOUNT, WERE ARE
EXPECTED TO BE .52% AND 1.27%,
RESPECTIVELY, FOR INSTITUTIONAL SHARES.
These fee waivers and expense
reimbursements may be revised or
cancelled at any time.
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
INSTITUTIONAL SHARES $138 $431 $745 $1,635
</TABLE>
28
- -
<PAGE> 148
MARKET CAPITALIZATION
is a common measure of
the size of a company.
It is the market price
of a share of the
company's stock
multiplied by the
number of outstanding
shares.
VALUE STOCKS are those
that appear to be
underpriced based on
valuation measures,
such as lower
price-to-earnings and
price-to-book value
ratios.
PORTFOLIO MANAGER
MVA's Equity Committee
is responsible for the
day-to-day management
of the Portfolio. The
Committee has managed
the Portfolio since
1998.
[Scales
Icon]
EQUITY INCOME
RISK/RETURN SUMMARY PORTFOLIO
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to seek to provide
an above-average level of income consistent with long-term
capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio invests primarily in the common stocks of
value companies with large market capitalizations
(generally, $5 billion or higher). In selecting these
stocks, the Adviser evaluates a number of quantitative
factors, including dividend yield, current and future
earnings potential compared to stock prices and total return
potential. The Adviser also examines other measures of
valuation, including cash flow, asset value and book value.
Under normal market conditions, the Portfolio invests at
least 65% of its total assets in income-producing
(dividend-paying) equity securities, primarily common
stocks. These stocks generally will be listed on a national
stock exchange or will be unlisted stocks with established
over-the-counter markets. Many such stocks may offer
above-average levels of income as compared to the S&P 500
Index.
PRINCIPAL RISK CONSIDERATIONS
The Portfolio invests in stocks and other equity securities,
which may decline in value over short or extended periods of
time. Equity markets tend to be cyclical; there are times
when stock prices generally increase, and other times when
they generally decrease. This could cause the value of your
investment in the Portfolio to fluctuate. In addition, the
Portfolio is subject to the additional risk that the value
stocks it typically holds may not perform as well as other
types of stocks, such as growth stocks.
The Adviser evaluates the rewards and risks presented by all
securities purchased by the Portfolio and how they may
advance the Portfolio's investment objective. It is
possible, however, that these evaluations will prove to be
inaccurate.
</TABLE>
29
- -
<PAGE> 149
KNOW YOUR INDEX
THE RUSSELL 1000 VALUE
INDEX is an unmanaged
index that measures the
performance of the stocks
in the Russell 1000 Index
with less than average
growth orientation.
Companies in this Index
generally have low price
to book and price/
earnings ratios, higher
dividend yields and lower
forecasted growth values.
The Russell 1000 Index
consists of the 1,000
largest U.S. companies as
ranked by total market
capitalization.
EQUITY INCOME
RISK/RETURN SUMMARY PORTFOLIO
<TABLE>
<S> <C>
RETURN HISTORY INSTITUTIONAL SHARES
The bar chart and table on this page YEAR-BY-YEAR TOTAL RETURNS
show the Portfolio's annual returns and (AS OF DECEMBER 31 EACH YEAR)
long-term performance, thereby giving
some indication of the risk of
investing in the Portfolio. The bar
chart shows the performance of the
Portfolio's Institutional Shares during
the last calendar year. The table shows
how the Portfolio's average annual
returns for one year and since
inception compare to those of a
broad-based market index. Both the bar
chart and table assume reinvestment of
all dividends and distributions. The
Portfolio's past performance does not
necessarily indicate how it will
perform in the future.
</TABLE>
[STATED IN PERCENTAGES]
<TABLE>
<CAPTION>
EQUITY INCOME PORTFOLIO
-----------------------
<S> <C>
'1998' 10.06
</TABLE>
Best quarter: 14.33% for the
quarter ending June
30, 1997
Worst quarter: -8.75% for the
quarter ending
September 30, 1998
AVERAGE ANNUAL TOTAL
RETURNS for the periods
ended December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION*
<S> <C> <C>
Institutional Shares 10.06% 17.22%
Russell 1000 Value Index 15.63% 23.26%
</TABLE>
* February 27, 1997 for Institutional Shares; February 28, 1997 for the
Russell 1000 Value Index.
30
- -
<PAGE> 150
FEES AND EXPENSES
<TABLE>
<S> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM THE INSTITUTIONAL
PORTFOLIO'S ASSETS) SHARES
The table on the right shows the
fees and expenses that you pay if
you buy and hold Institutional
Shares of the Equity Income
Portfolio.
Management Fees .75%
Distribution (12b-1) Fees None
Other Expenses .57%(1)
Total Annual Portfolio Operating Expenses 1.32%(1)
</TABLE>
(1) Other Expenses and Total Annual
Portfolio Operating Expenses for the
Portfolio's Institutional Shares for
the current fiscal year are expected to
be less than the amounts shown above
because certain of the Portfolio's
service providers are voluntarily
waiving a portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers
and/or reimbursements are being made in
order to keep the annual fees and
expenses for the Portfolio's
Institutional Shares at a certain
level. OTHER EXPENSES AND TOTAL ANNUAL
PORTFOLIO OPERATING EXPENSES, AFTER
TAKING THESE FEE WAIVERS AND EXPENSE
REIMBURSEMENTS INTO ACCOUNT, ARE
EXPECTED TO BE .52% AND 1.27%,
RESPECTIVELY, FOR INSTITUTIONAL SHARES.
These fee waivers and expense
reimbursements may be revised or
cancelled at any time.
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
INSTITUTIONAL SHARES $134 $418 $723 $1,590
</TABLE>
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then sell
all of your shares at the
end of those periods. The
example also assumes that
your investment has a 5%
return each year and the
Portfolio's operating
expenses remain the same.
Although your actual costs
may be higher or lower,
based on these assumptions
your costs would be:
EQUITY INCOME
RISK/RETURN SUMMARY PORTFOLIO
31
- -
<PAGE> 151
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to seek to provide
investment results that, before the deduction of operating
expenses, approximate the price and yield performance of
U.S. publicly traded common stocks with large stock market
capitalizations, as represented by the Standard & Poor's 500
Index (the "S&P 500 Index").
The Portfolio's investment objective can be changed by the
Fund's Board of Directors without shareholder approval.
Shareholders will be given at least 30 days' written notice
before any such change occurs.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio uses an "indexing" strategy through the use of
computer models to approximate the investment performance of
the S&P 500 Index. The Portfolio invests substantially all
(at least 80%) of its total assets in securities listed in
the S&P 500 Index and typically will hold all 500 stocks
represented in the Index. In general, each stock's
percentage weighting in the Portfolio is based on its
weighting in the Index. When stocks are removed from or
added to the Index, those changes are reflected in the
Portfolio. The Portfolio periodically "rebalances" its
holdings as dictated by changes in shareholder purchase and
redemption activity and in the composition of the S&P 500
Index.
PRINCIPAL RISK CONSIDERATIONS
The Portfolio invests in stocks and other equity securities,
which may decline in value over short or extended periods of
time. Equity markets tend to be cyclical; there are times
when stock prices generally increase, and other times when
they generally decrease. This could cause the value of your
investment in the Portfolio to fluctuate. In addition, the
Portfolio is subject to the additional risk that the
large-capitalization stocks it typically holds may not
perform as well as other types of stocks, such as
small-capitalization stocks.
There is the additional risk that the Portfolio's investment
results may fail to match those of the S&P 500 Index.
</TABLE>
INDEXING is a strategy
whereby a Portfolio
attempts to weight its
securities to match
those of a broadly-
based securities index
in an attempt to
approximate the
index's performance.
The S&P 500 INDEX is
an unmanaged index
comprised of 500
widely held common
stocks listed on the
New York Stock
Exchange, the American
Stock Exchange and
NASDAQ.
[Scales
Icon]
EQUITY INDEX
RISK/RETURN SUMMARY PORTFOLIO
32
- -
<PAGE> 152
EQUITY INDEX
RISK/RETURN SUMMARY PORTFOLIO
<TABLE>
<S> <C>
RETURN HISTORY INSTITUTIONAL SHARES
The bar chart and table on this page YEAR-BY-YEAR TOTAL RETURNS
show the Portfolio's annual returns and (AS OF DECEMBER 31 EACH YEAR)
long-term performance, thereby giving
some indication of the risk of
investing in the Portfolio. The bar
chart shows the performance of the
Portfolio's Institutional Shares during
the last calendar year. The table shows
how the Portfolio's average annual
returns for one year and since
inception compare to those of the S&P
500 Index. Both the bar chart and table
assume reinvestment of all dividends
and distributions. The Portfolio's past
performance does not necessarily
indicate how it will perform in the
future.
</TABLE>
[INSTITUTIONAL SHARES BAR GRAPH]
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES
--------------------
<S> <C>
1998 27.92%
</TABLE>
Best quarter: 21.04% for the
quarter ending
December 31, 1998
Worst quarter: -9.96% for the
quarter ending
September 30, 1998
AVERAGE ANNUAL TOTAL
RETURNS for the periods
ended December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION*
<S> <C> <C>
Institutional Shares 27.92% 30.83%
S&P 500 Index 28.60% 31.31%
</TABLE>
* May 1, 1997 for Institutional Shares; April 30, 1997 for the S&P 500 Index.
33
<PAGE> 153
EQUITY INDEX
RISK/RETURN SUMMARY PORTFOLIO
FEES AND EXPENSES
<TABLE>
<S> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM THE INSTITUTIONAL
PORTFOLIO'S ASSETS) SHARES
The table on the right shows the
fees and expenses that you pay if
you buy and hold Institutional
Shares of the Equity Index
Portfolio.
Management Fees .30%
Distribution (12b-1) Fees None
Other Expenses .73%(1)
Total Annual Portfolio Operating Expenses 1.03%(1)
</TABLE>
(1) Other Expenses and Total Annual
Portfolio Operating Expenses for the
Portfolio's Institutional Shares for
the current fiscal year are expected to
be less than the amounts shown above
because certain of the Portfolio's
service providers are voluntarily
waiving a portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers
and/or reimbursements are being made in
order to keep the annual fees and
expenses for the Portfolio's
Institutional Shares at a certain
level. OTHER EXPENSES AND TOTAL ANNUAL
PORTFOLIO OPERATING EXPENSES, AFTER
TAKING THESE FEE WAIVERS AND EXPENSE
REIMBURSEMENTS INTO ACCOUNT, ARE
EXPECTED TO BE .55% AND .85%,
RESPECTIVELY, FOR INSTITUTIONAL SHARES.
These fee waivers and expense
reimbursements may be revised or
cancelled at any time.
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
INSTITUTIONAL SHARES $105 $328 $569 $1,259
</TABLE>
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then sell
all of your shares at the
end of those periods. The
example also assumes that
your investment has a 5%
return each year and the
Portfolio's operating
expenses remain the same.
Although your actual costs
may be higher or lower,
based on these assumptions
your costs would be:
34
- -
<PAGE> 154
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to provide long-term
capital growth, with income a secondary consideration.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio invests primarily in common stocks. The
Adviser selects stocks based on a number of factors related
to historical and projected earnings and the price/earnings
relationship as well as company growth and asset value,
consistency of earnings growth and earnings quality.
Stocks purchased for the Portfolio generally will be listed
on a national stock exchange or will be unlisted securities
with an established over-the-counter market. These stocks
tend to pay dividends, so many of the Portfolio's
investments may produce some income. Nevertheless, income is
not the primary factor in the stock selection process.
PRINCIPAL RISK CONSIDERATIONS
The Portfolio invests in stocks and other equity securities,
which may decline in value over short or extended periods of
time. Equity markets tend to be cyclical; there are times
when stock prices generally increase, and other times when
they generally decrease. This could cause the value of your
investment in the Portfolio to fluctuate.
The Adviser evaluates the rewards and risks presented by all
securities purchased by the Portfolio and how they may
advance the Portfolio's investment objective. It is
possible, however, that these evaluations will prove to be
inaccurate.
</TABLE>
PORTFOLIO MANAGER
MVA's Equity Committee
is responsible for the
day-to-day management
of the Portfolio. The
Committee has managed
the Portfolio since
1998.
logo
logo Q
GROWTH & INCOME
RISK/RETURN SUMMARY EQUITY PORTFOLIO
35
- -
<PAGE> 155
RETURN HISTORY
The bar chart and table on
this page show the
Portfolio's annual returns
and long-term performance,
thereby giving some
indication of the risk of
investing in the Portfolio.
The bar chart shows how the
performance of the
Portfolio's Institutional
Shares has varied from year
to year. The table shows
how the Portfolio's average
annual returns for one
year, five years, ten years
and since inception compare
to those of a broad-based
market index. Both the bar
chart and table assume
reinvestment of all
dividends and
distributions. The
Portfolio's past
performance does not
necessarily indicate how it
will perform in the future.
KNOW YOUR INDEX
THE S&P 500 INDEX is an
unmanaged index comprised
of 500 widely held common
stocks listed on the New
York Stock Exchange, the
American Stock Exchange and
NASDAQ.
GROWTH & INCOME
RISK/RETURN SUMMARY EQUITY PORTFOLIO
INSTITUTIONAL SHARES*
YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
[STATED IN PERCENTAGES]
<TABLE>
<CAPTION>
GROWTH & INCOME EQUITY PORTFOLIO
--------------------------------
<S> <C>
'1989' 26.81
'90' -1.42
'91' 26.66
'92' 10.61
'93' 9.61
'94' -0.44
'95' 33.98
'96' 19.04
'97' 27.22
'98' 12.74
</TABLE>
<TABLE>
<S> <C>
Best quarter: 18.11% for the quarter ending
December 31, 1998
Worst quarter: -14.41% for the quarter ending
September 30, 1998
</TABLE>
AVERAGE ANNUAL TOTAL
RETURNS for periods ended
December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS 10 YEARS INCEPTION**
<S> <C> <C> <C> <C>
Institutional Shares* 12.74% 17.89% 15.89% 15.59%
S&P 500 Index 28.60% 24.05% 19.19% 18.93%
</TABLE>
* Institutional Shares of the Portfolio commenced operations on January 3,
1994. Total returns for prior periods reflect the performance of the
Portfolio's Investor A Shares without taking into account the sales charge
payable in connection with purchases of Investor A Shares.
** June 2, 1988 for Investor A Shares; May 31, 1988 for the S&P 500 Index.
36
- -
<PAGE> 156
FEES AND EXPENSES
<TABLE>
<S> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM THE INSTITUTIONAL
PORTFOLIO'S ASSETS) SHARES
The table on the right shows the
fees and expenses that you pay if
you buy and hold Institutional
Shares of the Growth & Income
Equity Portfolio.
Management Fees .55%
Distribution (12b-1) Fees None
Other Expenses .59%(1)
Total Annual Portfolio Operating Expenses 1.14%(1)
</TABLE>
(1) Other Expenses and Total Annual
Portfolio Operating Expenses for the
Portfolio's Institutional Shares for
the current fiscal year are expected to
be less than the amounts shown above
because certain of the Portfolio's
service providers are voluntarily
waiving a portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers
and/or reimbursements are being made in
order to keep the annual fees and
expenses for the Portfolio's
Institutional Shares at a certain
level. OTHER EXPENSES AND TOTAL ANNUAL
PORTFOLIO OPERATING EXPENSES, AFTER
TAKING THESE FEE WAIVERS AND EXPENSE
REIMBURSEMENTS INTO ACCOUNT, ARE
EXPECTED TO BE .49% AND 1.04%,
RESPECTIVELY, FOR INSTITUTIONAL SHARES.
These fee waivers and expense
reimbursements may be revised or
cancelled at any time.
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
INSTITUTIONAL SHARES $116 $362 $628 $1,386
</TABLE>
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then sell
all of your shares at the
end of those periods. The
example also assumes that
your investment has a 5%
return each year and the
Portfolio's operating
expenses remain the same.
Although your actual costs
may be higher or lower,
based on these assumptions
your costs would be:
GROWTH & INCOME
RISK/RETURN SUMMARY EQUITY PORTFOLIO
37
- -
<PAGE> 157
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is capital
appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio invests primarily in the common stocks of
growth companies. In selecting securities for the Portfolio,
the Adviser evaluates a company's earnings history and the
risk and volatility of the company's business. The Adviser
also considers other factors, such as product position and
the ability to increase market share, but the ability to
increase company earnings is the primary consideration.
Under normal market conditions, the Portfolio invests at
least 65% of its total assets in common stocks or other
equity securities, such as preferred stocks, convertible
securities and warrants. Typically, the Portfolio's stocks
are those of large- and medium-capitalization companies that
are listed on the New York Stock Exchange, the American
Stock Exchange or NASDAQ.
PRINCIPAL RISK CONSIDERATIONS
The Portfolio invests in stocks and other equity securities,
which may decline in value over short or extended periods of
time. Equity markets tend to be cyclical; there are times
when stock prices generally increase, and other times when
they generally decrease. This could cause the value of your
investment in the Portfolio to fluctuate. In addition, the
Portfolio is subject to the additional risk that the growth
stocks it typically holds may not perform as well as other
types of stocks, such as value stocks.
The Adviser evaluates the rewards and risks presented by all
securities purchased by the Portfolio and how they may
advance the Portfolio's investment objective. It is
possible, however, that these evaluations will prove to be
inaccurate.
</TABLE>
GROWTH STOCKS offer
strong revenue and
earnings potential and
accompanying capital
growth, with less
dividend income than
value stocks.
PORTFOLIO MANAGER
MVA's Equity Committee
is responsible for the
day-to-day management
of the Portfolio. The
Committee has managed
the Portfolio since
1998.
logo
logo Q
GROWTH EQUITY
PORTFOLIO
RISK/RETURN SUMMARY
38
- -
<PAGE> 158
RETURN HISTORY+
The bar chart and table
below show the Portfolio's
annual returns and
long-term performance,
thereby giving some
indication of the risk of
investing in the Portfolio.
The bar chart shows how the
performance of the
Portfolio's Institutional
Shares has varied from year
to year. The table shows
how the Portfolio's average
annual returns for one
year, five years and since
inception compare to those
of a broad-based market
index. Both the bar chart
and table assume
reinvestment of dividends
and distributions. The
Portfolio's past
performance does not
necessarily indicate how it
will perform in the future.
KNOW YOUR INDEX
THE S&P 500 INDEX is an
unmanaged index comprised
of 500 widely held common
stocks listed on the New
York Stock Exchange, the
American Stock Exchange and
NASDAQ.
GROWTH EQUITY
RISK/RETURN SUMMARY PORTFOLIO
INSTITUTIONAL SHARES*
YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
[STATED IN PERCENTAGES]
<TABLE>
<CAPTION>
GROWTH EQUITY PORTFOLIO
-----------------------
<S> <C>
'1994' -2.06
'95' 44.17
'96' 17.49
'97' 26.95
'98' 29.46
</TABLE>
<TABLE>
<S> <C>
Best quarter: 25.09% for the quarter ending
December 31, 1998
Worst quarter: -11.85% for the quarter ending
September 30, 1998
</TABLE>
AVERAGE ANNUAL TOTAL
RETURNS for the periods
ended December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION**
<S> <C> <C> <C>
Institutional Shares* 29.46% 22.21% 18.24%
S&P 500 Index 28.60% 21.73% 21.60%
</TABLE>
+ The Portfolio commenced operations on January 4, 1993 as the Arrow Equity
Portfolio, a separate investment portfolio (the "Predecessor Portfolio")
of Arrow Funds. On November 21, 1997, the Predecessor Portfolio was
reorganized as a new portfolio of the Fund. Prior to the reorganization,
the Predecessor Portfolio offered and sold shares that were similar to the
Fund's Investor A Shares.
* Institutional Shares of the Portfolio commenced operations on December 2,
1997. Total returns for the period November 21, 1997 to December 2, 1997
reflect the performance of the Portfolio's Investor A Shares without
taking into account the sales charge payable in connection with purchases
of Investor A Shares. Total returns for periods prior to November 21, 1997
reflect the performance of the Predecessor Portfolio.
** January 4, 1993 for the Predecessor Portfolio; December 31, 1992 for the
S&P 500 Index.
39
- -
<PAGE> 159
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then
sell all of your shares at
the end of those periods.
The example also assumes
that your investment has a
5% return each year and the
Portfolio's operating
expenses remain the same.
Although your actual costs
may be higher or lower,
based on these assumptions
your costs would be:
GROWTH EQUITY
RISK/RETURN SUMMARY PORTFOLIO
FEES AND EXPENSES
<TABLE>
<S> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM INSTITUTIONAL
THE PORTFOLIO'S ASSETS) SHARES
The table on the right shows the
fees and expenses that you pay if
you buy and hold Institutional
Shares of the Growth Equity
Portfolio.
Management Fees .75%
Distribution (12b-1) Fees None
Other Expenses .69%(1)
Total Annual Portfolio Operating
Expenses 1.44%(1)
</TABLE>
(1)Other Expenses and Total Annual
Portfolio Operating Expenses for the
Portfolio's Institutional Shares for the
current fiscal year are expected to be
less than the amounts shown above
because certain of the Portfolio's
service providers are voluntarily
waiving a portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers and/or
reimbursements are being made in order
to keep the annual fees and expenses for
the Portfolio's Institutional Shares at
a certain level. OTHER EXPENSES AND
TOTAL ANNUAL PORTFOLIO OPERATING
EXPENSES, AFTER TAKING THESE FEE WAIVERS
AND EXPENSE REIMBURSEMENTS INTO ACCOUNT,
ARE EXPECTED TO BE .52% AND 1.27%,
RESPECTIVELY, FOR INSTITUTIONAL SHARES.
These fee waivers and expense
reimbursements may be revised or
cancelled at any time.
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
INSTITUTIONAL SHARES $147 $456 $787 $1,724
</TABLE>
40
- -
<PAGE> 160
PORTFOLIO MANAGER
Robert J. Anthony,
Senior Associate at
MVA, is responsible
for the day-to-day
management of the
Portfolio. He has been
with MVA for 25 years
and has managed the
Portfolio since its
inception in 1992.
logo
logo Q
SMALL CAP
EQUITY PORTFOLIO
RISK/RETURN SUMMARY
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is capital
appreciation.
PRINCIPAL INVESTMENT STRATEGIES
Under normal conditions, the Portfolio invests at least 65%
of its total assets in common stocks of small- to
medium-sized companies with market capitalizations from $100
million to $2 billion at the time of purchase and which the
Adviser believes have above-average prospects for capital
appreciation. Stocks purchased by the Portfolio may be
listed on a national securities exchange or may be unlisted
securities with or without an established over-the-counter
market.
The Portfolio also may invest a portion of its assets in
larger companies that the Adviser believes offer improved
growth possibilities because of rejuvenated management,
product changes or other developments likely to stimulate
earnings or asset growth. The Portfolio also may invest in
stocks the Adviser believes are undervalued or in initial
public offerings (IPOs) of new companies that demonstrate
the potential for price appreciation. The Adviser selects
stocks based on a number of factors, including historical
and projected earnings, asset value, potential for price
appreciation and earnings growth, and quality of the
products manufactured or services offered.
PRINCIPAL RISK CONSIDERATIONS
The Portfolio invests in stocks and other equity securities,
which may decline in value over short or extended periods of
time. Equity markets tend to be cyclical; there are times
when stock prices generally increase, and other times when
they generally decrease. This could cause the value of your
investment in the Portfolio to fluctuate.
Compared to larger-capitalization stocks,
small-capitalization stocks tend to carry greater risk and
exhibit greater price volatility because their businesses
may not be well-established. In addition, some smaller
companies may have specialized or limited product lines,
markets or financial resources and may be dependent on
one-person management. All of these factors increase risk
and may result in more significant losses than the other
Mercantile Stock Portfolios. In an effort to reduce the
risks inherent in smaller-company stocks, the Portfolio's
holdings are diversified over a number of companies and
industry groups.
The Adviser evaluates the rewards and risks presented by all
securities purchased by the Portfolio and how they may
advance the Portfolio's investment objective. It is
possible, however, that these evaluations will prove to be
inaccurate.
</TABLE>
41
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<PAGE> 161
RETURN HISTORY
The bar chart and table on
this page show the
Portfolio's annual returns
and long-term performance,
thereby giving some
indication of the risk of
investing in the Portfolio.
The bar chart shows how the
performance of the
Portfolio's Institutional
Shares has varied from year
to year. The table shows
how the Portfolio's average
annual returns for one
year, five years and since
inception compare to those
of a broad-based market
index. Both the bar chart
and the table assume
reinvestment of all
dividends and
distributions. The
Portfolio's past
performance does not
necessarily indicate how it
will perform in the future.
KNOW YOUR INDEX
THE RUSSELL 2000 INDEX is
an unmanaged index
comprised of the 2,000
smallest of the 3,000
largest U.S. companies
based on market
capitalization.
SMALL CAP
RISK/RETURN SUMMARY EQUITY PORTFOLIO
INSTITUTIONAL SHARES*
YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
[STATED IN PERCENTAGES]
<TABLE>
<CAPTION>
SMALL CAP EQUITY PORTFOLIO
--------------------------
<S> <C>
'1993' 23.58
'94' 2.11
'95' 16.9
'96' 10.61
'97' 26.56
'98' -8.05
</TABLE>
<TABLE>
<S> <C>
Best quarter: 18.55% for the quarter ending
December 31, 1992
Worst quarter: -24.69% for the quarter ending
September 30, 1998
</TABLE>
AVERAGE ANNUAL TOTAL
RETURNS for the periods
ended December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION**
<S> <C> <C> <C>
Institutional Shares* (8.05)% 7.91% 11.82%
Russell 2000 Index (2.55)% 11.87% 13.86%
</TABLE>
* Institutional Shares of the Portfolio commenced operations on January 3,
1994. Total returns for prior periods reflect the performance of the
Portfolio's Investor A Shares without taking into account the sales charge
payable in connection with purchases of Investor A Shares.
** May 6, 1992 for Investor A Shares; April 30, 1992 for the Russell 2000
Index.
42
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<PAGE> 162
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then
sell all of your shares at
the end of those periods.
The example also assumes
that your investment has a
5% return each year and the
Portfolio's operating
expenses remain the same.
Although your actual costs
may be higher or lower,
based on these assumptions
your costs would be:
SMALL CAP
EQUITY PORTFOLIO
RISK/RETURN SUMMARY
FEES AND EXPENSES
<TABLE>
<S> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM THE INSTITUTIONAL
PORTFOLIO'S ASSETS) SHARES
The table on the right shows
the fees and expenses that you pay
if you buy and hold Institutional
Shares of the Small Cap Equity
Portfolio.
Management Fees .75%
Distribution (12b-1) Fees None
Other Expenses .60%(1)
Total Annual Portfolio Operating Expenses 1.35%(1)
</TABLE>
(1) Other Expenses and Total Annual
Portfolio Operating Expenses for the
Portfolio's Institutional Shares for
the current fiscal year are expected to
be less than the amounts shown above
because certain of the Portfolio's
service providers are voluntarily
waiving a portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers
and/or reimbursements are being made in
order to keep the annual fees and
expenses for the Portfolio's
Institutional Shares at a certain
level. OTHER EXPENSES AND TOTAL ANNUAL
PORTFOLIO OPERATING EXPENSES, AFTER
TAKING THESE FEE WAIVERS AND EXPENSE
REIMBURSEMENTS INTO ACCOUNT, ARE
EXPECTED TO BE .50% AND 1.25%,
RESPECTIVELY, FOR INSTITUTIONAL SHARES.
These fee waivers and expense
reimbursements may be revised or
cancelled at any time.
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
INSTITUTIONAL SHARES $137 $428 $739 $1,624
</TABLE>
43
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<PAGE> 163
INDEXING is a strategy
whereby a Portfolio
attempts to weight its
securities to match
those of a broadly-
based securities index
in an attempt to
approximate the
index's performance.
THE S&P SMALLCAP 600
INDEX is an unmanaged
index that tracks the
performance of 600
domestic companies
traded on the New York
Stock Exchange,
American Stock
Exchange and NASDAQ.
The S&P SmallCap 600
Index is heavily
weighted with the
stocks of small
companies.
logo
logo Q
SMALL CAP EQUITY
RISK/RETURN SUMMARY INDEX PORTFOLIO
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to provide
investment results that, before deduction of operating
expenses, approximate the price and yield performance of
U.S. common stocks with smaller stock market
capitalizations, as represented by the S&P SmallCap 600
Index.
The Portfolio's investment objective can be changed by the
Fund's Board of Directors without shareholder approval.
Shareholders will be given at least 30 days' written notice
before any such change occurs.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio uses an "indexing" strategy through the use of
computer models to approximate the investment performance of
the S&P SmallCap 600 Index. The Portfolio will invest at
least 80% of its total assets in securities listed in the
S&P SmallCap 600 Index and typically will hold all 600
stocks represented in the Index. Under certain
circumstances, however, the Portfolio may not hold all 600
stocks in the Index because of shareholder activity or
changes in the Index. In general, each stock's percentage
weighting in the Portfolio is based on its weighting in the
S&P SmallCap 600 Index. When stocks are removed from or
added to the Index, those changes are reflected in the
Portfolio. The Portfolio periodically "rebalances" its
holdings as dictated by changes in shareholder purchase and
redemption activity, and in the composition of the S&P
SmallCap 600 Index.
PRINCIPAL RISK CONSIDERATIONS
The Portfolio invests in stocks and other equity securities,
which may decline in value over short or extended periods of
time. Equity markets tend to be cyclical; there are times
when stock prices generally increase, and other times when
they generally decrease. This could cause the value of your
investment in the Portfolio to fluctuate.
In addition, the Portfolio is subject to the additional risk
that the small-capitalization stocks that it holds may not
perform as well as other types of stocks. Compared to
larger-capitalization stocks, small-capitalization stocks
tend to carry greater risk and exhibit greater price
volatility because their businesses may not be
well-established. In addition, some smaller companies may
have specialized or limited product lines, markets or
financial resources and may be dependent on one-person
management. All of these factors increase risk and may
result in more significant losses than the other Mercantile
Stock Portfolios. By typically investing in all 600 stocks
in the Index, the Portfolio remains broadly diversified,
which may reduce some of this risk. There is the additional
risk that the Portfolio's investment results may fail to
match those of the S&P SmallCap 600 Index.
RETURN HISTORY
The Portfolio does not have a long-term performance record
because it has been in operation for less than one calendar
year.
</TABLE>
44
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<PAGE> 164
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then
sell all of your shares at
the end of those periods.
The example also assumes
that your investment has a
5% return each year and the
Portfolio's operating
expenses remain the same.
Although your actual costs
may be higher or lower,
based on these assumptions
your costs would be:
SMALL CAP EQUITY
RISK/RETURN SUMMARY INDEX PORTFOLIO
FEES AND EXPENSES
<TABLE>
<S> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM THE INSTITUTIONAL
PORTFOLIO'S ASSETS) SHARES
The table on the right shows the
fees and expenses that you pay if
you buy and hold shares of the
Small Cap Equity Index
Portfolio.
Management Fees 0.40%
Distribution (12b-1) Fees None
Other Expenses 0.79%(1)
Total Annual Portfolio Operating Expenses 1.19%(1)
</TABLE>
(1) Other Expenses and Total Annual
Portfolio Operating Expenses for the
Portfolio's Institutional Shares for
the current fiscal year are expected to
be less than the amounts shown above
because certain of the Portfolio's
service providers are voluntarily
waiving a portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers
and/or reimbursements are being made in
order to keep the annual fees and
expenses for the Portfolio's
Institutional Shares at a certain
level. OTHER EXPENSES AND TOTAL ANNUAL
PORTFOLIO OPERATING EXPENSES, AFTER
TAKING THESE FEE WAIVERS AND EXPENSE
REIMBURSEMENTS INTO ACCOUNT, ARE
EXPECTED TO BE .62% AND 1.02%,
RESPECTIVELY, FOR INSTITUTIONAL SHARES.
These fee waivers and expense
reimbursements may be revised or
cancelled at any time.
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
INSTITUTIONAL SHARES $121 $378 $654 $1,443
</TABLE>
45
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<PAGE> 165
SUB-ADVISER/
PORTFOLIO MANAGER
MVA has appointed Clay
Finlay, Inc. ("Clay
Finlay" or the
"Sub-Adviser") as sub-
adviser to assist in
the day-to-day
management of the
Portfolio. Frances
Dakers, a principal
and senior portfolio
manager of Clay
Finlay, is responsible
for the management of
the Portfolio. Ms.
Dakers has been with
Clay Finlay since
January 1982 and has
managed the Portfolio
since it began
operations in 1994.
logo
logo Q
INTERNATIONAL EQUITY
RISK/RETURN SUMMARY PORTFOLIO
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to provide capital
growth consistent with reasonable investment risk.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio invests primarily in foreign common stocks,
most of which will be denominated in foreign currencies.
During normal market conditions, the Portfolio will invest
substantially all (at least 80%) of its total assets in the
securities of companies that derive more than 50% of their
gross revenues outside the United States or have more than
50% of their assets outside the United States. Under normal
market conditions, the Portfolio invests in equity
securities from at least three foreign countries. Generally,
at least 50% of the Portfolio's total assets will be
invested in securities of companies located either in the
developed countries of Western Europe or in Japan. The
Portfolio also may invest in other developed countries and
in countries with emerging markets or economies.
By investing in various foreign stocks, the Portfolio
attempts to achieve broad diversification and to take
advantage of differences between economic trends and the
performance of securities markets in different countries,
regions and geographic areas. In selecting stocks, the Sub-
Adviser uses a screening tool to determine which companies
represent the best values relative to their long-term growth
prospects and local markets. The Sub-Adviser also uses
fundamental analysis by evaluating balance sheets, market
share and strength of management.
PRINCIPAL RISK CONSIDERATIONS
Investing in foreign companies involves different risks than
investing in U.S. companies due to such factors as currency
exchange rate volatility, government restrictions, different
accounting standards and political instability. The
multinational character of the Portfolio's investments
should reduce the effect that events in any one country or
geographic area will have on overall performance. However,
negative results from one foreign market may offset gains
from another market or may negatively affect other foreign
markets. The risks associated with foreign investments are
heightened when investing in emerging markets. The
governments and economies of emerging market countries
feature greater instability than those of more developed
countries. Such investments tend to fluctuate in price more
widely and to be less liquid than other foreign investments.
As with U.S. equity markets, foreign markets tend to be
cyclical. There are times when stock prices generally
increase, and other times when they generally decrease.
The Adviser evaluates the rewards and risks presented by all
securities purchased by the Portfolio and how they may
advance the Portfolio's investment objective. It is
possible, however, that these evaluations will prove to be
inaccurate.
</TABLE>
46
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<PAGE> 166
RETURN HISTORY
The bar chart and table on this
page show the Portfolio's
annual returns and long-term
performance, thereby giving
some indication of the risk of
investing in the Portfolio. The
bar chart shows how the
performance of the Portfolio's
Institutional Shares has varied
from year to year. The table
shows how the Portfolio's
average annual returns for one
year and since inception
compare to those of a
broad-based market index. Both
the bar chart and table assume
reinvestment of all dividends
and distributions. The
Portfolio's past performance
does not necessarily indicate
how it will perform in the
future.
KNOW YOUR INDEX
THE MORGAN STANLEY CAPITAL
INTERNATIONAL EUROPE,
AUSTRALASIA AND FAR EAST INDEX,
OR EAFE INDEX, is an unmanaged
index consisting of companies
in Australia, New Zealand,
Europe and the Far East.
INTERNATIONAL EQUITY
RISK/RETURN SUMMARY PORTFOLIO
INSTITUTIONAL SHARES
YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
[STATED IN PERCENTAGES]
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY PORTFOLIO
------------------------------
<S> <C>
'1995' 9.21
'96' 10.00
'97' 4.70
'98' 17.39
</TABLE>
<TABLE>
<S> <C>
Best quarter: 19.38% for the quarter ending
December 31, 1998
Worst quarter: -17.15% for the quarter ending
September 30, 1998
</TABLE>
AVERAGE ANNUAL TOTAL
RETURNS for the periods
ending December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION*
<S> <C> <C>
Institutional Shares 17.39% 8.58%
EAFE Index 18.23% 7.25%
</TABLE>
* April 4, 1994 for Institutional Shares; March 31, 1994 for the EAFE Index.
47
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<PAGE> 167
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then
sell all of your shares at
the end of those periods.
The example also assumes
that your investment has a
5% return each year and the
Portfolio's operating
expenses remain the same.
Although your actual costs
may be higher or lower,
based on these assumptions
your costs would be:
INTERNATIONAL EQUITY
RISK/RETURN SUMMARY PORTFOLIO
FEES AND EXPENSES
<TABLE>
<S> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM THE INSTITUTIONAL
PORTFOLIO'S ASSETS) SHARES
The table on the right shows
the fees and expenses that you pay
if you buy and hold Institutional Shares
of the International Equity
Portfolio.
Management Fees 1.00%
Distribution (12b-1) Fees None
Other Expenses .75%(1)
Total Annual Portfolio Operating Expenses 1.75%(1)
</TABLE>
(1) Other Expenses and Total Annual
Portfolio Operating Expenses for the
Portfolio's Institutional Shares for
the current year are expected to be
less than the amounts shown above
because certain of the Portfolio's
service providers are voluntarily
waiving a portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers
and/or reimbursements are being made in
order to keep the annual fees and
expenses for the Portfolio's
Institutional Shares at a certain
level. OTHER EXPENSES AND TOTAL ANNUAL
PORTFOLIO OPERATING EXPENSES, AFTER
TAKING THESE FEE WAIVERS AND EXPENSE
REIMBURSEMENTS INTO ACCOUNT, ARE
EXPECTED TO BE .58% AND 1.58%
RESPECTIVELY, FOR INSTITUTIONAL SHARES.
These fee waivers and expense
reimbursements may be revised or
cancelled at any time.
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
INSTITUTIONAL SHARES $178 $551 $949 $2,062
</TABLE>
48
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<PAGE> 168
The principal risks of investing in each Portfolio are described on the
previous pages. The following supplements that discussion.
SECURITIES LENDING
To obtain interest income, each Portfolio may lend its securities to
broker-dealers, banks or institutional borrowers pursuant to agreements
requiring that the loans be continuously secured by collateral equal at all
times in value to at least the market value of the securities loaned. There
is the risk that, when lending portfolio securities, the securities may not
be available to the Portfolio on a timely basis. Therefore, the Portfolio may
lose the opportunity to sell the securities at a desirable price.
Additionally, in the event that a borrower of securities would file for
bankruptcy or become insolvent, disposition of the securities may be delayed
pending court action.
TEMPORARY DEFENSIVE POSITIONS
Each Portfolio may temporarily hold investments that are not part of its main
investment strategy to try to avoid losses during unfavorable market
conditions. These investments may include cash (which will not earn any
income). In addition, each of the Taxable Bond and Stock Portfolios may hold
money market instruments, including short-term debt securities issued or
guaranteed by the U.S. Government or its agencies, and the International
Equity Portfolio may hold debt obligations of U.S. companies having their
principal business activities in the U.S. This strategy could prevent a
Portfolio from achieving its investment objective and, if utilized by a Stock
Portfolio, could reduce the Portfolio's return and affect its performance
during a market upswing.
OTHER TYPES OF INVESTMENTS
This prospectus describes each Portfolio's principal investment strategies
and the particular types of securities in which each Portfolio principally
invests. Each Portfolio may, from time to time, make other types of
investments and pursue other investment strategies in support of its overall
investment goal. These supplemental investment strategies -- and the risks
involved -- are described in detail in the Statement of Additional
Information ("SAI"), which is referred to on the back cover of this
prospectus.
YEAR 2000 RISKS
As with other mutual funds, financial and business organizations and
individuals around the world, the Portfolios could be adversely affected if
the computer systems used by the Adviser and the Portfolios' other service
providers do not properly process and calculate date-related information and
data from and after January 1, 2000. This possibility is commonly known as
the Year 2000 or "Y2K" problem. The Adviser is taking steps to address the
Y2K problem with respect to the computer systems that it uses and to obtain
assurances that comparable steps are being taken by the Portfolios' other
major service providers. At this time, however, there can be no assurance
that these steps will be sufficient to avoid any adverse impact on the
Portfolios. The Y2K problem could have a negative impact on the issuers of
securities in which the Portfolios invest, which could hurt the Portfolios'
investment returns.
logo
logo Q
RISK/RETURN SUMMARY ADDITIONAL INFORMATION ON RISK
49
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<PAGE> 169
BUSINESS DAYS DEFINED
A business day is any
day that both the New
York Stock Exchange
and the Federal
Reserve Bank of St.
Louis are open for
business. Currently,
the Fund observes the
following holidays:
New Year's Day, Martin
Luther King Jr. Day,
Presidents' Day, Good
Friday, Memorial Day
(observed),
Independence Day
(observed), Labor Day,
Columbus Day,
Veterans' Day,
Thanksgiving and
Christmas.
[Open Hand
Icon] Q
YOUR ACCOUNT EXPLANATION OF SALES PRICE
<TABLE>
<S> <C>
Institutional Shares of the Portfolios are sold at their net
asset value (NAV). The NAV for each class of shares of a
Money Market Portfolio is determined as of 12:00 noon
(Eastern time) and as of the close of regular trading on the
New York Stock Exchange (currently 4:00 p.m., Eastern time)
on every business day. The NAV for each class of shares of a
Taxable Bond or Stock Portfolio is determined as of the
close of regular trading on the New York Stock Exchange
(currently 4:00 p.m., Eastern time) on every business day.
The NAV for a class of shares is determined by adding the
value of a Portfolio's investments, cash and other assets
attributable to a particular share class, subtracting the
Portfolio's liabilities attributable that class and then
dividing the result by the total number of shares in the
class that are outstanding.
- The investments of each of the Money Market Portfolios are
valued at amortized cost, which is approximately equal to
market value.
- The investments of each of the Taxable Bond and Stock
Portfolios are valued according to market value. When a
market quote is not readily available, the security's
value is based on "fair value" as determined by MVA (or
Clay Finlay, with respect to the International Equity
Portfolio) under the supervision of the Fund's Board of
Directors. Foreign securities acquired by the
International Equity Fund may be valued in foreign markets
on days when the Portfolio's NAV is not calculated. In
such cases, the NAV of the Portfolio's shares may be
significantly affected on days when investors cannot buy
and sell Portfolio shares.
- A properly placed purchase order (see "How to Buy Shares"
on page 51) that is delivered to the Fund by 12:00 noon
(Eastern time) on any business day with respect to the
Treasury Money Market Portfolio or by 3:00 p.m. (Eastern
time) on any business day with respect to the Money Market
Portfolio receives the share price next determined if the
Fund receives payment in federal funds or other
immediately available funds by 4:00 p.m. (Eastern time)
that day. If payment is not received by that time, the
order will be cancelled. A properly placed purchase order
that is delivered to the Fund after 12:00 noon (Eastern
time) with respect to the Treasury Money Market Portfolio
or after 3:00 p.m. (Eastern time) with respect to the
Money Market Portfolio will be placed the following
business day.
- A properly placed purchase order (see "How to Buy Shares"
on page 51) for one of the Taxable Bond or Stock Portfolios
that is delivered to the Fund before 4:00 p.m. (Eastern
time) on any business day receives the share price
determined as of 4:00 p.m. that day. If the order is
received after 4:00 p.m., it will receive the price
determined on the next business day. Your financial
institution must forward your payment to the Fund no later
than 4:00 p.m. the next business day after placing the
order, or the order will be cancelled.
</TABLE>
50
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<PAGE> 170
Institutional Shares of the Portfolios are sold to financial institutions,
such as banks, trust companies and thrift institutions, that are purchasing
shares on behalf of discretionary and non-discretionary accounts for which
they do not receive account level asset-based management fees.
If you are purchasing Institutional Shares through a financial institution,
you must follow the procedures established by your institution. Your
financial institution is responsible for sending your purchase order to the
Fund's distributor and wiring payment to the Fund's custodian. Your financial
institution holds the shares in your name and receives all confirmations of
purchases and sales. Financial institutions placing orders for themselves or
on behalf of their customers should call the Fund at 1-800-452-2724.
The Fund does not have any minimum investment requirement for Institutional
Shares, but your financial institution may do so. They may also charge
transaction fees and require you to maintain a minimum account balance.
YOUR ACCOUNT HOW TO BUY SHARES
51
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<PAGE> 171
Orders to sell or "redeem" Institutional Shares should be placed with the
same financial institution that placed the original purchase order in
accordance with the procedures established by that institution. Your
financial institution is responsible for sending your order to the Fund's
distributor and for crediting your account with the proceeds. The Fund does
not currently charge for wiring the proceeds, but your financial institution
may do so.
If the shares being sold are represented by share certificates, then the
order to sell must be made in writing and mailed to: Mercantile Mutual Funds,
Inc., P.O. Box 78069 -- Tram 001/128/41-6, St. Louis, Missouri 63178. The
order must be accompanied by the share certificates, properly endorsed for
transfer. Additional documents may be required for certain types of
shareholders, such as corporations, partnerships, executors, trustees,
administrators or guardians.
The Fund's transfer agent may require a signature guarantee unless the
redemption proceeds are payable to the shareholder of record and the proceeds
are either mailed to the shareholder's address of record or electronically
transferred to the account designated on the original account application. A
signature guarantee helps prevent fraud, and you may obtain one from most
banks and broker/dealers. Contact the Fund for more information on signature
guarantees.
Institutional Shares will be sold at the NAV next determined after the Fund
accepts an order (see above). If the order to sell is received and accepted
by the Fund before 12:00 noon (Eastern time) on a business day with respect
to the Treasury Money Market Portfolio or before 3:00 p.m. (Eastern time) on
a business day with respect to the Money Market Portfolio, the proceeds are
sent electronically the same day to the financial institution that placed the
order. If the order to sell is received and accepted by the Fund after 12:00
noon (Eastern time) on a business day with respect to the Treasury Money
Market Portfolio or after 3:00 p.m. (Eastern time) on a business day with
respect to the Money Market Portfolio, or on a non-business day, the proceeds
normally are sent electronically to the financial institution on the next
business day.
Proceeds from redemptions from the Taxable Bond and Stock Portfolios
ordinarily are sent electronically to your financial institution the next
business day as long as the Fund receives your order by 4:00 p.m. (Eastern
time) on a business day.
YOUR ACCOUNT HOW TO SELL SHARES
52
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<PAGE> 172
HOW TO EXCHANGE SHARES
The exchange privilege enables shareholders to exchange Institutional Shares
of one Portfolio for Institutional Shares of another Portfolio. Contact your
financial institution or the Fund's distributor for additional information on
the exchange privilege. The exchange privilege may be exercised only in those
states where Institutional Shares of the Portfolio being acquired may be
legally sold.
ADMINISTRATIVE SERVICES FEES
Institutional Shares of the Portfolios pay administrative services fees at an
annual rate of up to 0.25% of each Money Market Portfolio's and up to 0.30%
of each Taxable Bond and Stock Portfolio's Institutional Share assets. These
fees are paid to financial institutions that provide certain administrative
services to their customers who own Institutional Shares.
GENERAL TRANSACTION POLICIES
The Fund reserves the right to:
- Refuse any order to buy shares.
- Reject any exchange request.
- Redeem all shares in an account if the balance falls below $500. If,
within 60 days of the Fund's written request, the account balance has not
been increased, a shareholder may be required to redeem all shares. The
Fund will not require a shareholder to redeem shares if the value of the
account drops below $500 due to fluctuations in net asset value.
- Send redemption proceeds within seven days after receiving a request, if
an earlier payment could adversely affect a Portfolio.
- Modify or terminate the exchange privilege after 60 days' written notice
to shareholders.
- Make a "redemption in kind." Under abnormal conditions that may make
payment in cash unwise, the Fund may offer partial or complete payment in
portfolio securities rather than cash at such securities'
then-market-value equal to the redemption price. In such cases, a
shareholder may incur brokerage costs in converting these securities to
cash.
Shareholders may be responsible for any fraudulent telephone orders as long
as the Fund has taken reasonable precautions to verify the shareholder's
identity. Shareholders who experience difficulty getting through to the Fund
by telephone because of unusual market conditions should consider selling or
exchanging their shares by mail.
YOUR ACCOUNT
53
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<PAGE> 173
DIVIDENDS AND DISTRIBUTIONS
[-] MONEY MARKET PORTFOLIOS
Each Money Market Portfolio declares dividends from net investment
income daily and pays them monthly. Although the Portfolios do not
expect to realize net long-term capital gains, any capital gains
realized would be distributed at least annually.
[-] TAXABLE BOND PORTFOLIOS
Each Taxable Bond Portfolio declares dividends from net investment
income daily and pays them monthly. Capital gains, if any, are
distributed at least once a year. It's expected that each Portfolio's
annual distribution will be primarily income dividends.
[-] STOCK PORTFOLIOS
The Balanced, Equity Income, Equity Index, Growth & Income Equity and
Growth Equity Portfolios declare and pay dividends from net investment
income monthly. The Small Cap Equity, Small Cap Equity Index and
International Equity Portfolios declare and pay dividends from net
investment income quarterly. Capital gains, if any, for all of the
Portfolios are distributed at least once a year. It's expected that each
Portfolio's annual distributions will normally -- but not
always -- consist primarily of capital gains and not ordinary income.
[-] ALL PORTFOLIOS
Dividends on each share class of a Portfolio are determined in the same
manner and are paid in the same amount. However, each share class bears
all expenses associated with that particular class.
All of your dividends and capital gains distributions with respect to a
particular Portfolio will be reinvested in additional shares of the same
class unless you or your financial institution instruct otherwise on
your account application or have redeemed all shares you held in the
Portfolio. In such cases, dividends and distributions will be paid in
cash.
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DISTRIBUTIONS AND TAXES
54
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<PAGE> 174
You will be advised at
least annually
regarding the federal
income tax treatment
of dividends and
distributions made to
you. You should save
your account
statements because
they contain
information you will
need to calculate your
capital gains or
losses upon your
ultimate sale or
exchange of shares in
the Portfolios.
DISTRIBUTIONS AND TAXES
TAXATION
As with any investment, you should consider the tax
implications of an investment in the Portfolios. The
following is only a brief summary of some of the
important tax considerations generally affecting the
Portfolios and their shareholders under current law,
which may be subject to change in the future.
Consult your tax adviser with specific reference to
your own tax situation.
The Portfolios' distributions generally will be
taxable to shareholders as ordinary income and
capital gains (which may be taxable at different
rates depending on the length of time each Portfolio
held the relevant assets). You will be subject to
income tax on these distributions whether they are
paid in cash or reinvested in additional shares.
If you purchase shares just prior to a distribution,
the purchase price will reflect the amount of the
upcoming distribution, but you will be taxed on the
entire amount of the distribution received even
though, as an economic matter, the distribution
simply constitutes a return of capital. This is
known as "buying into a dividend."
You will recognize a taxable gain or loss on a sale,
exchange or redemption of your shares, including an
exchange for shares of another Portfolio, based on
the difference between your tax basis in the shares
and the amount you receive for them. Any loss
realized on shares held for six months or less will
be treated as a long-term capital loss to the extent
that any capital gains distributions were received
on the shares.
Distributions on, and sales, exchanges and
redemptions of, shares held in an IRA or other
tax-qualified plan will not be currently taxable.
The International Equity Portfolio is expected to be
subject to foreign withholding taxes with respect to
dividends or interest received from sources in
foreign countries. The Portfolio may make an
election to treat a proportionate amount of such
taxes as a distribution to each shareholder. This
would allow each shareholder to either (1) credit
such proportionate amount of taxes against U.S.
federal income tax liability; or (2) take such
amount as an itemized deduction.
The Treasury Money Market Portfolio is designed to
provide shareholders, to the extent permitted by
federal law, with income that is exempt or excluded
from taxation at the state or local level. Please
consult your tax adviser as to the status of
distributions by the Portfolio in your state.
For more information regarding the taxation of the
Portfolios, consult the SAI under the heading
"Additional Information Concerning Taxes." You also
should consult your tax adviser for information
regarding state and local tax consequences and the
applicability of any foreign taxes or U.S.
withholding taxes with respect to your specific
situation.
55
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<PAGE> 175
THE ADVISER
MVA, subject to the general supervision of the Fund's Board of Directors, is
responsible for the day-to-day management of the Portfolios in accordance
with each Portfolio's respective investment objective and policies. This
includes making investment decisions, buying and selling securities and
overseeing the administration and recordkeeping for each Portfolio.
In exchange for these services, MVA receives an investment advisory fee,
which is calculated daily and paid monthly, according to the average daily
net assets of each Portfolio. For the fiscal year ended November 30, 1998,
the Portfolios paid MVA advisory fees as follows:
<TABLE>
<CAPTION>
INVESTMENT ADVISORY FEES
PORTFOLIO AS A % OF NET ASSETS
<S> <C>
------------------------------
Treasury Money Market Portfolio .35%
------------------------------
Money Market Portfolio .35%
------------------------------
U.S. Government Securities Portfolio .45%
------------------------------
Intermediate Corporate Bond Portfolio .35%
------------------------------
Bond Index Portfolio .24%
------------------------------
Government & Corporate Bond Portfolio .45%
------------------------------
Balanced Portfolio .75%
------------------------------
Equity Income Portfolio .62%
------------------------------
Equity Index Portfolio .23%
------------------------------
Growth & Income Equity Portfolio .55%
------------------------------
Growth Equity Portfolio .75%
------------------------------
Small Cap Equity Portfolio .75%
------------------------------
Small Cap Equity Index Portfolio* .40%
------------------------------
International Equity Portfolio 1.00%
-----------------------------------------------------------------------------
</TABLE>
* The Portfolio commenced operations on December 30, 1998 and the fee
shown is that which currently is in effect.
THE SUB-ADVISER
Clay Finlay, Inc., an experienced international investment manager, serves as
sub-adviser to the International Equity Portfolio and is responsible for the
management of the Portfolio's assets. Clay Finlay manages the Portfolio under
the guidance and direction of MVA and according to its sub-advisory agreement
with MVA. For its services, Clay Finlay receives from MVA a monthly fee based
on a percentage of the Portfolio's average daily net assets.
Founded in 1982, Clay Finlay is a registered investment adviser and a
wholly-owned subsidiary of United Asset Management Corporation, a financial
services holding company. Clay Finlay's principal office is located at 200
Park Avenue, 56th Floor, New York, NY 10166.
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MANAGEMENT OF THE FUND
56
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<PAGE> 176
INTRODUCTION
The financial highlights tables presented below are intended to help you
understand the financial performance of each Portfolio's Institutional Shares
for the past five years (or, if shorter, the period since the Portfolio began
operations or the particular shares were first offered). Certain information
reflects financial results for a single Institutional Share in each
Portfolio. The total returns in the tables represent the rate that an
investor would have earned (or lost) on an investment in Institutional
Shares, assuming reinvestment of all dividends and distributions. This
information has been audited by KPMG LLP, independent auditors, whose report,
along with the Portfolios' financial statements, are included in the Fund's
Annual Report to Shareholders, and are incorporated by reference into the
SAI. The Small Cap Equity Index Portfolio did not conduct investment
operations during the periods covered by the tables.
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FINANCIAL HIGHLIGHTS
57
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<PAGE> 177
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
YEAR ENDED NOVEMBER 30, JANUARY 26, 1995 TO
1998 1997 1996 NOVEMBER 30, 1995(a)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
-----------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.043 0.044 0.044 0.042
-----------------------------------------------------------------------------------------
Total from Investment Activities 0.043 0.044 0.044 0.042
-----------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.043) (0.044) (0.044) (0.042)
-----------------------------------------------------------------------------------------
Total Distributions (0.043) (0.044) (0.044) (0.042)
-----------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
-----------------------------------------------------------------------------------------
Total Return 4.40% 4.53% 4.46% 4.94%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000) $ 236 $ 233 $ 299 $ 28
Ratio of expenses to average net
assets 0.81% 0.77% 0.79% 0.92%(c)
Ratio of net investment income to
average net assets 4.30% 4.44% 4.39% 5.76%(c)
Ratio of expenses to average net
assets* 0.96% 0.92% 0.94% 1.07%(c)
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
(a) Period from commencement of operations.
(b) Represents the total return for Investor A Shares from December 1, 1994
to January 25, 1995 plus the total return for Institutional Shares from
January 26, 1995 to November 30, 1995.
(c) Annualized.
FINANCIAL HIGHLIGHTS TREASURY MONEY MARKET PORTFOLIO
58
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<PAGE> 178
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
YEAR ENDED NOVEMBER 30,
1998 1997 1996 1995 1994(a)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.048 0.048 0.047 0.052 0.033
-------------------------------------------------------------------------------------------
Total from Investment Activities 0.048 0.048 0.047 0.052 0.033
-------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.048) (0.048) (0.047) (0.052) (0.033)
-------------------------------------------------------------------------------------------
Total Distributions (0.048) (0.048) (0.047) (0.052) (0.033)
-------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------------------------------------------------------------------------------------------
Total Return 4.95% 4.93% 4.81% 5.33% 3.34%
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000) $28,536 $22,022 $15,921 $13,340 $10,295
Ratio of expenses to average net
assets 0.78% 0.77% 0.78% 0.77% 0.78%
Ratio of net investment income to
average net assets 4.84% 4.83% 4.70% 5.20% 3.48%
Ratio of expenses to average net
assets* 0.93% 0.92% 0.93% 0.92% 0.95%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
(a) On January 3, 1994, the Portfolio issued a new series of Shares which
were designated as "Institutional" Shares. The financial highlights
presented for periods prior to January 3, 1994 represent the financial
highlights applicable to Investor Shares.
FINANCIAL HIGHLIGHTS MONEY MARKET PORTFOLIO
59
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<PAGE> 179
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
YEAR ENDED NOVEMBER 30,
1998 1997 1996 1995 1994(a)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.58 $ 10.64 $10.82 $10.02 $11.20
---------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.57 0.56 0.62 0.63 0.61
Net realized and unrealized gains
(losses) from investments 0.12 (0.04) (0.15) 0.80 (1.00)
---------------------------------------------------------------------------------------
Total from Investment Activities 0.69 0.52 0.47 1.43 (0.39)
---------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.57) (0.58) (0.62) (0.63) (0.61)
In excess of net realized gains -- -- (0.03) -- (0.18)
---------------------------------------------------------------------------------------
Total Distributions (0.57) (0.58) (0.65) (0.63) (0.79)
---------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.70 $ 10.58 $10.64 $10.82 $10.02
---------------------------------------------------------------------------------------
Total Return 6.67% 5.10% 4.55% 14.69% (3.46)%
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000) $6,140 $ 7,049 $2,232 $ 667 $ 51
Ratio of expenses to average net
assets 0.97% 0.97% 0.96% 0.97% 0.95%
Ratio of net investment income to
average net assets 5.34% 5.52% 5.75% 5.91% 6.54%
Ratio of expenses to average net
assets* 1.07% 1.07% 1.06% 1.07% 1.16%
Portfolio Turnover** 54.57% 100.33% 53.76% 93.76% 50.00%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) On June 7, 1994, the Portfolio issued a new series of Shares which were
designated as "Institutional" Shares. The financial highlights presented
for periods prior to June 7, 1994 represent the financial highlights
applicable to Investor Shares.
FINANCIAL HIGHLIGHTS U.S. GOVERNMENT SECURITIES PORTFOLIO
60
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<PAGE> 180
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
YEAR ENDED FEBRUARY 10, 1997 TO
NOVEMBER 30, 1998 NOVEMBER 30, 1997(a)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.11 $10.00
--------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.61 0.53
Net realized and unrealized gains from
investments 0.29 0.11
--------------------------------------------------------------------------------------------------
Total from Investment Activities 0.90 0.64
--------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.61) (0.53)
Net realized gains (0.11) --
--------------------------------------------------------------------------------------------------
Total Distributions (0.72) (0.53)
--------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.29 $10.11
--------------------------------------------------------------------------------------------------
Total Return 9.32% 6.60%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000) $1,124 $ 27
Ratio of expenses to average net assets 1.07% 0.29%(c)
Ratio of net investment income to average net
assets 5.72% 7.06%(c)
Ratio of expenses to average net assets* 1.18% 1.31%(c)
Portfolio Turnover** 9.65% 61.98%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
FINANCIAL HIGHLIGHTS INTERMEDIATE CORPORATE BOND PORTFOLIO
61
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<PAGE> 181
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
YEAR ENDED FEBRUARY 10, 1997 TO
NOVEMBER 30, 1998 NOVEMBER 30, 1997(a)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.17 $10.00
--------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.62 0.53
Net realized and unrealized gains from
investments 0.31 0.17
--------------------------------------------------------------------------------------------------
Total from Investment Activities 0.93 0.70
--------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.62) (0.53)
Net realized gains (0.03) --
--------------------------------------------------------------------------------------------------
Total Distributions (0.65) (0.53)
--------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.45 $10.17
--------------------------------------------------------------------------------------------------
Total Return 9.47% 7.20%(b)
RATIOS/SUPPLEMENTARY DATA:
Net assets at the end of period (000) $7,034 $ 27
Ratio of expenses to average net assets 0.79% 0.24%(c)
Ratio of net investment income to average net
assets 5.77% 7.09%(c)
Ratio of expenses to average net assets* 0.91% 0.95%(c)
Portfolio Turnover** 33.37% 46.16%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
FINANCIAL HIGHLIGHTS BOND INDEX PORTFOLIO
62
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<PAGE> 182
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
YEAR ENDED NOVEMBER 30,
1998 1997 1996 1995 1994(a)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.37 $ 10.34 $ 10.53 $ 9.64 $10.65
-----------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.57 0.56 0.64 0.61 0.60
Net realized and unrealized gains
(losses) from Investments 0.37 0.03 (0.19) 0.89 (0.94)
-----------------------------------------------------------------------------------------
Total from Investment Activities 0.94 0.59 0.45 1.50 (0.34)
-----------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.57) (0.56) (0.64) (0.61) (0.60)
In excess of net realized gains -- -- -- -- (0.07)
-----------------------------------------------------------------------------------------
Total Distributions (0.57) (0.56) (0.64) (0.61) (0.67)
-----------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.74 $ 10.37 $ 10.34 $10.53 $ 9.64
-----------------------------------------------------------------------------------------
Total Return 9.30% 6.00% 4.51% 15.98% (3.32)%
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000) $20,835 $16,954 $14,875 $9,413 $5,965
Ratio of expenses to average net
assets 0.96% 0.95% 0.95% 0.95% 0.96%
Ratio of net investment income to
average net assets 5.41% 5.55% 6.06% 6.01% 6.03%
Ratio of expenses to average net
assets* 1.06% 1.05% 1.05% 1.05% 1.07%
Portfolio Turnover** 91.14% 140.72% 149.20% 59.32% 50.00%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between classes of shares issued.
(a) On January 3, 1994, the Portfolio issued a new series of Shares which
were designated as "Institutional" Shares. The financial highlights
presented for periods prior to January 3, 1994 represent the financial
highlights applicable to Investor Shares.
FINANCIAL HIGHLIGHTS GOVERNMENT & CORPORATE BOND PORTFOLIO
63
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<PAGE> 183
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
YEAR ENDED NOVEMBER 30,
1998 1997 1996 1995 1994(a)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.23 $ 12.54 $ 11.62 $ 9.60 $ 10.22
-------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.28 0.31 0.32 0.31 0.28
Net realized and unrealized gains
(losses) from investments 0.83 1.49 1.34 2.02 (0.48)
-------------------------------------------------------------------------------------------
Total from Investment Activities 1.11 1.80 1.66 2.33 (0.20)
-------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.28) (0.37) (0.32) (0.31) (0.29)
In excess of net investment income -- (0.03) -- -- --
Net realized gains (1.47) (0.71) (0.42) -- --
In excess of net realized gains -- -- -- -- (0.13)
-------------------------------------------------------------------------------------------
Total Distributions (1.75) (1.11) (0.74) (0.31) (0.42)
-------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 12.59 $ 13.23 $ 12.54 $ 11.62 $ 9.60
-------------------------------------------------------------------------------------------
Total Return 9.38% 15.52% 15.08% 24.67% (2.00)%
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000) $70,962 $61,655 $54,731 $36,827 $22,723
Ratio of expenses to average net
assets 1.26% 1.27% 1.27% 1.27% 1.27%
Ratio of net investment income to
average net assets 2.23% 2.56% 2.78% 2.97% 2.77%
Ratio of expenses to average net
assets* 1.36% 1.37% 1.37% 1.37% 1.40%
Portfolio Turnover** 47.79% 43.60% 85.16% 58.16% 49.00%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) On January 3, 1994, the Portfolio issued a new series of Shares which
were designated as "Institutional" Shares. The financial highlights
presented for periods prior to January 3, 1994 represent the financial
highlights applicable to Investor Shares.
FINANCIAL HIGHLIGHTS BALANCED PORTFOLIO
64
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<PAGE> 184
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
YEAR ENDED MARCH 7, 1997 TO
NOVEMBER 30, 1998 NOVEMBER 30, 1997(a)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.56 $10.00
--------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.18 0.19
Net realized and unrealized gains from
investments 0.98 1.56
--------------------------------------------------------------------------------------------------
Total from Investment Activities 1.16 1.75
--------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.19) (0.19)
Net realized gains (2.29) --
--------------------------------------------------------------------------------------------------
Total Distributions (2.48) (0.19)
--------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.24 $11.56
--------------------------------------------------------------------------------------------------
Total Return 11.82% 17.64%(b)
RATIOS/SUPPLEMENTARY DATA:
Net assets at end of period (000) $ 35 $ 1
Ratio of expenses to average net assets 1.23% 0.37%(c)
Ratio of net investment income to average net
assets 1.40% 2.34%(c)
Ratio of expenses to average net assets* 1.32% 1.60%(c)
Portfolio Turnover** 98.32% 48.33%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
FINANCIAL HIGHLIGHTS EQUITY INCOME PORTFOLIO
65
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<PAGE> 185
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
YEAR ENDED MAY 1, 1997 TO
NOVEMBER 30, 1998 NOVEMBER 30, 1997(a)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.94 $ 10.00
--------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.10 0.10
Net realized and unrealized gains from
investments 2.63 1.94
--------------------------------------------------------------------------------------------------
Total from Investment Activities 2.73 2.04
--------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.11) (0.10)
Net realized gains (0.02) --
--------------------------------------------------------------------------------------------------
Total Distributions (0.13) (0.10)
--------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 14.54 $ 11.94
--------------------------------------------------------------------------------------------------
Total Return 23.01% 20.40%(b)
RATIOS/SUPPLEMENTARY DATA:
Net assets at end of period (000) $10,944 $ 8
Ratio of expenses to average net assets 0.91% 0.46%(c)
Ratio of net investment income to average net
assets 0.63% 1.30%(c)
Ratio of expenses to average net assets* 1.03% 1.19%(c)
Portfolio Turnover** 14.83% 1.66%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
FINANCIAL HIGHLIGHTS EQUITY INDEX PORTFOLIO
66
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<PAGE> 186
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
YEAR ENDED NOVEMBER 30,
1998 1997 1996 1995 1994(a)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 21.12 $ 18.67 $ 16.29 $ 12.70 $ 14.74
---------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.12 0.12 0.20 0.23 0.20
Net realized and unrealized gains
(losses) from investments 1.58 3.95 3.33 3.74 (0.17)
---------------------------------------------------------------------------------------
Total from Investment Activities 1.70 4.07 3.53 3.97 0.03
---------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.11) (0.13) (0.20) (0.24) (0.21)
In excess of net investment income (0.01) (0.03) (0.01) -- --
Net realized gains (3.57) (1.46) (0.94) (0.14) (0.18)
In excess of net realized gains -- -- -- -- (1.68)
---------------------------------------------------------------------------------------
Total Distributions (3.69) (1.62) (1.15) (0.38) (2.07)
---------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 19.13 $ 21.12 $ 18.67 $ 16.29 $ 12.70
---------------------------------------------------------------------------------------
Total Return 9.36% 23.90% 23.08% 31.88% 0.19%
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000) $107,133 $92,515 $72,950 $40,228 $21,897
Ratio of expenses to average net
assets 1.04% 1.04% 1.05% 1.05% 1.05%
Ratio of net investment income to
average net assets 0.60% 0.60% 1.19% 1.58% 1.41%
Ratio of expenses to average net
assets* 1.14% 1.14% 1.15% 1.15% 1.16%
Portfolio Turnover** 91.23% 57.11% 63.90% 58.50% 65.00%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) On January 3, 1994, the Portfolio issued a new series of Shares which
were designated as "Institutional" Shares. The financial highlights
presented for periods prior to January 3, 1994 represent the financial
highlights applicable to Investor Shares.
FINANCIAL HIGHLIGHTS GROWTH & INCOME EQUITY PORTFOLIO
67
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<PAGE> 187
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
DECEMBER 2, 1997 TO
NOVEMBER 30, 1998(a)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 16.27
-------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment loss (0.04)
Net realized and unrealized gains from
investments 3.70
-------------------------------------------------------------------------------------------------
Total from Investment Activities 3.66
-------------------------------------------------------------------------------------------------
DISTRIBUTIONS
In excess of net investment income (0.01)
-------------------------------------------------------------------------------------------------
Total Distributions (0.01)
-------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 19.92
-------------------------------------------------------------------------------------------------
Total Return 19.56%(b)
RATIOS/SUPPLEMENTARY DATA:
Net assets at end of period (000) $ 7,720
Ratio of expenses to average net assets 1.36%(c)
Ratio of net investment loss to average net
assets (0.28)%(c)
Ratio of expenses to average net assets* 1.46%(c)
Portfolio Turnover** 54.33%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Period from initial public investment.
(b) Not annualized.
(c) Annualized.
FINANCIAL HIGHLIGHTS GROWTH EQUITY PORTFOLIO
68
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<PAGE> 188
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
YEAR ENDED NOVEMBER 30,
1998 1997 1996 1995 1994(a)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.98 $ 13.36 $ 13.40 $ 11.96 $ 13.14
-------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment loss (0.07) (0.04) (0.01) (0.01) (0.03)
Net realized and unrealized gains
(losses) from Investments (1.87) 2.48 1.03 2.36 0.86
-------------------------------------------------------------------------------------------
Total from Investment Activities (1.94) 2.44 1.02 2.35 0.83
-------------------------------------------------------------------------------------------
DISTRIBUTIONS
In excess of net investment income -- -- (0.01) -- --
Net realized gains (1.19) (0.82) (1.05) (0.91) (1.78)
In excess of net realized gains (0.03) -- -- -- (0.23)
-------------------------------------------------------------------------------------------
Total Distributions (1.22) (0.82) (1.06) (0.91) (2.01)
-------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 11.82 $ 14.98 $ 13.36 $ 13.40 $ 11.96
-------------------------------------------------------------------------------------------
Total Return (14.17)% 19.41% 8.39% 21.43% 7.11%
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000) $25,037 $34,395 $30,081 $17,620 $ 5,633
Ratio of expenses to average net
assets 1.25% 1.25% 1.26% 1.26% 1.25%
Ratio of net investment loss to
average net assets (0.45)% (0.29)% (0.13)% (0.11)% (0.41)%
Ratio of expenses to average net
assets* 1.35% 1.35% 1.36% 1.36% 1.37%
Portfolio Turnover** 69.72% 80.23% 65.85% 83.13% 85.00%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) On January 3, 1994, the Portfolio issued a new series of Shares which
were designated as "Institutional" Shares. The financial highlights
presented for periods prior to January 3, 1994 represent the financial
highlights applicable to Investor Shares.
FINANCIAL HIGHLIGHTS SMALL CAP EQUITY PORTFOLIO
69
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<PAGE> 189
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
YEAR ENDED NOVEMBER 30, APRIL 4, 1994 TO
1998 1997 1996 1995 NOVEMBER 30, 1994(a)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.97 $12.03 $10.75 $ 9.90 $10.00
-----------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income (loss) -- (0.03) 0.01 0.01 (0.01)
Net realized and unrealized gains
(losses) from Investments and
foreign currency 1.78 0.33 1.27 0.86 (0.09)
-----------------------------------------------------------------------------------------------
Total from Investment Activities 1.78 0.30 1.28 0.87 (0.10)
-----------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.01) -- -- -- --
In excess of net investment income (0.06) (0.05) -- -- --
Net realized gains (0.43) (0.31) -- (0.01) --
Tax return of capital -- -- -- (0.01) --
-----------------------------------------------------------------------------------------------
Total Distributions (0.50) (0.36) -- (0.02) --
-----------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $13.25 $11.97 $12.03 $10.75 $ 9.90
-----------------------------------------------------------------------------------------------
Total Return 15.37% 2.59% 11.91% 8.78% (1.00)%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000) $8,058 $6,798 $6,059 $2,159 $ 197
Ratio of expenses to average net
assets 1.58% 1.59% 1.44% 1.44% 1.70%(c)
Ratio of net investment income
(loss) to average net assets 0.01% (0.21)% 0.16% 0.13% (0.48)%(c)
Ratio of expenses to average net
assets* 1.75% 1.75% 1.76% 1.75% 2.17%(c)
Portfolio Turnover** 88.95% 75.18% 77.63% 62.78% 21.00%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) On April 24, 1994, the Portfolio issued an additional series of Shares
which were designated as "Institutional" Shares. The financial highlights
presented for the period April 4, 1994 to April 24, 1994 represent the
financial highlights applicable to Trust Shares.
(b) Not annualized.
(c) Annualized.
FINANCIAL HIGHLIGHTS INTERNATIONAL EQUITY PORTFOLIO
70
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<PAGE> 190
[Back Cover Page]
Where to find more information
You'll find more information about the Portfolios in the following documents:
ANNUAL AND SEMI-ANNUAL REPORTS
The Fund's annual and semi-annual reports contain more information about each
Portfolio and a discussion about the market conditions and investment strategies
that had a significant effect on each Portfolio's performance during the last
fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI contains detailed information about the Portfolios and their policies.
By law, it's incorporated by reference into (considered to be part of) this
prospectus.
You can get a free copy of these documents, request other information about the
Portfolios and make shareholder inquiries by calling the Fund at 1-800-452-2724
or by writing to:
Mercantile Mutual Funds, Inc.
P.O. Box 78069
St. Louis, Missouri 63175
If you buy your shares through a broker-dealer or other financial institution,
you may contact your institution for more information.
You can write to the Securities and Exchange Commission (SEC) Public Reference
Section and ask them to mail you information about the Portfolios, including the
SAI. They'll charge you a fee for this service. You can also visit the SEC
Public Reference Room and copy the documents while you're there. For information
about the operation of the Public Reference Room, call the SEC.
Public Reference Section of the SEC
Washington, DC 20549-6009
1-800-SEC-0330
Reports and other information about the Portfolios are also available on the
SEC's website at http://www.sec.gov.
The Fund's Investment Company Act File No. is 811-3567
-60-
<PAGE> 191
MERCANTILE MUTUAL FUNDS, INC.
PROSPECTUS
MARCH 31, 1999
MONEY MARKET PORTFOLIOS
Treasury Money Market Portfolio
Money Market Portfolio
Tax-Exempt Money Market Portfolio
Investor A Shares and Investor B Shares
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved any shares of these Portfolios or determined if this
prospectus is truthful or complete. Anyone who tells you otherwise is committing
a criminal offense.
<PAGE> 192
CONTENTS
<TABLE>
<S> <C> <C> <C>
RISK/RETURN SUMMARY
LOGO
LOGO
3 Overview
4 Treasury Money Market Portfolio
7 Money Market Portfolio
11 Tax-Exempt Money Market Portfolio
14 Additional Information on Risk
YOUR ACCOUNT
LOGO
LOGO
15 Distribution Arrangements/Sales Charges
17 Explanation of Sales Price
18 How to Buy Shares
19 How to Sell Shares
21 Investor Programs
23 General Transaction Policies
DISTRIBUTIONS AND TAXES
LOGO
LOGO
24 Dividends and Distributions
25 Taxation
MANAGEMENT OF THE FUND
LOGO
LOGO
26 The Adviser
FINANCIAL HIGHLIGHTS
LOGO
LOGO
27 Introduction
28 Treasury Money Market Portfolio
29 Money Market Portfolio
30 Tax-Exempt Money Market Portfolio
</TABLE>
2
<PAGE> 193
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RISK/RETURN SUMMARY OVERVIEW
<TABLE>
<S> <C>
This prospectus describes the Mercantile Money Market
Portfolios, three investment portfolios offered by
Mercantile Mutual Funds, Inc. (the "Fund"). The Fund was
formerly known as The ARCH Fund(R), Inc. On the following
pages, you will find important information about each
Portfolio, including:
- A description of the Portfolio's investment objective
(sometimes referred to as its goal);
- The Portfolio's principal investment strategies (the steps
it takes to try to meet its goal);
- The principal risks associated with the Portfolio (factors
that may prevent it from meeting its goal);
- The Portfolio's past performance (how successful it's been
in meeting its goal); and
- The fees and expenses (including sales charges) you pay as
an investor in the Portfolio.
WHO MAY WANT TO INVEST IN The Treasury Money Market Portfolio may be appropriate for
THE MERCANTILE MONEY MARKET investors who want a way to earn money market returns from
PORTFOLIOS? U.S. Treasury obligations that are generally exempt from
state and local taxes. The Money Market Portfolio may be
appropriate for investors who want a flexible and convenient
way to manage cash while earning money market returns. The
Tax-Exempt Money Market Portfolio may be appropriate for
investors who want a way to earn money market returns that
are generally exempt from federal income tax; however, the
Portfolio is NOT an appropriate investment for tax-deferred
retirement accounts, such as IRAs, because its return before
taxes is generally lower than that of a taxable fund.
Before investing in a Portfolio, you should carefully
consider:
- Your own investment goals
- The amount of time you are willing to leave your money
invested
- How much risk you are willing to take.
THE INVESTMENT ADVISER Mississippi Valley Advisors Inc. ("MVA" or the "Adviser")
serves as the investment adviser to each Portfolio. Founded
in 1987, MVA is a subsidiary of Mercantile Bancorporation
Inc., a regional banking and financial services
organization, and has its main office at One Mercantile
Center, Seventh and Washington Streets, St. Louis, Missouri
63101. As of December 31, 1998, MVA had approximately $9.9
billion in assets under management, including the Fund's
assets, which were approximately $4.3 billion.
An investment in the Portfolios is not a Mercantile Bank
deposit and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government
agency. Although the Portfolios seek to preserve the value
of your investment at $1.00 per share, it is possible to
lose money by investing in the Portfolios.
</TABLE>
3
<PAGE> 194
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TREASURY MONEY
RISK/RETURN SUMMARY MARKET PORTFOLIO
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to seek a high level
of current income exempt from state income tax consistent
with liquidity and security of principal.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio invests substantially all (but not less than
65%) of its total assets in money market instruments issued
by the U.S. Treasury and certain U.S. Government agencies
and instrumentalities that provide income that is generally
not subject to state income tax.
PRINCIPAL RISK CONSIDERATIONS
The yield paid by the Portfolio will vary with changes in
interest rates.
Although U.S. Government securities, particularly U.S.
Treasury obligations, have historically involved little
risk, if an issuer fails to pay interest or repay principal,
the value of your investment could decline.
The Adviser evaluates the rewards and risks presented by all
securities purchased by the Portfolio and how they may
advance the Portfolio's investment objective. It is
possible, however, that these evaluations will prove to be
inaccurate.
There's no guarantee the Portfolio will be able to preserve
the value of your investment at $1.00 per share.
MONEY MARKET INSTRUMENTS are
short-term obligations
issued by banks,
corporations, the U.S.
Government and state and
local governments. Money
market instruments purchased
by the Portfolios must meet
strict requirements as to
investment quality, maturity
and diversification. The
Portfolios generally do not
invest in securities with
maturities of more than 397
days and the average
maturity of all securities
held by a particular
Portfolio must be 90 days or
less. Prior to purchasing a
money market instrument for
one of the Portfolios, the
Adviser must determine that
the instrument carries very
little credit risk.
</TABLE>
4
<PAGE> 195
TREASURY MONEY
MARKET PORTFOLIO
RISK/RETURN SUMMARY
<TABLE>
<S> <C>
RETURN HISTORY INVESTOR A SHARES
The bar chart and table on this page YEAR-BY-YEAR TOTAL RETURNS
show the Portfolio's annual returns and (AS OF DECEMBER 31 EACH YEAR)
long-term performance, thereby giving [STATED IN PERCENTAGES]
some indication of the risk of
investing in the Portfolio. The bar
chart shows how the performance of the
Portfolio's Investor A Shares has
varied from year to year. The table
shows the Portfolio's average annual
returns for one year, five years and
since inception. Both the bar chart and
table assume reinvestment of all
dividends and distributions. The
Portfolio's past performance does not
necessarily indicate how it will
perform in the future.
</TABLE>
<TABLE>
<CAPTION>
TREASURY MONEY MARKET PORTFOLIO
-------------------------------
<S> <C>
'93' 3.22
'94' 2.43
'95' 3.33
'96' 4.96
'97' 4.43
'98' 4.54
</TABLE>
Best quarter: 1.26% for the
quarter ending
June 30, 1995
Worst quarter: 0.58% for the
quarter ending
June 30, 1993
AVERAGE ANNUAL TOTAL
RETURNS
for the periods ended
December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION*
<S> <C> <C> <C>
Investor A Shares 4.34% 4.32% 3.84%
</TABLE>
* April 20, 1992.
To obtain the Portfolio's current 7-day yield, please call 1-800-452-2724.
5
<PAGE> 196
TREASURY MONEY
MARKET PORTFOLIO
RISK/RETURN SUMMARY
FEES AND EXPENSES
<TABLE>
<S> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS) INVESTOR A SHARES
The table on the right shows the fees and
expenses that you pay if you buy and hold
Investor A Shares of the Treasury Money
Market Portfolio. There are no sales charges
when you buy or sell Investor A Shares of the
Portfolio.
Management Fees .40%(1)
Distribution (12b-1) and Service Fees .25%
Other Expenses .31%(1)
Total Annual Portfolio Operating Expenses .96%(1)
</TABLE>
(1) Management Fees, Other Expenses and
Total Annual Portfolio Operating
Expenses for the Portfolio's Investor A
Shares for the current fiscal year are
expected to be less than the amounts
shown above because certain of the
Portfolio's service providers are
voluntarily waiving a portion of their
fees and/or reimbursing the Portfolio
for certain other expenses. These fee
waivers and/or reimbursements are being
made in order to keep the annual fees
and expenses for the Portfolio's
Investor A Shares at a certain level.
MANAGEMENT FEES, OTHER EXPENSES AND
TOTAL ANNUAL PORTFOLIO OPERATING
EXPENSES, AFTER TAKING THESE FEE
WAIVERS AND EXPENSE REIMBURSEMENTS INTO
ACCOUNT, ARE EXPECTED TO BE .35%, .20%
AND .80%, RESPECTIVELY, FOR INVESTOR A
SHARES. These fee waivers and expense
reimbursements may be revised or
cancelled at any time.
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
INVESTOR A SHARES $98 $306 $531 $1,178
</TABLE>
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then sell
all of your shares at the
end of those periods. The
example also assumes that
your investment has a 5%
return each year and the
Portfolio's operating
expenses remain the same.
Although your actual costs
may be higher or lower,
based on these assumptions
your costs would be:
6
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<PAGE> 197
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MONEY MARKET
RISK/RETURN SUMMARY PORTFOLIO
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to seek current
income with liquidity and stability of principal.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio invests substantially all (but not less than
80%) of its total assets in a broad range of money market
instruments, including commercial paper, notes and bonds
issued by U.S. and foreign corporations, obligations issued
by the U.S. Government and its agencies and
instrumentalities, and obligations issued by U.S. and
foreign banks, such as certificates of deposit, letters of
credit, bankers' acceptances and time deposits.
The Portfolio will only buy a money market instrument if it
has the highest short-term rating from at least two
nationally recognized statistical rating organizations, such
as Standard & Poor's Ratings Group or Moody's Investors
Service, Inc., or only one such rating if only one
organization has rated the instrument. If the money market
instrument is not rated, the Adviser must determine that it
is of comparable quality to eligible rated instruments.
PRINCIPAL RISK CONSIDERATIONS
The yield paid by the Portfolio will vary with short-term
interest rates.
Although credit risk is very low because the Portfolio only
invests in high quality obligations, if an issuer fails to
pay interest or repay principal, the value of your
investment could decline.
The Adviser evaluates the rewards and risks presented by all
securities purchased by the Portfolio and how they may
advance the Portfolio's investment objective. It is
possible, however, that these evaluations will prove to be
inaccurate.
There's no guarantee the Portfolio will be able to preserve
the value of your investment at $1.00 per share.
</TABLE>
7
<PAGE> 198
MONEY MARKET
RISK/RETURN SUMMARY PORTFOLIO
<TABLE>
<S> <C>
RETURN HISTORY INVESTOR A SHARES
The bar chart and table on this page YEAR-BY-YEAR TOTAL RETURNS
show the Portfolio's annual returns and (AS OF DECEMBER 31 EACH YEAR)
long-term performance, thereby giving [STATED IN PERCENTAGES]
some indication of the risk of
investing in the Portfolio. The bar
chart shows how the performance of the
Portfolio's Investor A Shares has
varied from year to year. The table
shows the Portfolio's average annual
returns for one year, five years, ten
years and since inception. Both the bar
chart and table assume reinvestment of
all dividends and distributions. The
Portfolio's past performance does not
necessarily indicate how it will
perform in the future.
</TABLE>
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO
----------------------
<S> <C>
'1989' 9.19
'90' 8.03
'91' 5.45
'92' 3.06
'93' 2.51
'94' 3.58
'95' 5.36
'96' 4.78
'97' 4.96
'98' 4.9
</TABLE>
The returns for Investor B Shares differed
from the returns shown in the bar chart,
because the two classes bear different
expenses.
Best quarter: 2.36% for the
quarter ending
June 30, 1989
Worst quarter: 0.61% for the
quarter ending
June 30, 1993
AVERAGE ANNUAL TOTAL
RETURNS
for the periods ended
December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS 10 YEARS INCEPTION*
<S> <C> <C> <C> <C>
Investor A Shares 4.90% 4.71% 5.16% 5.37%
Investor B Shares**
(with applicable contingent deferred sales charge) (0.88)% 4.08% 4.93% 3.14%
</TABLE>
* March 24, 1983.
** Investor B Shares of the Portfolio commenced operations on January 26,
1996. Average annual total returns for prior periods reflect the
performance of the Portfolio's Investor A Shares which has been restated
to reflect the applicable contingent deferred sales charges payable on
redemptions of Investor B Shares within six years of the date of purchase.
Investor B Shares are subject to distribution and service fees at a
maximum annual rate of 1.00% of the Portfolio's Investor B Shares assets.
Had the performance of Investor A Shares been restated to reflect these
distribution and service fees, average annual total returns would have
been lower.
To obtain the Portfolio's current 7-day yield, please call 1-800-452-2724.
8
- -
<PAGE> 199
The table on this page
shows the fees and expenses
that you pay if you buy and
hold Investor A Shares or
Investor B Shares of the
Money Market Portfolio.
MONEY MARKET
RISK/RETURN SUMMARY PORTFOLIO
FEES AND EXPENSES
<TABLE>
<S> <C> <C> <C>
SHAREHOLDER FEES INVESTOR A INVESTOR B
(FEES YOU PAY DIRECTLY) SHARES SHARES
Maximum sales charge (load) to
buy shares, shown as a % of the
offering price None None
Maximum deferred sales charge
(load) shown as a % of the
offering price or sale price,
whichever is less None 5.00%(1)
ANNUAL PORTFOLIO OPERATING
EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM INVESTOR A INVESTOR B
THE PORTFOLIO'S ASSETS) SHARES SHARES
Management Fees .40%(2) .40%(2)
Distribution (12b-1) and Service
Fees .25% 1.00%
Other Expenses .28%(2) .28%(2)
Total Annual Portfolio Operating
Expenses .93%(2) 1.68%(2)
</TABLE>
(1) This amount applies if you sell your
shares in the first year after purchase
and gradually declines until it is
eliminated after six years. After eight
years, Investor B Shares will
automatically convert to Investor A
Shares. See "Distribution Arrangements/
Sales Charges" below.
(2) Management Fees, Other Expenses and
Total Annual Portfolio Operating
Expenses for the Portfolio's Investor A
Shares and Investor B Shares for the
current fiscal year are expected to be
less than the amounts shown above
because certain of the Portfolio's
service providers are voluntarily
waiving a portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers
and/or reimbursements are being made in
order to keep the annual fees and
expenses for the Portfolio's Investor A
Shares and Investor B Shares at certain
levels. MANAGEMENT FEES, OTHER EXPENSES
AND TOTAL ANNUAL PORTFOLIO OPERATING
EXPENSES, AFTER TAKING THESE FEE
WAIVERS AND EXPENSE REIMBURSEMENTS INTO
ACCOUNT, ARE EXPECTED TO BE .35%, .19%
AND .79%, RESPECTIVELY, FOR INVESTOR A
SHARES AND .35%, .19% AND 1.54%,
RESPECTIVELY, FOR INVESTOR B SHARES.
These fee waivers and expense
reimbursements may be revised or
cancelled at any time.
9
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<PAGE> 200
MONEY MARKET
RISK/RETURN SUMMARY PORTFOLIO
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then sell
all of your shares at the
end of those periods. The
example also assumes that
your investment has a 5%
return each year, the
Portfolio's operating
expenses remain the same and
your Investor B Shares
automatically convert to
Investor A Shares after
eight years. Although your
actual costs may be higher
or lower, based on these
assumptions your costs would
be:
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
INVESTOR A SHARES $ 95 $296 $ 515 $1,143
INVESTOR B SHARES $671 $830 $1,113 $1,788
If you hold Investor B
Shares, you would pay the
following expenses if you
did not sell your shares:
$171 $530 $ 913 $1,788
</TABLE>
10
<PAGE> 201
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TAX-EXEMPT MONEY
RISK/RETURN SUMMARY MARKET PORTFOLIO
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to seek as high a
level of current interest income exempt from federal income
tax as is consistent with liquidity and stability of
principal.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio normally invests at least 80% of its total
assets in short-term municipal securities that pay interest
which is exempt from federal income tax. Municipal
securities purchased by the Portfolio may include general
obligation securities, revenue securities and private
activity bonds. General obligation securities are secured by
the issuer's full faith, credit and taxing power. Revenue
securities are usually payable only from revenues derived
from specific facilities or revenue sources. Private
activity bonds are usually revenue obligations since they
are typically payable by the private user of the facilities
financed by the bonds. The interest on private activity
bonds may be subject to the federal alternative minimum tax.
Investments in private activity bonds will not be treated as
investments in municipal securities for purposes of the 80%
requirement stated above.
The Portfolio will only buy a municipal security if it has
the highest short-term rating from at least two nationally
recognized statistical rating organizations, such as
Standard & Poor's Ratings Group or Moody's Investors
Service, Inc., or one such rating if only one organization
has rated the security. If the security is not rated, the
Adviser must determine that it is of comparable quality to
eligible rated securities.
PRINCIPAL RISK CONSIDERATIONS
The yield paid by the Portfolio will vary with changes in
interest rates.
Although credit risk is very low because the Portfolio only
invests in high quality obligations, if an issuer fails to
pay interest or repay principal, the value of your
investment could decline. The ability of a state or local
government issuer to make payments can be affected by many
factors, including economic conditions, the flow of tax
revenues and changes in the level of federal, state or local
aid. Some municipal securities are payable only from limited
revenue sources or by private entities.
The Portfolio is not diversified, which means that it can
invest a large percentage of its assets in a small number of
issuers. As a result, a change in the value of any one
investment held by the Portfolio may affect the overall
value of the Portfolio more than it would affect a
diversified portfolio.
The Adviser evaluates the rewards and risks presented by all
securities purchased by the Portfolio and how they may
advance the Portfolio's investment objective. It is
possible, however, that these evaluations will prove to be
inaccurate.
There's no guarantee the Portfolio will be able to preserve
the value of your investment at $1.00 per share.
WHAT ARE MUNICIPAL
SECURITIES?
State and local governments
issue municipal securities
to raise money to finance
public works, to repay
outstanding obligations, to
raise funds for general
operating expenses and to
make loans to other public
institutions. Some municipal
securities, known as private
activity bonds, are backed
by private entities and are
used to finance various
non-public projects.
Municipal securities, which
can be issued as bonds,
notes or commercial paper,
usually have fixed interest
rates, although some have
interest rates that change
from time to time.
</TABLE>
11
<PAGE> 202
TAX-EXEMPT MONEY
RISK/RETURN SUMMARY MARKET PORTFOLIO
<TABLE>
<S> <C>
RETURN HISTORY()+ INVESTOR A SHARES
The bar chart and table on this page YEAR-BY-YEAR TOTAL RETURNS
show the Portfolio's annual returns and (AS OF DECEMBER 31 EACH YEAR)
long-term performance, thereby giving [STATED IN PERCENTAGES]
some indication of the risk of
investing in the Portfolio. The bar
chart shows how the performance of the
Portfolio's Investor A Shares has
varied from year to year. The table
shows the Portfolio's average annual
returns for one year, five years, ten
years and since inception. Both the bar
chart and table assume reinvestment of
all dividends and distributions. The
Portfolio's past performance does not
necessarily indicate how it will
perform in the future.
</TABLE>
<TABLE>
<CAPTION>
TAX-EXEMPT MONEY MARKET PORTFOLIO
---------------------------------
<S> <C>
'1989' 6.07
'90' 5.5
'91' 3.73
'92' 2.24
'93' 1.72
'94' 2.13
'95' 3.04
'96' 2.77
'97' 2.89
'98' 2.68
</TABLE>
Best quarter: 1.58% for the
quarter ending
June 30, 1989
Worst quarter: 0.39% for the
quarter ending
March 31, 1994
AVERAGE ANNUAL TOTAL
RETURNS
for the periods ended
December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS 10 YEARS INCEPTION*
<S> <C> <C> <C> <C>
Investor A Shares 2.68% 2.70% 3.27% 3.42%
</TABLE>
+ The Portfolio commenced operations on July 10, 1986 as a separate
investment portfolio (the "Predecessor Portfolio") of The ARCH Tax-Exempt
Trust. On October 2, 1995, the Predecessor Portfolio was reorganized as a
new portfolio of the Fund. Prior to the reorganization, the Predecessor
Portfolio offered and sold shares that were similar to the Fund's Investor
A Shares. Total returns for periods prior to October 2, 1995 reflect the
performance of the Predecessor Portfolio.
* July 10, 1986.
To obtain the Portfolio's current 7-day yield, please call 1-800-452-2724.
12
<PAGE> 203
TAX-EXEMPT MONEY
RISK/RETURN SUMMARY MARKET PORTFOLIO
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then
sell all of your shares at
the end of those periods.
The example also assumes
that your investment has a
5% return each year and the
Portfolio's operating
expenses remain the same.
Although your actual costs
may be higher or lower,
based on these assumptions
your costs would be:
FEES AND EXPENSES
<TABLE>
<S> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM THE INVESTOR A
PORTFOLIO'S ASSETS) SHARES
The table on the right shows the fees
and expenses that you pay if you
buy and hold Investor A Shares of the
Tax-Exempt Money Market Portfolio.
There are no sales charges when you
buy or sell Investor A Shares of the
Portfolio.
Management Fees .40%(1)
Distribution (12b-1) and Service Fees .25%
Other Expenses .19%
Total Annual Portfolio Operating Expenses .84%(1)
</TABLE>
(1) Management Fees and Total Annual
Portfolio Operating Expenses for the
Portfolio's Investor A Shares for the
current fiscal year are expected to be
less than the amounts shown above
because the Advisor is voluntarily
waiving a portion of its advisory fee.
This fee waiver is being made in order
to keep the annual fees and expenses
for the Portfolio's Investor A Shares
at a certain level. MANAGEMENT FEES AND
TOTAL ANNUAL PORTFOLIO OPERATING
EXPENSES, AFTER TAKING THIS FEE WAIVER
INTO ACCOUNT, ARE EXPECTED TO BE .35%,
AND .79%, RESPECTIVELY, FOR INVESTOR A
SHARES. This fee waiver may be revised
or cancelled at any time.
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
INVESTOR A SHARES $86 $268 $466 $1,037
</TABLE>
13
<PAGE> 204
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RISK/RETURN SUMMARY ADDITIONAL INFORMATION ON RISK
The principal risks of investing in each Portfolio are described on the
previous pages. The following supplements that discussion.
SECURITIES LENDING
To obtain interest income, the Treasury Money Market Portfolio and Money
Market Portfolio may lend their securities to broker-dealers, banks or
institutional borrowers pursuant to agreements requiring that the loans be
continuously secured by collateral equal at all times in value to at least
the market value of the securities loaned. There is the risk that, when
lending portfolio securities, the securities may not be available to the
Portfolio on a timely basis. Therefore, the Portfolio may lose the
opportunity to sell the securities at a desirable price. Additionally, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
TEMPORARY DEFENSIVE POSITIONS
Each Portfolio may temporarily hold investments that are not part of its main
investment strategy during unfavorable market conditions. These investments
may include cash (which will not earn any income) and, in the case of the
Tax-Exempt Money Market Portfolio, short-term taxable money market
instruments not to exceed 20% of the Portfolio's assets. This strategy could
prevent a Portfolio from achieving its investment objective.
OTHER TYPES OF INVESTMENTS
This prospectus describes each Portfolio's principal investment strategies
and the particular types of securities in which each Portfolio principally
invests. Each Portfolio may, from time to time, make other types of
investments and pursue other investment strategies in support of its overall
investment goal. These supplemental investment strategies -- and the risks
involved -- are described in detail in the Statement of Additional
Information ("SAI"), which is referred to on the back cover of this
prospectus.
YEAR 2000 RISKS
As with other mutual funds, financial and business organizations and
individuals around the world, the Portfolios could be adversely affected if
the computer systems used by the Adviser and the Portfolios' other service
providers do not properly process and calculate date-related information and
data from and after January 1, 2000. This possibility is commonly known as
the Year 2000 or "Y2K" problem. The Adviser is taking steps to address the
Y2K problem with respect to the computer systems that it uses and to obtain
assurances that comparable steps are being taken by the Portfolios' other
major service providers. At this time, however, there can be no assurance
that these steps will be sufficient to avoid any adverse impact on the
Portfolios. The Y2K problem could have a negative impact on the issuers of
securities in which the Portfolios invest, which could hurt the Portfolios'
investment returns.
14
<PAGE> 205
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DISTRIBUTION ARRANGEMENTS/
SALES CHARGES
YOUR ACCOUNT
SHARE CLASSES
Each Portfolio offers Investor A Shares. The Money Market Portfolio also
offers Investor B Shares. The primary difference between the share classes is
the sales charge structure and distribution/service fee arrangement.
<TABLE>
<S> <C> <C>
TYPES OF CHARGES INVESTOR A SHARES INVESTOR B SHARES
Sales Charge (Load) None. A contingent deferred sales charge
(CDSC) is assessed on shares
redeemed within six years of
purchase. Investor B Shares
automatically convert to Investor
A Shares eight years after
purchase.
Distribution (12b-1) and Service Subject to annual distribution and Subject to annual distribution and
Fees shareholder servicing fees of up shareholder servicing fees of up
to 0.25% of a Portfolio's average to 1.00% of a Portfolio's average
daily net assets attributable to daily net assets attributable to
its Investor A Shares. its Investor B Shares.
</TABLE>
15
<PAGE> 206
DISTRIBUTION ARRANGEMENTS/
YOUR ACCOUNT SALES CHARGES
CALCULATION OF SALES CHARGES
INVESTOR B SHARES
<TABLE>
<S> <C> <C>
For purposes of calculating the CDSC, all NUMBER OF CDSC AS A % OF
purchases made during a calendar month are YEARS SINCE DOLLAR AMOUNT
considered to be made on the first day of that PURCHASE SUBJECT TO THE CHARGE
month. The CDSC is based on the value of the 1 or less 5.0%
Investor B Shares on the date that they are sold 1-2 4.0%
or the original cost of the shares, whichever is 2-3 3.0%
lower. To keep your CDSC as low as possible each 3-4 3.0%
time you sell shares, the Fund will first sell 4-5 2.0%
any shares in your account that are not subject 5-6 1.0%
to a CDSC. If there are not enough of these, the more than 6 None
Fund will sell the shares that have the lowest
CDSC.
</TABLE>
No CDSC is assessed on redemptions of Investor B Shares if:
- The shares were purchased with reinvested dividends or capital gains
distributions.
- The shares were purchased through an exchange of Investor B Shares of
another Portfolio.
- The redemption represents a distribution from a qualified retirement plan
under Section 403(b)(7) of the Internal Revenue Code, due to death,
disability or the attainment of a specified age.
- The redemption is in connection with the death or disability of the
shareholder.
- You participate in the Automatic Withdrawal Plan and your annual
withdrawals do not exceed 12% of your account's value.
- Your account falls below the Portfolio's minimum account size, and the Fund
liquidates your account (see page 23).
- The redemption results from a tax-free return of an excess contribution,
pursuant to Section 408(d)(4) or (5) of the Internal Revenue Code.
DISTRIBUTION AND SERVICE FEES
Investor A Shares of the Portfolios pay distribution (12b-1) and shareholder
service fees at an annual rate of up to 0.25% of each Portfolio's Investor A
Share assets. Investor B Shares of the Money Market Portfolio pay
distribution (12b-1) and shareholder service fees at an annual rate of up to
1.00% of the Portfolio's Investor B Share assets. The Fund has adopted
separate distribution and service plans under Rule 12b-1 that allow each
Portfolio to pay fees from its Investor A Share and/or Investor B Share
assets for selling and distributing Investor A Shares or Investor B Shares,
as the case may be, and for services provided to shareholders. Because 12b-1
fees are paid on an ongoing basis, over time they increase the cost of your
investment and may cost more than other sales charges.
CONVERTING INVESTOR B SHARES TO INVESTOR A SHARES
Eight years after you buy Investor B Shares of the Money Market Portfolio,
they will automatically convert to Investor A Shares of the Portfolio. This
allows you to benefit from the lower annual expenses of Investor A Shares.
16
- -
<PAGE> 207
YOUR ACCOUNT EXPLANATION OF SALES PRICE
<TABLE>
<S> <C>
Shares of each class in a Portfolio are sold at their net
asset value (NAV). The NAV for each class of shares of a
Portfolio is determined as of 12:00 noon (Eastern time) and
as of the close of regular trading on the New York Stock
Exchange (currently 4:00 p.m., Eastern time) on every
business day. The NAV for a class of shares is determined by
adding the value of the Portfolio's investments, cash and
other assets attributable to a particular share class,
subtracting the Portfolio's liabilities attributable to that
class and then dividing the result by the total number of
shares in the class that are outstanding.
- Each Portfolio's investments are valued at amortized cost,
which is approximately equal to market value.
- If you properly place a purchase order (see "How to Buy
Shares" on page 18) that is delivered to the Fund before
12:00 noon (Eastern time) on any business day with respect
to the Treasury Money Market Portfolio and Tax-Exempt
Money Market Portfolio or by 3:00 p.m. (Eastern time) on
any business day with respect to the Money Market
Portfolio, the order receives the share price next
determined if the Fund receives payment in federal funds
or other immediately available funds by 4:00 p.m. (Eastern
time) that day. If payment is not received by that time,
your order will be cancelled. If you properly place a
purchase order that is delivered to the Fund after 12:00
noon (Eastern time) with respect to the Treasury Money
Market Portfolio and Tax-Exempt Money Market Portfolio or
after 3:00 p.m. (Eastern time) with respect to the Money
Market Portfolio, the order will be placed the following
business day.
BUSINESS DAYS DEFINED
A business day is any day
that both the New York Stock
Exchange and the Federal
Reserve Bank of St. Louis
are open for business.
Currently, the Fund observes
the following holidays: New
Year's Day, Martin Luther
King Jr. Day, Presidents'
Day, Good Friday, Memorial
Day (observed), Independence
Day (observed), Labor Day,
Columbus Day, Veterans' Day,
Thanksgiving and Christmas.
</TABLE>
17
<PAGE> 208
YOUR ACCOUNT HOW TO BUY SHARES
<TABLE>
<CAPTION>
TO OPEN TO ADD TO
MINIMUM INVESTMENTS YOUR ACCOUNT YOUR ACCOUNT
<S> <C> <C>
Regular accounts $1,000 $100
-----------------------------------------------------------
Sweep program
through your
financial institution None None
-----------------------------------------------------------
Wrap fee program
through your
financial institution None None
-----------------------------------------------------------
Payroll Deduction
Program* None $25
-----------------------------------------------------------
Automatic Exchange $1,000 minimum
Program* $5,000 account balance
-----------------------------------------------------------
Automatic
Investment Program* $50 $50
</TABLE>
* See Investor Programs below.
Investing in the Mercantile Money
Market Portfolios is quick and
convenient. You can purchase
Investor A Shares in any of the
following ways:
- THROUGH A BROKER-DEALER
ORGANIZATION. You can
purchase shares through any
broker-dealer organization
that has a sales agreement
with the Fund's distributor.
The broker-dealer
organization is responsible
for sending your purchase
order to the Fund.
- THROUGH A FINANCIAL
ORGANIZATION. You can
purchase shares through any
financial organization that
has entered into a servicing
agreement with the Fund. The
financial organization is
responsible for sending your
purchase order to the Fund.
- DIRECTLY FROM THE FUND BY MAIL. Just complete an account application and
send it, along with a check for at least the minimum purchase amount, to:
Mercantile Mutual Funds, Inc., P.O. Box 78069 -- Tram 001/128/41-6, St.
Louis, Missouri 63178. To make additional investments once you've opened
your account, send your check to the address above together with the
detachable form that's included with your Fund statement or confirmation
of a prior transaction or a letter stating the amount of your investment,
the name of the Portfolio you want to invest in and your account number.
Investor B Shares of the Money Market Portfolio are available for purchase only
by those investors participating in the Mercantile Asset Adviser Program.
Otherwise, Investor B Shares of the Money Market Portfolio are available only
to holders of Investor B Shares of another of the Fund's portfolios who wish
to exchange such shares for Investor B Shares of the Money Market Portfolio.
For further information on the Mercantile Asset Adviser Program, contact your
broker-dealer or other financial organization or call the Fund at
1-800-452-2724. See "Investor Programs" below for more information on the
Fund's exchange privilege.
In addition, you may call the Fund at 1-800-452-2724 for more information on how
to buy shares.
18
<PAGE> 209
YOUR ACCOUNT HOW TO SELL SHARES
SELLING RECENTLY
PURCHASED SHARES
If you attempt to
sell shares you
recently purchased
with a personal
check, the Fund may
delay processing
your request until
it collects payment
for those shares.
This process may
take up to 15 days,
so if you plan to
sell shares shortly
after purchasing
them, you may want
to consider
purchasing shares
with a certified or
bank check or via
electronic transfer
to avoid delays.
<TABLE>
<S> <C>
You can arrange to get money out of your account by selling
some or all of your shares. This is known as "redeeming"
your shares. You can redeem your shares in the following
ways:
- THROUGH A BROKER-DEALER OR OTHER FINANCIAL
ORGANIZATION. If you purchased your shares through a
broker-dealer or other financial organization, your
redemption order should be placed through the same
organization. The organization is responsible for sending
your redemption order to the Fund on a timely basis.
- BY MAIL. Send your written redemption request to:
Mercantile Mutual Funds, Inc., P.O. Box 78069 -- Tram
001/128/41-6, St. Louis, Missouri 63178. Your request must
include the name of the Portfolio, the number of shares or
the dollar amount you want to sell, your account number,
your social security or tax identification number and the
signature of each registered owner of the account. Your
request also must be accompanied by any share certificates
that are properly endorsed for transfer. Additional
documents may be required for certain types of
shareholders, such as corporations, partnerships,
executors, trustees, administrators or guardians.
The Fund's transfer agent may require a signature guarantee
unless the redemption proceeds are payable to the
shareholder of record and the redemption is either mailed
to the shareholder's address of record or electronically
transferred to the account designated on the original
account application. A signature guarantee helps prevent
fraud, and you may obtain one from most banks and
broker-dealers. Contact your broker-dealer or other
financial organization or the Fund for more information on
signature guarantees.
- BY TELEPHONE. You may redeem your shares by telephone if
you have selected that option on your account application.
Call the Fund at 1-800-452-2724 with your request. You may
have your proceeds mailed to your address or transferred
electronically to the bank account designated on your
account application. If you have not previously selected
the telephone privilege, you may add this feature by
providing written instructions to the Fund's transfer
agent. If you have difficulty getting through to the Fund
because of unusual market conditions, consider selling
your shares by mail.
</TABLE>
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<PAGE> 210
YOUR ACCOUNT HOW TO SELL SHARES
You may sell your Portfolio shares at any time. Your shares will be sold at
the NAV next determined after the Fund accepts your order (see page 19). The
proceeds of the sale of Investor B Shares of the Money Market Portfolio will
be reduced by the applicable CDSC. If your order to sell is received and
accepted by the Fund before 12:00 noon (Eastern time) on a business day with
respect to the Treasury Money Market Portfolio and Tax-Exempt Money Market
Portfolio or before 3:00 p.m. (Eastern time) on a business day with respect
to the Money Market Portfolio, your proceeds normally will be sent
electronically the same day or mailed by check the next business day. If your
order to sell is received and accepted by the Fund after 12:00 noon (Eastern
time) on a business day with respect to the Treasury Money Market Portfolio
and Tax-Exempt Money Market Portfolio or after 3:00 p.m. (Eastern time) on a
business day with respect to the Money Market Portfolio, or on a non-business
day, your proceeds will normally be sent electronically the next business day
(or mailed by check the second business day thereafter). If your account
holds both Investor A Shares and Investor B Shares, be sure to specify which
shares you are selling. Otherwise, Investor A Shares will be sold first.
20
<PAGE> 211
YOUR ACCOUNT INVESTOR PROGRAMS
It's also easy to buy or sell shares of the Portfolios by using one of the
programs described below.
AUTOMATIC INVESTMENT PROGRAM
You may open an account or make additional investments to an existing account
for as little as $50 a month with the Fund's Automatic Investment Program
(AIP). Under the AIP, you specify the dollar amount to be automatically
withdrawn each month from your bank checking account and invested in your
Portfolio account. Purchases of Investor A Shares or Investor B Shares will
occur on the 5th or 20th day (or the next business day after the 5th or 20th)
of each month at the net asset value next determined on the day the order is
effected. To take advantage of the AIP, complete the AIP authorization form
included with your account application or contact your broker-dealer or other
financial organization.
EXCHANGES
The exchange privilege enables you to exchange Investor A Shares of one
Portfolio for Investor A Shares (or in certain limited circumstances, Trust
or Institutional Shares) of another Portfolio and to exchange Investor B
Shares of the Money Market Portfolio for Investor B Shares of another
Portfolio. Just sign up for the exchange privilege on your account
application and contact your broker-dealer or other financial organization
when you want to exchange shares. You also may exchange shares by telephoning
the Fund directly (call 1-800-452-2724) if you have elected this privilege on
your account application. The exchange privilege may be exercised only in
those states where the class of shares of the Portfolio being acquired may be
legally sold.
Unless you qualify for a waiver, you will have to pay a sales charge when you
exchange Investor A Shares of a Portfolio for Investor A Shares of another
Portfolio that imposes a sales charge on purchases.
You may exchange Investor B Shares of the Money Market Portfolio without
paying a CDSC on the exchange. The holding period of the shares originally
held and redeemed will be added to the holding period of the new shares
acquired through the exchange.
AUTOMATIC EXCHANGE PROGRAM
This program lets you automatically exchange shares of one Portfolio for
shares of another Portfolio on a regular basis, as long as the shares are of
the same class.
To participate, you must make a minimum initial purchase of $5,000 and
maintain a minimum account balance of $1,000. In addition, you must complete
the authorization form included with your account application or available
from your broker-dealer or other financial organization. In order to change
instructions with respect to the Automatic Exchange Program or to discontinue
the program, you must send written instructions to your broker-dealer or
other financial organization or to the Fund.
21
<PAGE> 212
YOUR ACCOUNT INVESTOR PROGRAMS
AUTOMATIC WITHDRAWAL PLAN
If the net asset value of your account equals $10,000 or more, you may take
advantage of the Fund's Automatic Withdrawal Plan (AWP). With the AWP, you
can have monthly, quarterly, semi-annual or annual redemptions of at least
$50 from your Portfolio account sent to you via check or to your bank account
electronically on the 5th or 20th day of the applicable month of withdrawal.
No CDSC will be charged on withdrawals of Investor B Shares of the Money
Market Portfolio made through the AWP that don't annually exceed 12% of your
account's value.
To participate in the AWP, complete the AWP application included with your
account application or contact your broker-dealer or other financial
organization. A signature guarantee will be required. You may terminate your
participation in the AWP upon 30 days' notice to your broker-dealer or other
financial organization or to the Fund.
CHECKWRITING PRIVILEGE
You can sign up for the Fund's checkwriting privilege by completing the
signature card that accompanies the account application or by calling your
broker-dealer or other financial organization to obtain a signature card. You
may write up to six checks per month in an amount per check of $250 or more.
The Fund may charge a fee for use of the checkwriting privilege. Please note
that you can't write a check to close your account.
PAYROLL DEDUCTION PROGRAM
You can make regular investments from your paycheck. The minimum investment
is $25 per pay period. Call the Fund at 1-800-452-2724 for an application and
further information. The Fund may terminate the program at any time.
22
<PAGE> 213
YOUR ACCOUNT GENERAL TRANSACTION POLICIES
The Fund reserves the right to:
- Vary or waive any minimum investment requirement.
- Refuse any order to buy shares.
- Reject any exchange request.
- Change or cancel the procedures for selling or exchanging shares by
telephone at any time.
- Redeem all shares in your account if your balance falls below $500. If,
within 60 days of the Fund's written request, you have not increased your
account balance, you may be required to redeem your shares. The Fund will
not require you to redeem shares if the value of your account drops below
$500 due to fluctuations in net asset value.
- Send redemption proceeds within seven days after receiving a request, if
an earlier payment could adversely affect a Portfolio.
- Modify or terminate the Automatic Exchange, Automatic Investment and
Automatic Withdrawal programs at any time.
- Modify or terminate the exchange privilege after 60 days' written notice
to shareholders.
- Modify or terminate the checkwriting privilege after 30 days' written
notice to shareholders.
- Make a "redemption in kind." Under abnormal conditions that may make
payment in cash unwise, the Fund may offer partial or complete payment in
portfolio securities rather than cash at such securities'
then-market-value equal to the redemption price. In such cases, you may
incur brokerage costs in converting these securities to cash.
If you elect telephone privileges on the account application or in a letter
to the Fund, you may be responsible for any fraudulent telephone orders as
long as the Fund has taken reasonable precautions to verify your identity.
Also, your broker-dealer or other financial organization may establish
policies that differ from those of the Funds. For example, the organization
may charge transaction fees, set higher minimum investments, or impose
certain limitations on purchasing or redeeming shares in addition to those
identified in this prospectus. Contact your broker-dealer or other financial
organization for details.
23
<PAGE> 214
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DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Each Portfolio declares dividends from net investment income daily and pays
them monthly. Although the Portfolios do not expect to realize net long-term
capital gains, any capital gains realized will be distributed at least
annually.
Dividends on each share class of the Portfolios are determined in the same
manner and are paid in the same amount. However, each share class bears all
expenses associated with that particular class. So, because Investor B Shares
have higher distribution and service fees than Investor A Shares, the
dividends paid to Investor B shareholders will be lower than those paid to
Investor A shareholders.
All of your dividends and capital gains distributions, with respect to a
particular Portfolio will be reinvested in additional shares of the same
class unless you instruct otherwise on your account application or have
redeemed all shares you held in the Portfolio. In such cases, dividends and
distributions will be paid in cash.
24
<PAGE> 215
DISTRIBUTIONS AND TAXES
<TABLE>
<S> <C>
TAXATION
As with any investment, you should consider the tax
implications of an investment in the Portfolios. The
following is only a brief summary of some of the important
tax considerations generally affecting the Portfolios and
their shareholders under current law, which may be subject
to change in the future. Consult your tax adviser with
specific reference to your own tax situation.
- TREASURY MONEY MARKET AND MONEY MARKET PORTFOLIOS
Dividends you receive from these Portfolios, whether paid
in cash or reinvested in additional shares, are generally
considered taxable. Dividends from these Portfolios'
long-term capital gains are taxable as capital gains.
Dividends from other sources are generally taxable as
ordinary income. It is anticipated that substantially all
of the dividends from the Portfolios will be taxable as
ordinary income and not capital gains.
- TAX-EXEMPT MONEY MARKET PORTFOLIO
The Portfolio intends to meet certain federal tax
requirements so that distributions of the tax-exempt
interest it earns may be treated as "exempt-interest
dividends." However, any portion of exempt-interest
dividends attributable to interest on private activity
bonds may increase certain shareholders' alternative
minimum tax. Dividends from the Portfolio's short-term and
long-term capital gains are taxable.
- STATE AND LOCAL TAXES
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 which, if realized directly, would be exempt
from such taxes.
The Treasury Money Market Portfolio is designed to provide
shareholders, to the extent permitted by federal law, with
income that is exempt or excluded from taxation at the
state or local level. Please consult with a tax adviser as
to the status of distributions by the Portfolio in your
state.
For more information regarding the taxation of the
Portfolios, consult the SAI under the heading "Additional
Information Concerning Taxes." You also should consult your
tax adviser for information regarding state and local tax
consequences with respect to your specific situation.
You will be advised at least
annually regarding the
federal income tax treatment
of dividends and
distributions made to you.
You should save your account
statements because they
contain information you will
need to calculate your
capital gains or losses upon
your ultimate sale or
exchange of shares in the
Portfolios.
</TABLE>
25
<PAGE> 216
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MANAGEMENT OF THE FUND
THE ADVISER
MVA, subject to the general supervision of the Fund's Board of Directors, is
responsible for the day-to-day management of the Portfolios in accordance
with each Portfolio's respective investment objective and policies. This
includes making investment decisions, buying and selling securities and
overseeing the administration and recordkeeping for each Portfolio.
In exchange for these services, MVA receives an investment advisory fee,
which is calculated daily and paid monthly, according to the average daily
net assets of each Portfolio. For the fiscal year ended November 30, 1998,
the Portfolios paid MVA advisory fees as follows:
<TABLE>
<CAPTION>
INVESTMENT ADVISORY FEES
PORTFOLIO AS A % OF NET ASSETS
<S> <C>
------------------------------
Treasury Money Market Portfolio .35%
------------------------------
Money Market Portfolio .35%
------------------------------
Tax-Exempt Money Market Portfolio .35%
---------------------------------------------------------------------
</TABLE>
26
<PAGE> 217
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FINANCIAL HIGHLIGHTS
INTRODUCTION
The financial highlights tables presented below are intended to help you
understand the financial performance of each Portfolio's Investor A Shares
and/or Investor B Shares for the past five years (or, if shorter, the period
since the Portfolio began operations or the particular shares were first
offered). Certain information reflects financial results for a single
Investor A Share or Investor B Share in each Portfolio. The total returns in
the tables represent the rate that an investor would have earned (or lost) on
an investment in either Investor A Shares or Investor B Shares, assuming
reinvestment of all dividends and distributions. This information has been
audited by KPMG LLP, independent auditors, whose report, along with the
Portfolios' financial statements, are included in the Fund's Annual Report to
Shareholders, and are incorporated by reference into the SAI.
27
<PAGE> 218
FINANCIAL HIGHLIGHTS TREASURY MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
YEAR ENDED NOVEMBER 30,
1998 1997 1996 1995 1994(a)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
----------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.043 0.044 0.044 0.048 0.031
----------------------------------------------------------------------------------------
Total from Investment Activities 0.043 0.044 0.044 0.048 0.031
----------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.043) (0.044) (0.044) (0.048) (0.031)
----------------------------------------------------------------------------------------
Total Distributions (0.043) (0.044) (0.044) (0.048) (0.031)
----------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
----------------------------------------------------------------------------------------
Total Return 4.40% 4.53% 4.46% 4.93% 3.16%
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000) $25,665 $8,409 $7,667 $2,776 $1,713
Ratio of expenses to average net
assets 0.81% 0.77% 0.81% 0.78% 0.71%
Ratio of net investment income to
average net assets 4.22% 4.43% 4.35% 4.84% 3.14%
Ratio of expenses to average net
assets* 0.96% 0.92% 0.96% 0.93% 0.94%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
(a) On September 27, 1994, the Portfolio redesignated Investor Shares as
"Investor A" Shares.
28
<PAGE> 219
FINANCIAL HIGHLIGHTS MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
YEAR ENDED NOVEMBER 30,
-------------------------------------------------
1998 1997 1996 1995
INVESTOR A INVESTOR A INVESTOR A INVESTOR A
SHARES SHARES SHARES SHARES
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.048 0.048 0.047 0.052
-------------------------------------------------------------------------------------
Total from Investment
Activities 0.048 0.048 0.047 0.052
-------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.048) (0.048) (0.047) (0.052)
-------------------------------------------------------------------------------------
Total Distributions (0.048) (0.048) (0.047) (0.052)
-------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------------------------------------------------------------------------------------
Total Return 4.95% 4.93% 4.81% 5.33%
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period
(000) $203,583 $164,777 $91,166 $64,865
Ratio of expenses to average net
assets 0.78% 0.77% 0.78% 0.77%
Ratio of net investment income
to average net assets 4.83% 4.84% 4.70% 5.20%
Ratio of expenses to average net
assets* 0.93% 0.92% 0.93% 0.92%
<CAPTION>
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
YEAR ENDED NOVEMBER 30,
------------------------------------ JAN. 26, 1996
1994(a) 1998 1997 to Nov. 30, 1996(c)
INVESTOR A INVESTOR B INVESTOR B INVESTOR B
SHARES SHARES SHARES SHARES
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.033 0.041 0.041 0.033
-------------------------------------------------------------------------------------
Total from Investment
Activities 0.033 0.041 0.041 0.033
-------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.033) (0.041) (0.041) (0.033)
-------------------------------------------------------------------------------------
Total Distributions (0.033) (0.041) (0.041) (0.033)
-------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------------------------------------------------------------------------------------
Total Return 3.37% 4.17% 4.15% 3.35%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period
(000) $48,384 $ 84 $ 73 $ 41
Ratio of expenses to average net
assets 0.78% 1.53% 1.52% 1.47%(d)
Ratio of net investment income
to average net assets 3.35% 4.09% 4.10% 3.73%(d)
Ratio of expenses to average net
assets* 0.93% 1.68% 1.67% 1.68%(d)
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been
indicated.
(a) On September 27, 1994, the Portfolio redesignated Investor Shares as
"Investor A" Shares.
(b) Not annualized.
(c) Period from commencement of operations.
(d) Annualized.
29
<PAGE> 220
FINANCIAL HIGHLIGHTS TAX-EXEMPT MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
YEARS ENDED
YEAR ENDED NOVEMBER 30, SIX MONTHS ENDED MAY 31,
--------------------------- NOVEMBER 30, -----------------
1998 1997 1996 1995(b) 1995(a) 1994
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net Investment income 0.027 0.028 0.028 0.014 0.027 0.017
---------------------------------------------------------------------------------------------------------
Total from Investment Activities 0.027 0.028 0.028 0.014 0.027 0.017
---------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.027) (0.028) (0.028) (0.014) (0.027) (0.017)
---------------------------------------------------------------------------------------------------------
Total Distributions (0.027) (0.028) (0.028) (0.014) (0.027) (0.017)
---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------------------------------------------------------------------------------------------------------
Total Return 2.72% 2.88% 2.83% 1.45%(c) 2.70% 1.73%
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period (000) $13,980 $15,789 $17,984 $ 5,403 $ 5,138 $ 8,631
Ratio of expenses to average net
assets 0.79% 0.77% 0.75% 0.94%(d) 0.84% 0.76%
Ratio of net investment income to
average net assets 2.68% 2.82% 2.78% 2.87%(d) 2.63% 1.72%
Ratio of expenses to average net
assets* 0.84% 0.82% 0.80% 0.99%(d) 0.93% 0.86%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
(a) On September 27, 1994, the Portfolio redesignated Investor Shares as
"Investor A" Shares.
(b) Upon reorganizing as a portfolio of the Fund on October 2, 1995, the
Tax-Exempt Money Market Portfolio changed its fiscal year end from May 31
to November 30.
(c) Not annualized.
(d) Annualized.
30
<PAGE> 221
[This Page Intentionally Left Blank]
<PAGE> 222
[Back Cover Page]
Where to find more information
You'll find more information about the Mercantile Money Market Portfolios in the
following documents:
Annual and semi-annual reports
The Fund's annual and semi-annual reports contain more information about each
Portfolio and a discussion about the market conditions and investment strategies
that had a significant effect on each Portfolio's performance during the last
fiscal year.
Statement of Additional Information (SAI)
The SAI contains detailed information about the Portfolios and their policies.
By law, it's incorporated by reference into (considered to be part of) this
prospectus.
You can get a free copy of these documents, request other information about the
Portfolios and make shareholder inquiries by calling the Fund at 1-800-452-2724
or by writing to:
Mercantile Mutual Funds, Inc.
P.O. Box 78069
St. Louis, Missouri 63175
If you buy your shares through a broker-dealer or other financial institution,
you may contact your institution for more information.
You can write to the Securities and Exchange Commission (SEC) Public Reference
Section and ask them to mail you information about the Portfolios, including the
SAI. They'll charge you a fee for this service. You can also visit the SEC
Public Reference Room and copy the documents while you're there. For information
about the operation of the Public Reference Room, call the SEC.
Public Reference Section of the SEC
Washington, DC 20549-6009
1-800-SEC-0330
Reports and other information about the Mercantile Money Market Portfolios are
also available on the SEC's website at http://www.sec.gov.
The Fund's Investment Company Act File No. is 811-3567
-28-
<PAGE> 223
MERCANTILE MUTUAL FUNDS, INC.
PROSPECTUS
MARCH 31, 1999
TAXABLE BOND PORTFOLIOS
U.S. Government Securities Portfolio
Intermediate Corporate Bond Portfolio
Bond Index Portfolio
Government & Corporate Bond Portfolio
Investor A Shares and Investor B Shares
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved any shares of these Portfolios or determined if this
prospectus is truthful or complete. Anyone who tells you otherwise is committing
a criminal offense.
<PAGE> 224
CONTENTS
<TABLE>
<S> <C> <C> <C>
RISK/RETURN SUMMARY
LOGO
LOGO
3 Overview
4 U.S. Government Securities Portfolio
8 Intermediate Corporate Bond Portfolio
13 Bond Index Portfolio
17 Government & Corporate Bond Portfolio
22 Additional Information on Risk
YOUR ACCOUNT
LOGO
LOGO
23 Distribution Arrangements/Sales Charges
28 Explanation of Sales Price
29 How to Buy Shares
30 How to Sell Shares
31 Investor Programs
33 General Transaction Policies
DISTRIBUTIONS AND TAXES
LOGO
LOGO
34 Dividends and Distributions
35 Taxation
MANAGEMENT OF THE FUND
LOGO
LOGO
36 The Adviser
FINANCIAL HIGHLIGHTS
LOGO
LOGO
37 Introduction
38 U.S. Government Securities Portfolio
40 Intermediate Corporate Bond Portfolio
41 Bond Index Portfolio
42 Government & Corporate Bond Portfolio
</TABLE>
2
<PAGE> 225
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RISK/RETURN SUMMARY OVERVIEW
<TABLE>
<S> <C>
This prospectus describes the Mercantile Taxable Bond
Portfolios, four investment portfolios offered by Mercantile
Mutual Funds, Inc. (the "Fund"). The Fund was formerly known
as The ARCH Fund(R), Inc. On the following pages, you will
find important information about each Portfolio, including:
- A description of the Portfolio's investment objective
(sometimes referred to as its goal);
- The Portfolio's principal investment strategies (the steps
it takes to try to meet its goal);
- The principal risks associated with the Portfolio (factors
that may prevent it from meeting its goal);
- The Portfolio's past performance (how successful it's been
in meeting its goal); and
- The fees and expenses (including sales charges) you pay as
an investor in the Portfolio.
WHO MAY WANT TO INVEST IN The Mercantile Taxable Bond Portfolios may be appropriate
THE MERCANTILE TAXABLE BOND for investors who seek current income from their investments
PORTFOLIOS? greater than that normally available from a money market
fund and can accept fluctuations in price and yield. The
Portfolios may NOT be appropriate for investors who are
investing for long-term capital appreciation.
Before investing in a Portfolio, you should carefully
consider:
- Your own investment goals
- The amount of time you are willing to leave your money
invested
- How much risk you are willing to take.
THE INVESTMENT ADVISER Mississippi Valley Advisors Inc. ("MVA" or the "Adviser")
serves as the investment adviser to each Portfolio. Founded
in 1987, MVA is a subsidiary of Mercantile Bancorporation
Inc., a regional banking and financial services
organization, and has its main office at One Mercantile
Center, Seventh and Washington Streets, St. Louis, Missouri
63101. As of December 31, 1998, MVA had approximately $9.9
billion in assets under management, including the Fund's
assets, which were approximately $4.3 billion.
AN INVESTMENT IN THE PORTFOLIOS IS NOT A MERCANTILE BANK
DEPOSIT AND IS NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY. YOU COULD LOSE MONEY BY INVESTING IN THE PORTFOLIOS.
</TABLE>
3
<PAGE> 226
Risk/Return Summary
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U.S. GOVERNMENT
SECURITIES PORTFOLIO
RISK/RETURN SUMMARY
REPURCHASE AGREEMENTS
are transactions in
which a Portfolio buys
securities from a
seller (usually a bank
or broker-dealer) who
agrees to buy them
back from the
Portfolio on a certain
date and at a certain
price.
MORTGAGE-BACKED
SECURITIES are
certificates
representing ownership
interests in a pool of
mortgage loans, and
include those issued
by the Government
National Mortgage
Association ("Ginnie
Maes"), the Federal
National Mortgage
Association ("Fannie
Maes") and the Federal
Home Loan Mortgage
Corporation ("Freddie
Macs").
PORTFOLIO MANAGER
David A. Bethke is the
person primarily
responsible for the
day-to- day management
of the Portfolio. Mr.
Bethke, Senior
Associate, joined MVA
in 1987 and has eight
years of prior
investment experience.
He has managed the
Portfolio since it
commenced operations
in 1988.
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to seek a high rate
of current income that is consistent with relative stability
of principal.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio normally invests at least 65% of its total
assets in debt obligations issued or guaranteed by the U.S.
Government and its agencies, including U.S. Treasury bonds,
notes and bills, as well as in repurchase agreements backed
by such obligations. The Portfolio also invests in
mortgage-backed securities issued by U.S. Government-
sponsored entities such as Ginnie Maes, Fannie Maes and
Freddie Macs. The remaining maturity (I.E., length of time
until an obligation must be repaid) of the obligations held
by the Portfolio will vary from 1 to 30 years.
PRINCIPAL RISK CONSIDERATIONS
The prices of debt securities tend to move in the opposite
direction to interest rates. When rates are rising, the
prices of debt securities tend to fall. When rates are
falling, the prices of debt securities tend to rise.
Generally, the longer the time until maturity, the more
sensitive the price of a debt security is to interest rate
changes. Changes in interest rates may also cause certain
debt securities held by the Portfolio, including
mortgage-backed securities, to be paid off much sooner or
later than expected. In the event that a security is paid
off sooner than expected because of a decline in interest
rates, the Portfolio may be unable to recoup all of its
initial investment and may also suffer from having to
reinvest in lower-yielding securities. In the event of a
later than expected payment because of a rise in interest
rates, the value of the obligation will decrease, and the
Portfolio may suffer from the inability to invest in
higher-yielding securities.
The value of debt securities also depends on the ability of
issuers to make principal and interest payments. If an
issuer can't meet its payment obligations, the value of its
debt securities will fall. Securities issued or guaranteed
by the U.S. Government and its agencies have historically
involved little risk of loss of principal if held to
maturity. Certain U.S. Government securities, such as Ginnie
Maes, are supported by the full faith and credit of the U.S.
Treasury. Others, such as Freddie Macs, are supported by the
right of the issuer to borrow from the U.S. Treasury. Other
securities, such as Fannie Maes, are supported by the
discretionary authority of the U.S. Government to purchase
certain obligations of the issuer, and still others are
supported by the issuer's own credit.
Repurchase agreements carry the risk that the other party
may not fulfill its obligations under the agreement.
The Adviser evaluates the rewards and risks presented by all
securities purchased by the Portfolio and how they may
advance the Portfolio's investment objective. It is
possible, however, that these evaluations will prove to be
inaccurate.
</TABLE>
4
<PAGE> 227
U.S. GOVERNMENT
SECURITIES PORTFOLIO
RISK/RETURN SUMMARY
RETURN HISTORY
The bar chart and table on
this page show the
Portfolio's annual returns
and long-term performance,
thereby giving some
indication of the risk of
investing in the Portfolio.
The bar chart shows how the
performance of the
Portfolio's Investor A
Shares has varied from year
to year. The table shows
how the Portfolio's average
annual returns for one
year, five years, ten years
and since inception compare
to those of a broad-based
market index. Both the bar
chart and table assume
reinvestment of all
dividends and
distributions. The
Portfolio's past
performance does not
necessarily indicate how it
will perform in the future.
KNOW YOUR INDEX THE
LEHMAN BROTHERS
INTERMEDIATE GOVERNMENT
BOND INDEX is an
unmanaged index which
tracks the performance of
intermediate-term U.S.
Government bonds.
INVESTOR A SHARES
YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
[STATED AS PERCENTAGES]
<TABLE>
<S> <C>
'1989' 9.97
'90' 11.04
'91' 13.98
'92' 5.48
'93' 8.77
'94' -2.74
'95' 14.95
'96' 3.02
'97' 6.37
'98' 6.43
</TABLE>
The returns for Investor B Shares differed
from the returns shown in the bar chart
because the two classes bear different
expenses. The bar chart does not reflect
any sales charges on purchases of the
Portfolio's Investor A Shares. If sales
charges were included, returns would be
lower than those shown.
Best quarter: 5.40% for the quarter
ending
September 30, 1991
Worst quarter: -2.60% for the
quarter ending
March 31, 1994
AVERAGE ANNUAL TOTAL
RETURNS
for the periods ended
December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS 10 YEARS INCEPTION*
<S> <C> <C> <C> <C>
Investor A Shares
(with 2.50% sales charge) 3.80% 4.92% 7.34% 7.26%
Investor B Shares**
(with applicable contingent deferred sales
charge) 0.79% 4.52% 7.22% 7.15%
Lehman Brothers Intermediate Government Bond
Index 8.49% 6.45% 8.34% 8.25%
</TABLE>
* June 2, 1988 for Investor A Shares; May 31, 1988 for the Lehman Brothers
Intermediate Government Bond Index.
** Investor B Shares of the Portfolio commenced operations on March 1, 1995.
Average annual total returns for prior periods reflect the performance of
the Portfolio's Investor A Shares which has been restated to reflect the
applicable contingent deferred sales charges payable on redemptions of
Investor B Shares within six years of the date of purchase. Investor B
Shares are subject to distribution and service fees at a maximum annual
rate of 1.00% of the Portfolio's Investor B Share assets. Had the
performance of Investor A Shares been restated to reflect these
distribution and service fees, average annual total returns would have
been lower.
5
<PAGE> 228
U.S. GOVERNMENT
SECURITIES PORTFOLIO
RISK/RETURN SUMMARY
FEES AND EXPENSES
<TABLE>
<S> <C> <C> <C>
SHAREHOLDER FEES INVESTOR A INVESTOR B
(FEES YOU PAY DIRECTLY) SHARES SHARES
The table on this page shows the
fees and expenses that you pay
if you buy and hold Investor A Shares
or Investor B Shares of the
U.S. Government Securities Portfolio.
Maximum sales charge (load) to
buy shares, shown as a % of the
offering price 2.50%(1) None
Maximum deferred sales charge
(load) shown as a % of the
offering price or sale price,
whichever is less None 5.00%(2)
ANNUAL PORTFOLIO OPERATING
EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM INVESTOR A INVESTOR B
THE PORTFOLIO'S ASSETS) SHARES SHARES
Management Fees .45% .45%
Distribution (12b-1) and Service
Fees .30% 1.00%
Other Expenses .32%(3) .32%(3)
Total Annual Portfolio Operating
Expenses 1.07%(3) 1.77%(3)
</TABLE>
(1) Reduced sales charges may be available.
See "Distribution Arrangements/Sales
Charges" below.
(2) This amount applies if you sell your
shares in the first year after purchase
and gradually declines until it is
eliminated after six years. After eight
years, your Investor B Shares will
automatically convert to Investor A
Shares. See "Distribution Arrangements/
Sales Charges" below.
(3) Other Expenses and Total Annual
Portfolio Operating Expenses for the
Portfolio's Investor A Shares and
Investor B Shares for the current
fiscal year are expected to be less
than the amounts shown above because
certain of the Portfolio's service
providers are voluntarily waiving a
portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers
and/or reimbursements are being made in
order to keep the annual fees and
expenses for the Portfolio's Investor A
Shares and Investor B Shares at certain
levels. OTHER EXPENSES AND TOTAL ANNUAL
PORTFOLIO OPERATING EXPENSES, AFTER
TAKING THESE FEE WAIVERS AND EXPENSE
REIMBURSEMENTS INTO ACCOUNT, ARE
EXPECTED TO BE .22% AND .97%,
RESPECTIVELY, FOR INVESTOR A SHARES AND
.22% AND 1.67%, RESPECTIVELY, FOR
INVESTOR B SHARES. These fee waivers
and expense reimbursements may be
revised or cancelled at any time.
6
<PAGE> 229
U.S. GOVERNMENT
SECURITIES PORTFOLIO
RISK/RETURN SUMMARY
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then sell
all of your shares at the
end of those periods. The
example also assumes that
your investment has a 5%
return each year, the
Portfolio's operating
expenses remain the same and
your Investor B Shares
automatically convert to
Investor A Shares after
eight years. Although your
actual costs may be higher
or lower, based on these
assumptions your costs would
be:
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
INVESTOR A SHARES $356 $582 $ 825 $1,523
INVESTOR B SHARES $680 $857 $1,159 $1,899
If you hold Investor B
Shares, you would pay the
following expenses if you
did not sell your shares: $180 $ 557 $ 959 $1,899
</TABLE>
7
<PAGE> 230
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INTERMEDIATE CORPORATE
RISK/RETURN SUMMARY BOND PORTFOLIO
INVESTMENT GRADE DEBT
SECURITIES are those
of medium credit
quality or better as
determined by a
national rating
agency, such as
Standard & Poor's
Ratings Group (debt
securities rated in
the four highest
rating categories,
i.e. BBB or higher)
and Moody's Investors
Service, Inc. (debt
securities rated in
the four highest
rating categories,
i.e. Baa or higher).
The higher the credit
rating, the less
likely it is that the
issuer of the
securities will
default on its
principal and interest
payments.
AVERAGE WEIGHTED
MATURITY gives you the
average time until all
debt securities in a
Portfolio come due or
mature. It is
calculated by
averaging the time to
maturity of all debt
securities held by a
Portfolio with each
maturity "weighted"
according to the
percentage of assets
it represents.
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to seek as high a
level of current income as is consistent with preservation
of capital.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio normally invests at least 65% of its total
assets in corporate debt obligations. These include
obligations that are issued by U.S. and foreign business
corporations and obligations issued by agencies,
instrumentalities or authorities that are organized as
corporations by the U.S., by states or political
subdivisions of the U.S., or by foreign governments or
political subdivisions. The Portfolio also invests in
obligations issued or guaranteed by U.S. or foreign
governments, their agencies and instrumentalities and in
mortgage-backed securities, including Ginnie Maes, Fannie
Maes and Freddie Macs.
The Portfolio may only purchase investment grade debt
obligations. Under normal market conditions, however, the
Portfolio intends to invest at least 65% of its total assets
in debt obligations rated in one of the three highest rating
categories. Unrated debt obligations will be purchased only
if they are determined by the Adviser to be at least
comparable in quality at the time of purchase to eligible
rated securities. 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.
In making investment decisions, the Adviser will consider a
number of factors including current yield, maturity, yield
to maturity, anticipated changes in interest rates, and the
overall quality of the investment. The Portfolio's average
weighted maturity will generally be between three and ten
years.
</TABLE>
8
<PAGE> 231
INTERMEDIATE CORPORATE
BOND PORTFOLIO
RISK/RETURN SUMMARY
<TABLE>
<S> <C>
PRINCIPAL RISK CONSIDERATIONS
The prices of debt securities tend to move in the opposite
direction to interest rates. When rates are rising, the
prices of debt securities tend to fall. When rates are
falling, the prices of debt securities tend to rise.
Generally, the longer the time until maturity, the more
sensitive the price of a debt security is to interest rate
changes. Changes in interest rates also may cause certain
debt securities held by the Portfolio, including callable
securities and mortgage-backed securities, to be paid off
much sooner or later than expected. In the event that a
security is paid off sooner than expected because of a
decline in interest rates, the Portfolio may be unable to
recoup all of its initial investment and may also suffer
from having to reinvest in lower-yielding securities. In the
event of a later than expected payment because of a rise in
interest rates, the value of the obligation will decrease,
and the Portfolio may suffer from the inability to invest in
higher-yielding securities.
The value of debt securities also depends on the ability of
issuers to make principal and interest payments. If an
issuer can't meet its payment obligations or if its credit
rating is lowered, the value of its debt securities will
fall.
Foreign investments may be riskier than U.S. investments
because of currency exchange rate volatility, government
restrictions, different accounting standards and political
instability.
The Adviser evaluates the rewards and risks presented by all
securities purchased by the Portfolio and how they may
advance the Portfolio's investment objective. It is
possible, however, that these evaluations will prove to be
inaccurate.
</TABLE>
PORTFOLIO MANAGER
David A. Bethke is the
person primarily
responsible for the
day-to-day management
of the Portfolio. Mr.
Bethke, Senior
Associate, joined MVA
in 1987 and has eight
years of prior
investment experience.
He has managed the
Portfolio since it
commenced operations
in 1997.
9
<PAGE> 232
INTERMEDIATE CORPORATE
RISK/RETURN SUMMARY BOND PORTFOLIO
RETURN HISTORY
The bar chart and table on
this page show the
Portfolio's annual returns
and long-term performance,
thereby giving some
indication of the risk of
investing in the Portfolio.
The bar chart shows the
performance of the
Portfolio's Investor A
Shares during the last
calendar year. The table
shows how the Portfolio's
average annual returns for
one year and since
inception compare to those
of a broad-based market
index. Both the bar chart
and table assume
reinvestment of all
dividends and
distributions. The
Portfolio's past
performance does not
necessarily indicate how it
will perform in the future.
KNOW YOUR INDEX THE
LEHMAN BROTHERS
INTERMEDIATE CORPORATE
BOND INDEX is an
unmanaged index which
tracks the performance
of intermediate-term
U.S. corporate bonds.
INVESTOR A SHARES
YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
[STATED AS PERCENTAGES]
<TABLE>
<S> <C>
'1998' 8.79
</TABLE>
The bar chart does not reflect any sales
charges on purchases of the Portfolio's
Investor A Shares. If sales charges were
included, the return would be lower than
that shown.
Best quarter: 5.25% for the
quarter ending
September 30, 1998
Worst quarter: -0.11% for the
quarter ending
December 31, 1998
AVERAGE ANNUAL TOTAL
RETURNS
for the periods ended
December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION*
<S> <C> <C>
Investor A Shares
(with 4.75% sales charge) 3.63% 5.89%
Lehman Brothers Intermediate Corporate Bond Index 8.29% 8.67%
</TABLE>
* February 10, 1997 for Investor A Shares; January 31, 1997 for the Lehman
Brothers Intermediate Corporate Bond Index.
10
<PAGE> 233
INTERMEDIATE CORPORATE
BOND PORTFOLIO
RISK/RETURN SUMMARY
FEES AND EXPENSES
<TABLE>
<S> <C> <C>
SHAREHOLDER FEES
(FEES YOU PAY DIRECTLY) INVESTOR A SHARES
The table on this page shows the fees
and expenses that you pay if you buy
and hold Investor A Shares
of the Intermediate Corporate
Bond Portfolio.
Maximum sales charge (load) to buy shares,
shown as a % of the offering price 4.75%(1)
Maximum deferred sales charge (load) shown
as a % of the offering price or sale
price, whichever is less None
ANNUAL PORTFOLIO OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS) INVESTOR A SHARES
Management Fees .55%
Distribution (12b-1) and Service Fees .30%
Other Expenses .34%(2)
Total Annual Portfolio Operating Expenses 1.19%(2)
</TABLE>
(1) Reduced sales charges may be available.
See "Distribution Arrangements/Sales
Charges" below.
(2) Other Expenses and Total Annual
Portfolio Operating Expenses for the
Portfolio's Investor A Shares for the
current fiscal year are expected to be
less than the amounts shown above
because certain of the Portfolio's
service providers are voluntarily
waiving a portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers
and/or reimbursements are being made in
order to keep the annual fees and
expenses for the Portfolio's Investor A
Shares at a certain level. OTHER
EXPENSES AND TOTAL ANNUAL PORTFOLIO
OPERATING EXPENSES, AFTER TAKING THESE
FEE WAIVERS AND EXPENSE REIMBURSEMENTS
INTO ACCOUNT, ARE EXPECTED TO BE .24%
AND 1.09%, RESPECTIVELY, FOR INVESTOR A
SHARES. These fee waivers and expense
reimbursements may be revised or
cancelled at any time.
11
<PAGE> 234
INTERMEDIATE CORPORATE
RISK/RETURN SUMMARY BOND PORTFOLIO
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then sell
all of your shares at the
end of those periods. The
example also assumes that
your investment has a 5%
return each year and the
Portfolio's operating
expenses remain the same.
Although your actual costs
may be higher or lower,
based on these assumptions
your costs would be:
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
INVESTOR A SHARES $591 $835 $1,098 $1,850
</TABLE>
12
<PAGE> 235
logo
logo
BOND INDEX
RISK/RETURN SUMMARY PORTFOLIO
INDEXING is a strategy
whereby a Portfolio
attempts to weight its
securities to match
those of a
broadly-based
securities index in an
attempt to approximate
the index's
performance.
THE LEHMAN BROTHERS
AGGREGATE
BOND INDEX is an
unmanaged index made
up of Lehman Brothers'
Government/Corporate
Bond Index, its
Mortgage Backed
Securities Index and
its Asset Backed
Securities Index.
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to seek to provide
investment results that, before deduction of operating
expenses, approximate the price and yield performance of
U.S. Government, mortgage-backed, asset-backed and corporate
debt securities as represented by the Lehman Brothers
Aggregate Bond Index (the "Lehman Aggregate").
The Portfolio's investment objective can be changed by the
Fund's Board of Directors without shareholder approval.
Shareholders will be given at least 30 days' written notice
before any such change occurs.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio uses an "indexing" strategy through the use of
computer models to approximate the investment performance of
the Lehman Aggregate. The Adviser generally selects
securities for the Portfolio on the basis of their
weightings in the Lehman Aggregate and will only purchase a
security for the Portfolio that is included in the Lehman
Aggregate at the time of such purchase. Because of the large
number of securities listed in the Lehman Aggregate, the
Portfolio cannot invest in all of them. Instead, the
Portfolio holds a representative sample of approximately 100
of the securities in the Lehman Aggregate, selecting one or
two securities to represent an entire "class" or type of
security in the Lehman Aggregate. The Portfolio will invest
substantially all (but not less than 80%) of its total
assets in securities listed in the Lehman Aggregate.
PRINCIPAL RISK CONSIDERATIONS
The prices of debt securities tend to move in the opposite
direction to interest rates. When rates are rising, the
prices of debt securities tend to fall. When rates are
falling, the prices of debt securities tend to rise.
Generally, the longer the time until maturity, the more
sensitive the price of a debt security is to interest rate
changes. Changes in interest rates also may cause certain
debt securities held by the Portfolio, including callable
securities and mortgage-backed securities, to be paid off
much sooner or later than expected. In the event that a
security is paid off sooner than expected because of a
decline in interest rates, the Portfolio may be unable to
recoup all of its initial investment and may also suffer
from having to reinvest in lower-yielding securities. In the
event of a later than expected payment because of a rise in
interest rates, the value of the obligation will decrease,
and the Portfolio may suffer from the inability to invest in
higher-yielding securities.
The value of debt securities also depends on the ability of
issuers to make principal and interest payments. If an
issuer can't meet its payment obligations or if its credit
rating is lowered, the value of its debt securities will
fall.
There is the additional risk that the Portfolio will fail to
match the investment results of the Lehman Aggregate.
</TABLE>
13
<PAGE> 236
BOND INDEX
RISK/RETURN SUMMARY PORTFOLIO
RETURN HISTORY
The bar chart and table on
this page show the
Portfolio's annual returns
and long-term performance,
thereby giving some
indication of the risk of
investing in the Portfolio.
The bar chart shows the
performance of the
Portfolio's Investor A
Shares during the last
calendar year. The table
shows how the Portfolio's
average annual returns for
one year and since
inception compare to those
of the Lehman Aggregate.
Both the bar chart and
table assume reinvestment
of all dividends and
distributions. The
Portfolio's past
performance does not
necessarily indicate how it
will perform in the future.
INVESTOR A SHARES
YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
[STATED AS PERCENTAGES]
<TABLE>
<CAPTION>
<S> <C>
'1998' 8.6
</TABLE>
The bar chart does not reflect any sales
charges on purchases of the Portfolio's
Investor A Shares. If sales charges were
included, the return would be lower than
that shown.
Best quarter: 4.60% for the
quarter ending
September 30, 1998
Worst quarter: 0.05% for the
quarter ending
December 31, 1998
AVERAGE ANNUAL TOTAL
RETURNS
for the periods ended
December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION*
<S> <C> <C>
Investor A Shares
(with 4.75% sales charge) 3.42% 6.03%
Lehman Brothers Aggregate Bond Index 8.69% 9.67%
</TABLE>
* February 10, 1997 for Investor A Shares; January 31, 1997 for the Lehman
Brothers Aggregate Bond Index.
14
<PAGE> 237
BOND INDEX
RISK/RETURN SUMMARY PORTFOLIO
FEES AND EXPENSES
<TABLE>
<S> <C> <C>
SHAREHOLDER FEES
(FEES YOU PAY DIRECTLY) INVESTOR A SHARES
The table on this page shows
the fees and expenses that you pay
if you buy and hold Investor A
Shares of the Bond Index Portfolio.
Maximum sales charge (load) to buy shares,
shown as a % of the offering price 4.75%(1)
Maximum deferred sales charge (load) shown
as a % of the offering price or sale
price, whichever is less None
ANNUAL PORTFOLIO OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS) INVESTOR A SHARES
Management Fees .30%
Distribution (12b-1) and Service Fees .30%
Other Expenses .33%(2)
Total Annual Portfolio Operating Expenses .93%(2)
</TABLE>
(1) Reduced sales charges may be available.
See "Distribution Arrangements/Sales
Charges" below.
(2) Other Expenses and Total Annual
Portfolio Operating Expenses for the
Portfolio's Investor A Shares for the
current fiscal year are expected to be
less than the amounts shown above
because certain of the Portfolio's
service providers are voluntarily
waiving a portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers
and/or reimbursements are being made in
order to keep the annual fees and
expenses for the Portfolio's Investor A
Shares at a certain level. OTHER
EXPENSES AND TOTAL ANNUAL PORTFOLIO
OPERATING EXPENSES, AFTER TAKING THESE
FEE WAIVERS AND EXPENSE REIMBURSEMENTS
INTO ACCOUNT, ARE EXPECTED TO BE .22%
AND .82%, RESPECTIVELY, FOR INVESTOR A
SHARES. These fee waivers and expense
reimbursements may be revised or
cancelled at any time.
15
<PAGE> 238
BOND INDEX
RISK/RETURN SUMMARY PORTFOLIO
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then sell
all of your shares at the
end of those periods. The
example also assumes that
your investment has a 5%
return each year and the
Portfolio's operating
expenses remain the same.
Although your actual costs
may be higher or lower,
based on these assumptions
your costs would be:
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
INVESTOR A SHARES $565 $757 $965 $1,564
</TABLE>
16
<PAGE> 239
logo
logo
GOVERNMENT & CORPORATE
RISK/RETURN SUMMARY BOND PORTFOLIO
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to seek the highest
level of current income consistent with conservation of
capital.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio invests substantially all of its assets in a
broad range of debt obligations, including corporate
obligations and U.S. Government obligations. Corporate
obligations may include bonds, notes and debentures. U.S.
Government obligations may include U.S. Treasury obligations
and obligations of certain U.S. Government agencies. The
Portfolio also invests in mortgage-backed securities,
including Ginnie Maes, Fannie Maes and Freddie Macs.
Although the Portfolio invests primarily in the debt
obligations of U.S. issuers, it may from time to time invest
in U.S. dollar-denominated debt obligations of foreign
corporations and governments.
The Portfolio may only purchase investment grade debt
obligations, which are those rated in one of the four
highest rating categories by one or more national rating
agencies, such as Standard & Poor's Ratings Group or Moody's
Investors Service, Inc. Under normal market conditions,
however, the Portfolio intends to invest at least 65% of its
total assets in debt obligations rated in one of the three
highest rating categories. Unrated debt obligations will be
purchased only if they are determined by the Adviser to be
at least comparable in quality at the time of purchase to
eligible rated securities. 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.
In making investment decisions, the Adviser considers a
number of factors including credit quality, the price of the
security relative to that of other securities in its sector,
current yield, maturity, yield to maturity, anticipated
changes in interest rates and other economic factors,
liquidity and the overall quality of the investment. The
Portfolio's average weighted maturity will vary from time to
time depending on current market and economic conditions and
the Adviser's assessment of probable changes in interest
rates.
</TABLE>
17
<PAGE> 240
GOVERNMENT & CORPORATE
RISK/RETURN SUMMARY BOND PORTFOLIO
<TABLE>
<S> <C>
PRINCIPAL RISK CONSIDERATIONS
The prices of debt securities tend to move in the opposite
direction to interest rates. When rates are rising, the
prices of debt securities tend to fall. When rates are
falling, the prices of debt securities tend to rise.
Generally, the longer the time until maturity, the more
sensitive the price of a debt security is to interest rate
changes. Changes in interest rates also may cause certain
debt securities held by the Portfolio, including callable
securities and mortgage-backed securities, to be paid off
much sooner or later than expected. In the event that a
security is paid off sooner than expected because of a
decline in interest rates, the Portfolio may be unable to
recoup all of its initial investment and may also suffer
from having to reinvest in lower-yielding securities. In the
event of a later than expected payment because of a rise in
interest rates, the value of the obligation will decrease,
and the Portfolio may suffer from the inability to invest in
higher-yielding securities.
The value of debt securities also depends on the ability of
issuers to make principal and interest payments. If an
issuer can't meet its payment obligations or if its credit
rating is lowered, the value of its debt securities will
fall.
Foreign investments may be riskier than U.S. investments
because of currency exchange rate volatility, government
restrictions, different accounting standards and political
instability.
The Adviser evaluates the rewards and risks presented by all
securities purchased by the Portfolio and how they may
advance the Portfolio's investment objective. It is
possible, however, that these evaluations will prove to be
inaccurate.
</TABLE>
PORTFOLIO MANAGER
George J. Schupp is
the person primarily
responsible for the
day-to-day management
of the Portfolio. Mr.
Schupp, MVA's Director
of Fixed Income
Management, joined MVA
in 1983 and has 7
years of prior
investment experience.
He has managed the
Portfolio since
February 1998.
18
<PAGE> 241
GOVERNMENT & CORPORATE
RISK/RETURN SUMMARY BOND PORTFOLIO
RETURN HISTORY
The bar chart and table on
this page show the
Portfolio's annual returns
and long-term performance,
thereby giving some
indication of the risk of
investing in the Portfolio.
The bar chart shows how the
performance of the
Portfolio's Investor A
Shares has varied from year
to year. The table shows
how the Portfolio's average
annual returns for one
year, five years, ten years
and since inception compare
to those of a broad-based
market index. Both the bar
chart and table assume
reinvestment of all
dividends and
distributions. The
Portfolio's past
performance does not
necessarily indicate how it
will perform in the future.
KNOW YOUR INDEX
THE LEHMAN BROTHERS
AGGREGATE BOND INDEX is
an unmanaged index made
up of Lehman Brothers'
Government/Corporate Bond
Index, its Mortgage Backed
Securities Index and its
Asset Backed Securities
Index.
INVESTOR A SHARES
YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
[STATED AS PERCENTAGES]
<TABLE>
<CAPTION>
<S> <C>
'1989' 11.5
'90' 6.46
'91' 15.23
'92' 5.78
'93' 9.07
'94' -2.92
'95' 16.73
'96' 1.83
'97' 8.03
'98' 8.68
</TABLE>
The returns for Investor B Shares differed
from the returns shown in the bar chart
because the two classes bear different
expenses. The bar chart does not reflect
any sales charges on purchases of the
Portfolio's Investor A Shares. If sales
charges were included, returns would be
lower than those shown.
Best quarter: 6.98% for the quarter
ending June 30, 1989
Worst quarter: -2.79% for the
quarter ending
March 31, 1996
AVERAGE ANNUAL TOTAL
RETURNS
for the periods ended
December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS 10 YEARS INCEPTION*
<S> <C> <C> <C> <C>
Investor A Shares
(with 4.75% sales charge) 3.50% 5.22% 7.37% 7.23%
Investor B Shares
(with applicable contingent deferred sales charge) 2.91% 5.56% 7.62% 7.46%
Lehman Brothers Aggregate Bond Index 8.69% 7.27% 9.26% 9.08%
</TABLE>
* June 15, 1988 for Investor A Shares; May 31, 1988 for the Lehman
Aggregate.
** Investor B Shares of the Portfolio commenced operations on March 1, 1995.
Average annual total returns for prior periods reflect the performance of
the Portfolio's Investor A Shares which has been restated to reflect the
applicable contingent deferred sales charges payable on redemptions of
Investor B Shares within six years of the date of purchase. Investor B
Shares are subject to distribution and service fees at a maximum annual
rate of 1.00% of the Portfolio's Investor B Share assets. Had the
performance of Investor A Shares been restated to reflect these
distribution and service fees, average annual total returns would have
been lower.
19
<PAGE> 242
GOVERNMENT & CORPORATE
RISK/RETURN SUMMARY BOND PORTFOLIO
FEES AND EXPENSES
<TABLE>
<S> <C> <C> <C>
SHAREHOLDER FEES INVESTOR A INVESTOR B
(FEES YOU PAY DIRECTLY) SHARES SHARES
The table on this page shows the
fees and expenses that you pay if
you buy and hold Investor A Shares
or Investor B Shares of the
Government & Corporate Bond
Portfolio.
Maximum sales charge (load) to buy
shares, shown as a % of the
offering price 4.75%(1) None
Maximum deferred sales charge
(load) shown as a % of the
offering price or sale price,
whichever is less None 5.00%(2)
ANNUAL PORTFOLIO OPERATING
EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM INVESTOR A INVESTOR B
THE PORTFOLIO'S ASSETS) SHARES SHARES
Management Fees .45% .45%
Distribution (12b-1) and Service
Fees .30% 1.00%
Other Expenses .31%(3) .31%(3)
Total Annual Portfolio Operating
Expenses 1.06%(3) 1.76%(3)
</TABLE>
(1) Reduced sales charges may be available.
See "Distribution Arrangements/Sales
Charges" below.
(2) This amount applies if you sell your
shares in the first year after purchase
and gradually declines until it is
eliminated after six years. After eight
years, your Investor B Shares will
automatically convert to Investor A
Shares. See "Distribution Arrangements/
Sales Charges" below.
(3) Other Expenses and Total Annual
Portfolio Operating Expenses for the
Portfolio's Investor A Shares and
Investor B Shares for the current
fiscal year are expected to be less
than the amounts shown above because
certain of the Portfolio's service
providers are voluntarily waiving a
portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers
and/or reimbursements are being made in
order to keep the annual fees and
expenses for the Portfolio's Investor A
Shares and Investor B Shares at certain
levels. OTHER EXPENSES AND TOTAL ANNUAL
PORTFOLIO OPERATING EXPENSES, AFTER
TAKING THESE FEE WAIVERS AND EXPENSE
REIMBURSEMENTS INTO ACCOUNT, ARE
EXPECTED TO BE .21% AND .96%,
RESPECTIVELY, FOR INVESTOR A SHARES AND
.21% AND 1.66%, RESPECTIVELY, FOR
INVESTOR B SHARES. These fee waivers
and expense reimbursements may be
revised or cancelled at any time.
20
- -
<PAGE> 243
GOVERNMENT & CORPORATE
RISK/RETURN SUMMARY BOND PORTFOLIO
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then sell
all of your shares at the
end of those periods. The
example also assumes that
your investment has a 5%
return each year, the
Portfolio's operating
expenses remain the same and
your Investor B Shares
automatically convert to
Investor A Shares after
eight years. Although your
actual costs may be higher
or lower, based on these
assumptions your costs would
be:
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
INVESTOR A SHARES $578 $796 $1,032 $1,708
INVESTOR B SHARES $679 $854 $1,154 $1,889
If you hold Investor B
Shares, you would pay the
following expenses if you
did not sell
your shares:
$179 $554 $ 954 $1,889
</TABLE>
21
<PAGE> 244
logo
logo
RISK/RETURN SUMMARY ADDITIONAL INFORMATION ON RISK
The principal risks of investing in each Portfolio are described on the
previous pages. The following supplements that discussion.
SECURITIES LENDING
To obtain interest income, the Portfolios may lend their securities to
broker-dealers, banks or institutional borrowers pursuant to agreements
requiring that the loans be continuously secured by collateral equal at all
times in value to at least the market value of the securities loaned. There
is the risk that, when lending portfolio securities, the securities may not
be available to the Portfolio on a timely basis. Therefore, the Portfolio may
lose the opportunity to sell the securities at a desirable price.
Additionally, in the event that a borrower of securities would file for
bankruptcy or become insolvent, disposition of the securities may be delayed
pending court action.
TEMPORARY DEFENSIVE POSITIONS
Each Portfolio may temporarily hold investments that are not part of its main
investment strategy to try to avoid losses during unfavorable market
conditions. These investments may include cash (which will not earn any
income), money market instruments and short-term debt securities issued or
guaranteed by the U.S. Government or its agencies. This strategy could
prevent a Portfolio from achieving its investment objective.
OTHER TYPES OF INVESTMENTS
This prospectus describes each Portfolio's principal investment strategies
and the particular types of securities in which each Portfolio principally
invests. Each Portfolio may, from time to time, make other types of
investments and pursue other investment strategies in support of its overall
investment goal. These supplemental investment strategies -- and the risks
involved -- are described in detail in the Statement of Additional
Information ("SAI"), which is referred to on the back cover of this
prospectus.
YEAR 2000 RISKS
As with other mutual funds, financial and business organizations and
individuals around the world, the Portfolios could be adversely affected if
the computer systems used by the Adviser and the Portfolios' other service
providers do not properly process and calculate date-related information and
data from and after January 1, 2000. This possibility is commonly known as
the Year 2000 or "Y2K" problem. The Adviser is taking steps to address the
Y2K problem with respect to the computer systems that it uses and to obtain
assurances that comparable steps are being taken by the Portfolios' other
major service providers. At this time, however, there can be no assurance
that these steps will be sufficient to avoid any adverse impact on the
Portfolios. The Y2K problem could have a negative impact on the issuers of
securities in which the Portfolios invest, which could hurt the Portfolios'
investment returns.
22
<PAGE> 245
logo
logo
DISTRIBUTION ARRANGEMENTS/
YOUR ACCOUNT SALES CHARGES
SHARE CLASSES
Each Portfolio offers Investor A Shares and each Portfolio except the
Intermediate Corporate Bond Portfolio and Bond Index Portfolio offers
Investor B Shares. The primary difference between the share classes is the
sales charge structure and distribution/service fee arrangement.
<TABLE>
<S> <C> <C>
TYPES OF CHARGES INVESTOR A SHARES INVESTOR B SHARES
Sales Charge (Load) A front-end sales charge is A contingent deferred sales charge
assessed at the time of your (CDSC) is assessed on shares
purchase. redeemed within six years of
purchase. Investor B Shares
automatically convert to Investor
A Shares eight years after
purchase.
Distribution (12b-1) and Service Subject to annual distribution and Subject to annual distribution and
Fees shareholder servicing fees of up shareholder servicing fees of up
to 0.30% of a Portfolio's average to 1.00% of a Portfolio's average
daily net assets attributable to daily net assets attributable to
its Investor A Shares. its Investor B Shares.
</TABLE>
23
<PAGE> 246
DISTRIBUTION ARRANGEMENTS/
YOUR ACCOUNT SALES CHARGES
CALCULATION OF SALES CHARGES
INVESTOR A SHARES
INTERMEDIATE CORPORATE BOND, BOND INDEX AND GOVERNMENT & CORPORATE BOND
PORTFOLIOS
<TABLE>
<CAPTION>
SALES CHARGE SALES CHARGE DEALERS'
AS A % OF THE AS A % OF REALLOWANCE
AMOUNT OF OFFERING PRICE NET ASSET VALUE AS A % OF
TRANSACTION PER SHARE PER SHARE OFFERING PRICE
<S> <C> <C> <C>
Less than $50,000 4.75% 4.99% 4.25%
-----------------------------------------------------------------------------------------
$50,000 but less than $100,000 4.50% 4.71% 4.00%
-----------------------------------------------------------------------------------------
$100,000 but less than $250,000 3.50% 3.63% 3.00%
-----------------------------------------------------------------------------------------
$250,000 but less than $500,000 2.50% 2.56% 2.00%
-----------------------------------------------------------------------------------------
$500,000 but less than $1 million 2.00% 2.04% 1.50%
-----------------------------------------------------------------------------------------
$1 million or more 0.50% 0.50% 0.40%
</TABLE>
U.S. GOVERNMENT SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
SALES CHARGE SALES CHARGE DEALERS'
AS A % OF THE AS A % OF REALLOWANCE
AMOUNT OF OFFERING PRICE NET ASSET VALUE AS A % OF
TRANSACTION PER SHARE PER SHARE OFFERING 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% 0.85%
----------------------------------------------------------------------------------------
$1 million or more 0.50% 0.50% 0.40%
</TABLE>
The Fund's distributor reserves the right to pay the entire sales charge on
purchases of Investor A Shares to dealers. In addition, the Fund's
distributor may from time to time implement programs under which a
broker-dealer's sales force may be eligible to win nominal awards for certain
sales efforts. If any such program is made available to any broker-dealer, it
will be made available to all broker-dealers on the same terms. Payments made
under such programs are made by the Fund's distributor out of its own assets
and not out of the assets of the Portfolios. These programs will not change
the price of Investor A Shares or the amount that the Portfolios will receive
from such sales.
24
<PAGE> 247
DISTRIBUTION ARRANGEMENTS/
YOUR ACCOUNT SALES CHARGES
CALCULATION OF SALES CHARGES
INVESTOR B SHARES
<TABLE>
<S> <C> <C>
For purposes of calculating the CDSC, all NUMBER OF CDSC AS A % OF
purchases made during a calendar month are YEARS SINCE DOLLAR AMOUNT
considered to be made on the first day of that PURCHASE SUBJECT TO THE CHARGE
month. The CDSC is based on the value of the 1 or less 5.0%
Investor B Shares on the date that they are sold 1-2 4.0%
or the original cost of the shares, whichever is 2-3 3.0%
lower. To keep your CDSC as low as possible each 3-4 3.0%
time you sell shares, the Fund will first sell 4-5 2.0%
any shares in your account that are not subject 5-6 1.0%
to a CDSC. If there are not enough of these, the more than 6 None
Fund will sell the shares that have the lowest
CDSC.
</TABLE>
SALES CHARGE REDUCTIONS
INVESTOR A SHARES
Additional purchases of Investor A Shares by existing Investor A shareholder
accounts at March 31, 1999 in the Intermediate Corporate Bond, Bond Index and
Government & Corporate Bond Portfolios are eligible for reduced sales
charges. See the SAI or call the Fund's distributor at 1-800-452-2724 for
further information.
You may also reduce the sales charge on Investor A Shares through:
- RIGHTS OF ACCUMULATION. You can add the value of the Investor A Shares
that you already own in any Portfolio of the Fund that charges a sales
load to your next investment in Investor A Shares for purposes of
calculating the sales charge.
- QUANTITY DISCOUNTS. As the dollar amount of your purchase increases, your
sales charge may decrease (see the tables on page 24). In addition, the
Fund will combine purchases made on the same day by you and your immediate
family members when calculating applicable sales charges.
- LETTER OF INTENT. You can purchase Investor A Shares of any Portfolio of
the Fund that charges a sales load over a 13-month period and pay the same
sales charge you would have paid if all shares were purchased at once. The
Fund's transfer agent will hold in escrow 5% of your total investment (for
payment of a higher sales load in case you do not purchase the full amount
indicated on the application) until the full amount is received. To
participate, complete the "Letter of Intent" section on your account
application.
- REINVESTMENT PRIVILEGE. You can reinvest some or all of the money that you
receive when you sell Investor A Shares of a Portfolio in Investor A
Shares of any Portfolio of the Fund within 60 days without paying a sales
charge.
25
<PAGE> 248
DISTRIBUTION ARRANGEMENTS/
YOUR ACCOUNT SALES CHARGES
PURCHASE OF INVESTOR A
SHARES AT NET ASSET
VALUE
From time to time, the
Fund's distributor may
offer investors the
option to purchase
Investor A Shares at
net asset value
without payment of a
front-end sales
charge. To qualify,
you must pay for the
shares with the
redemption proceeds
from a non-affiliated
mutual fund. In
addition, you must
have paid a front-end
sales charge on the
shares you redeem. The
purchase of Investor A
Shares must occur
within 30 days of the
prior redemption, and
you must show evidence
of the redemption
transaction. At the
time of purchase, your
broker-dealer or other
financial institution
must notify the Fund
that your transaction
qualifies for a
purchase at net asset
value.
<TABLE>
<S> <C>
SALES CHARGE WAIVERS
INVESTOR A SHARES
In addition, there's no sales charge when you buy Investor A
Shares if:
- You buy shares by reinvesting your dividends and capital
gains distributions.
- You're an officer or director of the Fund (or an immediate
family member of any such individual).
- You're a director, a current or retired employee or a
participant in an employee benefit or retirement plan of
Mercantile Bancorporation Inc. or the Fund's distributor
or any of their affiliates (or an immediate family member
of any such individual).
- You're a broker, dealer or agent who has a sales agreement
with the Fund's distributor (or an employee or immediate
family member of any such individual).
- You buy shares pursuant to a wrap-free program offered by
a broker-dealer or other financial institution.
- You buy shares with the proceeds of Trust Shares or
Institutional Shares of a Portfolio redeemed in connection
with a rollover of benefits paid by a qualified retirement
or employee benefit plan or a distribution on behalf of
any other qualified account administered by Mercantile
Bank or its affiliates or correspondents within 60 days of
receipt of such payment.
- You buy shares through a payroll deduction program.
- You're an employee of any sub-adviser to the Fund.
- You were a holder of a Southwestern Bell VISA card
formerly issued by Mercantile Bank of Southern Illinois,
N.A. and you participated in the Fund's Automatic
Investment Program.
- You're exchanging Trust Shares of a Portfolio received
from the distribution of assets held in a qualified trust,
agency or custodian account with Mercantile Bank or any of
its affiliates or correspondents.
- You're another investment company distributed by the
Fund's distributor or its affiliates.
If you think you qualify for any these waivers, please call
the Fund at 1-800-452-2724 before buying any shares.
</TABLE>
26
<PAGE> 249
DISTRIBUTION ARRANGEMENTS/
YOUR ACCOUNT SALES CHARGES
SALES CHARGE WAIVERS
INVESTOR B SHARES
No CDSC is assessed on redemptions of Investor B Shares if:
- The shares were purchased with reinvested dividends or capital gains
distributions.
- The shares were purchased through an exchange of Investor B Shares of
another Portfolio.
- The redemption represents a distribution from a qualified retirement plan
under Section 403(b)(7) of the Internal Revenue Code, due to death,
disability or the attainment of a specified age.
- The redemption is in connection with the death or disability of the
shareholder.
- You participate in the Automatic Withdrawal Plan and your annual
withdrawals do not exceed 12% of your account's value.
- Your account falls below the Portfolio's minimum account size, and the Fund
liquidates your account (see page 33).
- The redemption results from a tax-free return of an excess contribution,
pursuant to Section 408(d)(4) or (5) of the Internal Revenue Code.
DISTRIBUTION AND SERVICE FEES
Investor A Shares of the Portfolios pay distribution (12b-1) and shareholder
service fees at an annual rate of up to 0.30% of each Portfolio's Investor A
Share assets. Investor B Shares of the Portfolios pay distribution (12b-1)
and shareholder service fees at an annual rate of up to 1.00% of each
Portfolio's Investor B Share assets. The Fund has adopted separate
distribution and service plans under Rule 12b-1 that allow each Portfolio to
pay fees from its Investor A Share or Investor B Share assets for selling and
distributing Investor A Shares or Investor B Shares, as the case may be, and
for services provided to shareholders. Because 12b-1 fees are paid on an
ongoing basis, over time they increase the cost of your investment and may
cost more than other sales charges.
CONVERTING INVESTOR B SHARES TO INVESTOR A SHARES
Eight years after you buy Investor B Shares of a Portfolio, they will
automatically convert to Investor A Shares of the Portfolio. This allows you
to benefit from the lower annual expenses of Investor A Shares.
CHOOSING BETWEEN INVESTOR A SHARES AND INVESTOR B SHARES
In deciding whether to buy Investor A Shares or Investor B Shares, you should
consider how long you plan to hold the shares. Over time, the higher fees on
Investor B Shares may equal or exceed the initial sales charge and fees for
Investor A Shares. Investor A Shares may be a better choice if you qualify to
have the sales charges reduced or eliminated, or if you plan to sell your
shares within one or two years. Consult your financial adviser for help in
choosing the appropriate share class.
27
<PAGE> 250
YOUR ACCOUNT EXPLANATION OF SALES PRICE
<TABLE>
<S> <C>
Shares of each class in a Portfolio are sold at their net
asset value (NAV) plus, in the case of Investor A Shares, a
front-end sales charge, if applicable. This is commonly
referred to as the "public offering price."
The NAV for each class of shares of a Portfolio is
determined as of the close of regular trading on the New
York Stock Exchange (currently 4:00 p.m., Eastern time) on
every business day. The NAV for a class of shares is
determined by adding the value of the Portfolio's
investments, cash and other assets attributable to a
particular share class, subtracting the Portfolio's
liabilities attributable to that class and then dividing the
result by the total number of shares in the class that are
outstanding.
- Each Portfolio's investments are valued according to
market value. When a market quote is not readily available,
the security's value is based on "fair value" as
determined by MVA under the supervision of the Fund's
Board of Directors.
- If you properly place a purchase order (see "How to Buy
Shares" on page 29) that is delivered to the Fund before
4:00 p.m. (Eastern time) on any business day, the order
receives the share price determined for your share class
as of 4:00 p.m. that day. If the order is received after
4:00 p.m., it will receive the price determined on the
next business day. You must pay for your shares no later
than 4:00 p.m. three business days after placing the
order, or the order will be cancelled.
</TABLE>
BUSINESS DAYS DEFINED
A business day is any
day that both the New
York Stock Exchange
and the Federal
Reserve Bank of St.
Louis are open for
business. Currently,
the Fund observes the
following holidays:
New Year's Day, Martin
Luther King Jr. Day,
Presidents' Day, Good
Friday, Memorial Day
(observed),
Independence Day
(observed), Labor Day,
Columbus Day,
Veterans' Day,
Thanksgiving and
Christmas.
28
<PAGE> 251
YOUR ACCOUNT HOW TO BUY SHARES
<TABLE>
<CAPTION>
TO OPEN TO ADD TO
MINIMUM INVESTMENTS YOUR ACCOUNT YOUR ACCOUNT
<S> <C> <C>
Regular accounts $1,000 $100
------------------------------------------------------------
Sweep program
through your
financial institution None None
------------------------------------------------------------
Wrap fee program
through your
financial institution None None
------------------------------------------------------------
Payroll Deduction
Program* None $25
------------------------------------------------------------
$1,000 minimum
Automatic Exchange account
Program* $5,000 balance
------------------------------------------------------------
Automatic Investment
Program* $50 $50
</TABLE>
* See Investor Programs below.
Investing in the Mercantile
Taxable Bond Portfolios is quick
and convenient. You can purchase
Investor A Shares or Investor B
Shares in any of the following
ways:
- THROUGH A BROKER-DEALER
ORGANIZATION. You can
purchase shares through any
broker-dealer organization
that has a sales agreement
with the Fund's distributor.
The broker-dealer
organization is responsible
for sending your purchase
order to the Fund.
- THROUGH A FINANCIAL
ORGANIZATION. You can
purchase shares through any
financial organization that
has entered into a servicing
agreement with the Fund. The
financial organization is
responsible for sending your
purchase order to the Fund.
- DIRECTLY FROM THE FUND BY MAIL. Just complete an account application and
send it, along with a check for at least the minimum purchase amount, to:
Mercantile Mutual Funds, Inc. P.O. Box 78069, Tram 001/128/41-6, St.
Louis, Missouri 63178. Remember to specify whether you're buying Investor
A Shares or Investor B Shares. To make additional investments once you've
opened your account, send your check to the address above together with
the detachable form that's included with your Fund statement or
confirmation of a prior transaction or a letter stating the amount of your
investment, the name of the Portfolio you want to invest in and your
account number.
In addition, you may call the Fund at 1-800-452-2724 for more information on
how to buy shares.
29
<PAGE> 252
YOUR ACCOUNT HOW TO SELL SHARES
<TABLE>
<S> <C>
You can arrange to get money out of your account by selling
some or all of your shares. This is known as "redeeming"
your shares. You can redeem your shares in the following
ways:
THROUGH A BROKER-DEALER OR OTHER FINANCIAL ORGANIZATION
If you purchased your shares through a broker-dealer or
other financial organization, your redemption order should
be placed through the same organization. The organization is
responsible for sending your redemption order to the Fund on
a timely basis.
BY MAIL
Send your written redemption request to: Mercantile Mutual
Funds, Inc., P.O. Box 78069 -- Tram 001/128/41-6, St. Louis,
Missouri 63178. Your request must include the name of the
Portfolio, the number of shares or the dollar amount you
want to sell, your account number, your social security or
tax identification number and the signature of each
registered owner of the account. Your request also must be
accompanied by any share certificates that are properly
endorsed for transfer. Additional documents may be required
for certain types of shareholders, such as corporations,
partnerships, executors, trustees, administrators or
guardians.
The Fund's transfer agent may require a signature guarantee
unless the redemption proceeds are payable to the
shareholder of record and the redemption is either mailed to
the shareholder's address of record or electronically
transferred to the account designated on the original
account application. A signature guarantee helps prevent
fraud, and you may obtain one from most banks and
broker-dealers. Contact your broker-dealer or other
financial organization or the Fund for more information on
signature guarantees.
BY TELEPHONE
You may redeem your shares by telephone if you have selected
that option on your account application. Call the Fund at
1-800-452-2724 with your request. You may have your proceeds
mailed to your address or transferred electronically to the
bank account designated on your account application. If you
have not previously selected the telephone privilege, you
may add this feature by providing written instructions to
the Fund's transfer agent. If you have difficulty getting
through to the Fund because of unusual market conditions,
consider selling your shares by mail.
You may sell your Portfolio shares at any time. Your shares
will be sold at the NAV next determined after the Fund
accepts your order (see above). The proceeds of the sale of
Investor B Shares will be reduced by the applicable CDSC.
Your proceeds ordinarily are sent electronically or mailed
by check within three business days. If your account holds
both Investor A Shares and Investor B Shares, be sure to
specify which shares you are selling. Otherwise, Investor A
Shares will be sold first.
</TABLE>
<TABLE>
<S> <C>
SELLING RECENTLY
PURCHASED SHARES
If you attempt to sell
shares you recently
purchased with a
personal check, the
Fund may delay
processing your request
until it collects
payment for those
shares. This process
may take up to 15 days,
so if you plan to sell
shares shortly after
purchasing them, you
may want to consider
purchasing shares with
a certified or bank
check or via electronic
transfer to avoid
delays.
</TABLE>
30
- -
<PAGE> 253
YOUR ACCOUNT INVESTOR PROGRAMS
It's also easy to buy or sell shares of the Portfolios by using one of the
programs described below.
AUTOMATIC INVESTMENT PROGRAM
You may open an account or make additional investments to an existing account
for as little as $50 a month with the Fund's Automatic Investment Program
(AIP). Under the AIP, you specify the dollar amount to be automatically
withdrawn each month from your bank checking account and invested in your
Portfolio account. Purchases of Investor A Shares or Investor B Shares will
occur on the 5th or 20th day (or the next business day after the 5th or 20th)
of each month at the net asset value plus any front-end sales charge, if
applicable, next determined on the day the order is effected. To take
advantage of the AIP, complete the AIP authorization form included with your
account application or contact your broker-dealer or other financial
organization.
AIP lets you take advantage of "dollar cost averaging," a long-term
investment technique designed to help investors reduce their average cost per
share over time. Instead of trying to time the market, you can invest a fixed
dollar amount each month. So, you buy fewer Portfolio shares when prices are
high and more when prices are low. Because dollar cost averaging involves
regular investing over time, regardless of share price, it may not be
appropriate for all investors.
In addition, dollar cost averaging does not guarantee a profit or protect
against loss in a steadily declining market. To be effective, dollar cost
averaging usually should be followed on a sustained, consistent basis. Even
then, however, there can be no guarantee of the success of this technique,
and it will not prevent a loss if an investor ultimately redeems his or her
shares at a price that is lower than the original purchase price.
EXCHANGES
The exchange privilege enables you to exchange Investor A Shares of one
Portfolio for Investor A Shares (or in certain limited circumstances, Trust
or Institutional Shares) of another Portfolio and to exchange Investor B
Shares of one Portfolio for Investor B Shares of another Portfolio. Just sign
up for the exchange privilege on your account application and contact your
broker-dealer or other financial organization when you want to exchange
shares. You also may exchange shares by telephoning the Fund directly (call
1-800-452-2724) if you have elected this privilege on your account
application. The exchange privilege may be exercised only in those states
where the class of shares of the Portfolio being acquired may be legally
sold.
When exchanging Investor A Shares of a Portfolio that has no sales charge or
a lower sales charge for Investor A Shares of a Portfolio with a higher sales
charge, you will pay the difference.
You may exchange Investor B Shares without paying a CDSC on the exchange. The
holding period of the shares originally held and redeemed will be added to
the holding period of the new shares acquired through the exchange.
31
<PAGE> 254
YOUR ACCOUNT INVESTOR PROGRAMS
AUTOMATIC EXCHANGE PROGRAM
This program lets you automatically exchange shares of one Portfolio for
shares of another Portfolio on a regular basis, as long as the shares are of
the same class. Because you're making regular purchases, the Automatic
Exchange Program enables you to take advantage of dollar cost averaging. (See
"Automatic Investment Program" above.)
To participate, you must make a minimum initial purchase of $5,000 and
maintain a minimum account balance of $1,000. In addition, you must complete
the authorization form included with your account application or available
from your broker-dealer or other financial organization. In order to change
instructions with respect to the Automatic Exchange Program or to discontinue
the program, you must send written instructions to your broker-dealer or
other financial organization or to the Fund.
AUTOMATIC WITHDRAWAL PLAN
If the net asset value of your account equals $10,000 or more, you may take
advantage of the Fund's Automatic Withdrawal Plan (AWP). With the AWP, you
can have monthly, quarterly, semi-annual or annual redemptions of at least
$50 from your Portfolio account sent to you via check or to your bank account
electronically on the 5th or 20th day of the applicable month of withdrawal.
No CDSC will be charged on withdrawals of Investor B Shares made through the
AWP that don't annually exceed 12% of your account's value.
To participate in the AWP, complete the AWP application included with your
account application or contact your broker-dealer or other financial
organization. A signature guarantee will be required. You may terminate your
participation in the AWP upon 30 days' notice to your broker-dealer or other
financial organization or to the Fund.
PAYROLL DEDUCTION PROGRAM
You can make regular investments from your paycheck. The minimum investment
is $25 per pay period. Call the Fund at 1-800-452-2724 for an application and
further information. The Fund may terminate the program at any time.
32
<PAGE> 255
YOUR ACCOUNT GENERAL TRANSACTION POLICIES
The Fund reserves the right to:
- Vary or waive any minimum investment requirement.
- Refuse any order to buy shares.
- Reject any exchange request.
- Change or cancel the procedures for selling or exchanging shares by
telephone at any time.
- Redeem all shares in your account if your balance falls below $500. If,
within 60 days of the Fund's written request, you have not increased your
account balance, you may be required to redeem your shares. The Fund will
not require you to redeem shares if the value of your account drops below
$500 due to fluctuations in net asset value.
- Send redemption proceeds within seven days after receiving a request, if
an earlier payment could adversely affect a Portfolio.
- Modify or terminate the Automatic Exchange, Automatic Investment and
Automatic Withdrawal programs at any time.
- Modify or terminate the exchange privilege after 60 days' written notice
to shareholders.
- Make a "redemption in kind." Under abnormal conditions that may make
payment in cash unwise, the Fund may offer partial or complete payment in
portfolio securities rather than cash at such securities'
then-market-value equal to the redemption price. In such cases, you may
incur brokerage costs in converting these securities to cash.
If you elect telephone privileges on the account application or in a letter
to the Fund, you may be responsible for any fraudulent telephone orders as
long as the Fund has taken reasonable precautions to verify your identity.
Also, your broker-dealer or other financial organization may establish
policies that differ from those of the Funds. For example, the organization
may charge transaction fees, set higher minimum investments, or impose
certain limitations on purchasing or redeeming shares in addition to those
identified in this prospectus. Contact your broker-dealer or other financial
organization for details.
33
<PAGE> 256
logo
logo
DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Portfolios pay their shareholders dividends from the Portfolios'
respective net investment income and distribute any net capital gains the
Portfolios have realized.
Dividends are declared daily and paid monthly. Shares of the Portfolios earn
dividends from the day after the Fund's transfer agent receives a purchase
order through the day the transfer agent receives a redemption order for
those shares. Capital gains, if any, are distributed for all of the
Portfolios at least once a year. It's expected that each Portfolio's annual
distributions will normally - but not always - consist primarily of ordinary
income rather than capital gains.
Dividends on each share class of the Portfolios are determined in the same
manner and are paid in the same amount. However, each share class bears all
expenses associated with that particular class. So, because Investor B Shares
have higher distribution and service fees than Investor A Shares, the
dividends paid to Investor B shareholders will be lower than those paid to
Investor A shareholders.
All of your dividends and capital gains distributions with respect to a
particular Portfolio will be reinvested in additional shares of the same
class unless you instruct otherwise on your account application or have
redeemed all shares you held in the Portfolio. In such cases, dividends and
distributions will be paid in cash.
34
<PAGE> 257
DISTRIBUTIONS AND TAXES
You will be advised at
least annually
regarding the federal
income tax treatment
of dividends and
distributions made to
you. You should save
your account
statements because
they contain
information you will
need to calculate your
capital gains or
losses upon your
ultimate sale or
exchange of shares in
the Portfolios.
<TABLE>
<S> <C>
TAXATION
As with any investment, you should consider the tax
implications of an investment in the Portfolios. The
following is only a brief summary of some of the important
tax considerations generally affecting the Portfolios and
their shareholders under current law, which may be subject
to change in the future. Consult your tax adviser with
specific reference to your own tax situation.
- The Portfolios' distributions generally will be taxable to
shareholders as ordinary income and capital gains (which may
be taxable at different rates depending on the length of
time each Portfolio held the relevant assets). You will be
subject to income tax on these distributions whether they
are paid in cash or reinvested in additional shares.
- You will recognize a taxable gain or loss on a sale,
exchange or redemption of your shares, including an exchange
for shares of another Portfolio, based on the difference
between your tax basis in the shares and the amount you
receive for them.
- Any loss realized on shares held for six months or less
will be treated as a long-term capital loss to the extent
that any capital gains distributions were received with
respect to the shares.
- If you purchase shares just prior to a distribution, the
purchase price will reflect the amount of the upcoming
distribution, but you will be taxed on the entire amount
of the distribution received even though, as an economic
matter, the distribution simply constitutes a return of
capital. This is known as "buying into a dividend."
- Distributions on, and sales, exchanges and redemptions of,
shares held in an IRA or other tax-qualified plan will not
be currently taxable.
For more information regarding the taxation of the
Portfolios, consult the SAI under the heading "Additional
Information Concerning Taxes." You also should consult your
tax adviser for information regarding state and local tax
consequences with respect to your specific situation.
</TABLE>
35
<PAGE> 258
logo
logo
MANAGEMENT OF THE FUND
THE ADVISER
MVA, subject to the general supervision of the Fund's Board of Directors, is
responsible for the day-to-day management of the Portfolios in accordance
with each Portfolio's respective investment objective and policies. This
includes making investment decisions, buying and selling securities and
overseeing the administration and recordkeeping for each Portfolio.
In exchange for these services, MVA receives an investment advisory fee,
which is calculated daily and paid monthly, according to the average daily
net assets of each Portfolio. For the fiscal year ended November 30, 1998,
the Portfolios paid MVA advisory fees as follows:
<TABLE>
<CAPTION>
INVESTMENT ADVISORY FEES
PORTFOLIO AS A % OF NET ASSETS
<S> <C>
------------------------------
U.S. Government Securities Portfolio .45%
------------------------------
Intermediate Corporate Bond Portfolio .35%
------------------------------
Bond Index Portfolio .24%
------------------------------
Government & Corporate Bond Portfolio .45%
----------------------------------------------------------------------
</TABLE>
36
<PAGE> 259
logo
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FINANCIAL HIGHLIGHTS
INTRODUCTION
The financial highlights tables presented below are intended to help you
understand the financial performance of each Portfolio's Investor A Shares
and/or Investor B Shares for the past five years (or, if shorter, the period
since the Portfolio began operations or the particular shares were first
offered). Certain information reflects financial results for a single
Investor A Share or Investor B Share in each Portfolio. The total returns in
the tables represent the rate that an investor would have earned (or lost) on
an investment in either Investor A Shares or Investor B Shares, assuming
reinvestment of all dividends and distributions. This information has been
audited by KPMG LLP, independent auditors, whose report, along with the
Portfolios' financial statements, are included in the Fund's Annual Report to
Shareholders, and are incorporated by reference into the SAI.
37
<PAGE> 260
FINANCIAL HIGHLIGHTS U.S. GOVERNMENT SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
YEAR ENDED NOVEMBER 30,
1998 1997 1996 1995 1994(a)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $10.62 $10.67 $10.85 $10.05 $11.20
-------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.57 0.60 0.62 0.64 0.63
Net realized and unrealized gains
(losses) from investments 0.12 (0.07) (0.15) 0.80 (0.97)
-------------------------------------------------------------------------------------------
Total from Investment Activities 0.69 0.53 0.47 1.44 (0.34)
-------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.57) (0.58) (0.62) (0.64) (0.63)
In excess of net realized gains -- -- (0.03) -- (0.18)
-------------------------------------------------------------------------------------------
Total Distributions (0.57) (0.58) (0.65) (0.64) (0.81)
-------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.74 $10.62 $10.67 $10.85 $10.05
-------------------------------------------------------------------------------------------
Total Return (excludes sales
charges) 6.66% 5.20% 4.57% 14.66% (3.14)%
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000) $4,664 $5,181 $7,153 $8,179 $9,631
Ratio of expenses to average net
assets 0.97% 0.97% 0.97% 0.97% 0.96%
Ratio of net investment income to
average net assets 5.35% 5.56% 5.82% 6.05% 5.98%
Ratio of expenses to average net
assets* 1.07% 1.07% 1.07% 1.07% 1.06%
Portfolio turnover** 54.57% 100.33% 53.76% 93.76% 50.00%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) On September 27, 1994, the Portfolio redesignated Investor Shares as
"Investor A" Shares, and authorized the issuance of a series of shares
designated as "Investor B" Shares.
38
<PAGE> 261
FINANCIAL HIGHLIGHTS U.S. GOVERNMENT SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MARCH 1, 1995
YEAR ENDED NOVEMBER 30, TO NOVEMBER 30,
1998 1997 1996 1995(a)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.61 $10.66 $10.84 $10.34
-----------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.50(d) 0.51 0.55 0.31
Net realized and unrealized gains
(losses) from investments 0.13 (0.05) (0.15) 0.50
-----------------------------------------------------------------------------------------
Total from Investment Activities 0.63 0.46 0.40 0.81
-----------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.50) (0.51) (0.55) (0.31)
In excess of net realized gains -- -- (0.03) --
-----------------------------------------------------------------------------------------
Total Distributions (0.50) (0.51) (0.58) (0.31)
-----------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.74 $10.61 $10.66 $10.84
-----------------------------------------------------------------------------------------
Total Return (excludes sales
charges) 6.02% 4.47% 3.85% 12.85%(b)
RATIOS/SUPPLEMENTARY DATA:
Net assets at end of period (000) $ 149 $ 466 $ 359 $ 41
Ratio of expenses to average net
assets 1.67% 1.67% 1.66% 1.68%(c)
Ratio of net investment income to
average net assets 4.67% 4.84% 5.06% 5.37%(c)
Ratio of expenses to average net
assets* 1.77% 1.77% 1.76% 1.78%(c)
Portfolio turnover** 54.57% 100.33% 53.76% 93.76%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Represents total return for Investor A Shares from December 1, 1994 to
February 28, 1995 plus total return for Investor B Shares from March 1,
1995 to November 30, 1995.
(c) Annualized.
(d) Per share net investment income has been calculated using the daily
average share method.
39
<PAGE> 262
FINANCIAL HIGHLIGHTS INTERMEDIATE CORPORATE BOND PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
YEAR ENDED FEBRUARY 10, 1997 TO
NOVEMBER 30, 1998 November 30, 1997(a)
<S> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $10.11 $10.00
-----------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.60 0.52
Net realized and unrealized gains from
investments 0.30 0.11
-----------------------------------------------------------------------------------------------
Total from Investment Activities 0.90 0.63
-----------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.60) (0.52)
Net realized gains (0.11) --
-----------------------------------------------------------------------------------------------
Total Distributions (0.71) (0.52)
-----------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.30 $10.11
-----------------------------------------------------------------------------------------------
Total Return (excludes sales charges) 9.32% 6.48%(b)
RATIOS/SUPPLEMENTARY DATA:
Net assets at end of period (000) $ 284 $ 277
Ratio of expenses to average net assets 0.89% 0.58%(c)
Ratio of net investment income to average
net assets 5.92% 6.52%(c)
Ratio of expenses to average net assets* 1.19% 1.31%(c)
Portfolio turnover** 9.65% 61.98%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
40
<PAGE> 263
FINANCIAL HIGHLIGHTS BOND INDEX PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
YEAR ENDED FEBRUARY 10, 1997 TO
NOVEMBER 30, 1998 November 30, 1997(a)
<S> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $10.17 $10.00
-----------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.61 0.50
Net realized and unrealized gains from
investments 0.31 0.17
-----------------------------------------------------------------------------------------------
Total from Investment Activities 0.92 0.67
-----------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.61) (0.50)
Net realized gains (0.03) --
-----------------------------------------------------------------------------------------------
Total Distributions (0.64) (0.50)
-----------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.45 $10.17
-----------------------------------------------------------------------------------------------
Total Return (excludes sales charges) 9.36% 6.93%(b)
RATIOS/SUPPLEMENTARY DATA:
Net assets at end of period (000) $ 364 $ 55
Ratio of expenses to average net assets 0.77% 0.54%(c)
Ratio of net investment income to average
net assets 5.81% 6.71%(c)
Ratio of expenses to average net assets* 0.93% 0.95%(c)
Portfolio turnover** 33.37% 46.16%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
41
<PAGE> 264
FINANCIAL HIGHLIGHTS GOVERNMENT & CORPORATE BOND PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
YEAR ENDED NOVEMBER 30,
1998 1997 1996 1995 1994(a)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $10.35 $10.34 $10.53 $ 9.64 $10.65
-------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.57 0.56 0.64 0.61 0.60
Net realized and unrealized gains
(losses) from investments 0.37 0.01 (0.19) 0.89 (0.94)
-------------------------------------------------------------------------------------------
Total from Investment Activities 0.94 0.57 0.45 1.50 (0.34)
-------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.57) (0.56) (0.64) (0.61) (0.60)
In excess of net realized gains -- -- -- -- (0.07)
-------------------------------------------------------------------------------------------
Total Distributions (0.57) (0.56) (0.64) (0.61) (0.67)
-------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.72 $10.35 $10.34 $10.53 $ 9.64
-------------------------------------------------------------------------------------------
Total Return (excludes sales
charges) 9.31% 5.78% 4.51% 15.98% (3.32)%
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000) $4,927 $4,774 $4,915 $5,496 $5,167
Ratio of expenses to average net
assets 0.96% 0.95% 0.95% 0.95% 0.95%
Ratio of net investment income to
average net assets 5.41% 5.46% 6.06% 6.03% 6.00%
Ratio of expenses to average net
assets* 1.06% 1.05% 1.05% 1.05% 1.05%
Portfolio turnover** 91.14% 140.72% 149.20% 59.32% 50.00%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) On September 27, 1994, the Portfolio redesignated Investor Shares as
"Investor A" Shares, and authorized the issuance of a series of Shares
designated as "Investor B" Shares.
42
<PAGE> 265
FINANCIAL HIGHLIGHTS GOVERNMENT & CORPORATE BOND PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR B SHARES
(FOR A SHARE(a) OUTSTANDING THROUGHOUT EACH PERIOD)
MARCH 1, 1995
YEAR ENDED NOVEMBER 30, TO NOVEMBER 30,
1998 1997 1996 1995(b)
<S> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $10.37 $10.34 $10.53 $ 9.92
---------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.50 0.49 0.57 0.38
Net realized and unrealized gains
(losses) from investments 0.38 0.03 (0.19) 0.61
---------------------------------------------------------------------------------------------
Total from Investment Activities 0.88 0.52 0.38 0.99
---------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.50) (0.49) (0.57) (0.38)
---------------------------------------------------------------------------------------------
Total Distributions (0.50) (0.49) (0.57) (0.38)
---------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.75 $10.37 $10.34 $10.53
---------------------------------------------------------------------------------------------
Total Return (excludes sales
charges) 8.65% 5.26% 3.79% 15.27%(c)
RATIOS/SUPPLEMENTARY DATA:
Net assets at end of period (000) $ 662 $ 545 $ 511 $ 106
Ratio of expenses to average net
assets 1.66% 1.65% 1.65% 1.65%(d)
Ratio of net investment income to
average net assets 4.70% 4.84% 5.37% 5.19%(d)
Ratio of expenses to average net
assets* 1.76% 1.75% 1.75% 1.75%(d)
Portfolio turnover** 91.14% 140.72% 149.20% 59.32%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio is calculated on the basis of the Portfolio as a whole without
distinguishing between the classes of shares issued.
(a) On September 27, 1994, the Portfolio redesignated Investor Shares as
"Investor A" Shares and authorized the issuance of a series of Shares
designated as "Investor B" Shares.
(b) Period from commencement of operations.
(c) Represents total return for Investor A Shares from December 1, 1994 to
February 28, 1995 plus total return for Investor B Shares from March 1,
1995 to November 30, 1995.
(d) Annualized.
43
<PAGE> 266
[Back Cover Page]
Where to find more information
You'll find more information about the Mercantile Taxable Bond Portfolios in the
following documents:
Annual and semi-annual reports
The Fund's annual and semi-annual reports contain more information about each
Portfolio and a discussion about the market conditions and investment strategies
that had a significant effect on each Portfolio's performance during the last
fiscal year.
Statement of Additional Information (SAI)
The SAI contains detailed information about the Portfolios and their policies.
By law, it's incorporated by reference into (considered to be part of) this
prospectus.
You can get a free copy of these documents, request other information about the
Portfolios and make shareholder inquiries by calling the Fund at 1-800-452-2724
or by writing to:
Mercantile Mutual Funds, Inc.
P.O. Box 78069
St. Louis, Missouri 63175
If you buy your shares through a broker-dealer or other financial institution,
you may contact your institution for more information.
You can write to the Securities and Exchange Commission (SEC) Public Reference
Section and ask them to mail you information about the Portfolios, including the
SAI. They'll charge you a fee for this service. You can also visit the SEC
Public Reference Room and copy the documents while you're there. For information
about the operation of the Public Reference Room, call the SEC.
Public Reference Section of the SEC
Washington, DC 20549-6009
1-800-SEC-0330
Reports and other information about the Mercantile Taxable Bond Portfolios are
also available on the SEC's website at http://www.sec.gov.
The Fund's Investment Company Act File No. is 811-3567
-40-
<PAGE> 267
MERCANTILE MUTUAL FUNDS, INC.
PROSPECTUS
MARCH 31, 1999
TAX-EXEMPT BOND PORTFOLIOS
Short-Intermediate Municipal Portfolio
Missouri Tax-Exempt Bond Portfolio
National Municipal Bond Portfolio
Investor A Shares and Investor B Shares
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved any shares of these Portfolios or determined if this
prospectus is truthful or complete. Anyone who tells you otherwise is committing
a criminal offense.
<PAGE> 268
<TABLE>
<S> <C> <C> <C>
RISK/RETURN SUMMARY
[Scale
Icon]
3 Overview
4 Short-Intermediate Municipal Portfolio
9 Missouri Tax-Exempt Bond Portfolio
14 National Municipal Bond Portfolio
19 Additional Information on Risk
YOUR ACCOUNT
[Magnifying
Glass Icon]
20 Distribution Arrangements/Sales Charges
25 Explanation of Sales Price
26 How to Buy Shares
27 How to Sell Shares
28 Investor Programs
30 General Transaction Policies
DISTRIBUTIONS AND TAXES
[Chart
Icon]
31 Dividends and Distributions
32 Taxation
MANAGEMENT OF THE FUND
[Open Book
Icon]
33 The Adviser
FINANCIAL HIGHLIGHTS
[Open Hand
Icon]
34 Introduction
35 Short-Intermediate Municipal Portfolio
36 Missouri Tax-Exempt Bond Portfolio
38 National Municipal Bond Portfolio
</TABLE>
2
CONTENTS
<PAGE> 269
[Scales
Icon]
RISK/RETURN SUMMARY OVERVIEW
<TABLE>
<S> <C>
This prospectus describes the Mercantile Tax-Exempt Bond
Portfolios, three investment portfolios offered by
Mercantile Mutual Funds, Inc. (the "Fund"). The Fund was
formerly known as The ARCH Fund(R), Inc. On the following
pages, you will find important information about each
Portfolio, including:
- A description of the Portfolio's investment objective
(sometimes referred to as its goal);
- The Portfolio's principal investment strategies (the steps
it takes to try to meet its goal);
- The principal risks associated with the Portfolio (factors
that may prevent it from meeting its goal);
- The Portfolio's past performance (how successful it's been
in meeting its goal); and
- The fees and expenses (including sales charges) you pay as
an investor in the Portfolio.
WHO MAY WANT TO INVEST IN The Mercantile Tax-Exempt Bond Portfolios may be appropriate
THE MERCANTILE TAX-EXEMPT for investors who are looking for income that is exempt from
BOND PORTFOLIOS? federal income tax and who can accept fluctuations in price
and yield. The Missouri Tax-Exempt Bond Portfolio is best
suited to Missouri residents who are also looking for income
that is exempt from Missouri state income tax. The
Portfolios are NOT appropriate investments for tax-deferred
retirement accounts, such as IRAs, because their returns
before taxes are generally lower than those of taxable
funds.
Before investing in a Portfolio, you should carefully
consider:
- Your own investment goals
- The amount of time you are willing to leave your money
invested
- How much risk you are willing to take.
THE INVESTMENT ADVISER Mississippi Valley Advisors Inc. ("MVA" or the "Adviser")
serves as the investment adviser to each Portfolio. Founded
in 1987, MVA is a subsidiary of Mercantile Bancorporation
Inc., a regional banking and financial services
organization, and has its main office at One Mercantile
Center, Seventh and Washington Streets, St. Louis, Missouri
63101. As of December 31, 1998, MVA had approximately $9.9
billion in assets under management, including the Fund's
assets, which were approximately $4.3 billion.
An investment in the Portfolios is not a Mercantile Bank
deposit and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government
agency. You could lose money by investing in the Portfolios.
</TABLE>
3
<PAGE> 270
[Scales
Icon]
SHORT-INTERMEDIATE
RISK/RETURN SUMMARY MUNICIPAL PORTFOLIO
WHAT ARE MUNICIPAL
SECURITIES?
State and local
governments issue
municipal securities
to raise money to
finance public works,
to repay outstanding
obligations, to raise
funds for general
operating expenses and
to make loans to other
public institutions.
Some municipal
securities, known as
private activity
bonds, are backed by
private entities and
are used to finance
various non-public
projects. Municipal
securities, which can
be issued as bonds,
notes or commercial
paper, usually have
fixed interest rates,
although some have
interest rates that
change from time to
time.
AVERAGE WEIGHTED
MATURITY gives you the
average time until all
debt obligations,
including municipal
securities, in a
Portfolio come due or
mature. It is
calculated by
averaging the time to
maturity of all debt
obligations held by a
Portfolio with each
maturity "weighted"
according to the
percentage of assets
which it represents.
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to seek as high a
level of current income, exempt from regular federal income
tax, as is consistent with preservation of capital.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio normally invests at least 80% of its total
assets in municipal securities that pay interest which is
exempt from federal income tax. Municipal securities
purchased by the Portfolio may include general obligation
securities, revenue securities and private activity bonds.
General obligation securities are secured by the issuer's
full faith, credit and taxing power. Revenue securities are
usually payable only from revenues derived from specific
facilities or revenue sources. Private activity bonds are
usually revenue obligations since they are typically payable
by the private user of the facilities financed by the bonds.
The interest on private activity bonds may be subject to the
federal alternative minimum tax. Investments in private
activity bonds will not be treated as investments in
municipal securities for purposes of the 80% requirement
stated above.
In selecting municipal securities for the Portfolio, the
Adviser favors those sectors of the municipal market that
offer the most favorable returns. The Adviser emphasizes
municipal securities that offer both a high credit quality
rating and a high degree of liquidity. The Adviser also
attempts to maintain a broad geographic diversification for
the Portfolio, with emphasis on no particular state.
The Portfolio will invest only in investment grade municipal
securities. These are securities which have one of the four
highest ratings assigned by a national rating agency, such
as Standard & Poor's Ratings Group or Moody's Investors
Service, Inc., or are unrated securities determined by the
Adviser to be of comparable quality. Short-term municipal
securities purchased by the Portfolio, such as municipal
notes and tax-exempt commercial paper, will have one of the
two highest ratings assigned by a national rating agency or
will be unrated securities that the Adviser has determined
to be of comparable quality. Occasionally, the rating of a
security held by the Portfolio may be downgraded below the
minimum required rating. 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 Portfolio's average weighted maturity will generally be
between two and five years.
</TABLE>
4
<PAGE> 271
SHORT-INTERMEDIATE
RISK/RETURN SUMMARY MUNICIPAL PORTFOLIO
<TABLE>
<S> <C>
PRINCIPAL RISK CONSIDERATIONS
The prices of debt securities, including municipal
securities, tend to move in the opposite direction to
interest rates. When rates are rising, the prices of debt
securities tend to fall. When rates are falling, the prices
of debt securities tend to rise. Generally, the longer the
time until maturity, the more sensitive the price of a debt
security is to interest rate changes. Changes in interest
rates may cause certain municipal securities held by the
Portfolio to be paid off much sooner or later than expected.
In the event that a security is paid off sooner than
expected because of a decline in interest rates, the
Portfolio may be unable to recoup all of its initial
investment and may also suffer from having to reinvest in
lower-yielding securities. In the event of a later than
expected payment because of a rise in interest rates, the
value of the obligation will decrease, and the Portfolio may
also suffer from the inability to invest in higher-yielding
securities.
The value of debt securities also depends on the ability of
issuers to make principal and interest payments. If an
issuer can't meet its payment obligations or if its credit
rating is lowered, the value of its debt securities will
fall. The ability of a state or local government issuer to
make payments can be affected by many factors, including
economic conditions, the flow of tax revenues and changes in
the level of federal, state or local aid. Some municipal
securities are payable only from limited revenue sources or
by private entities.
The Adviser evaluates the rewards and risks presented by all
securities purchased by the Portfolio and how they may
advance the Portfolio's investment objective. It is
possible, however, that these evaluations will prove to be
inaccurate.
</TABLE>
PORTFOLIO MANAGER
Peter Merzian is the
person primarily
responsible for the
day-to-day management
of the Portfolio. Mr.
Merzian, a Senior
Associate, has been
with MVA since 1993
and has served as
portfolio manager of
the Portfolio since it
commenced operations
in 1995.
5
<PAGE> 272
SHORT-INTERMEDIATE
RISK/RETURN SUMMARY MUNICIPAL PORTFOLIO
RETURN HISTORY
The bar chart and table on
this page show the
Portfolio's annual returns
and long-term performance,
thereby giving some
indication of the risk of
investing in the Portfolio.
The bar chart shows how the
performance of the
Portfolio's Investor A
Shares has varied from year
to year. The table shows
how the Portfolio's average
annual returns for one year
and since inception compare
to those of a broad-based
market index. Both the bar
chart and table assume
reinvestment of all
dividends and
distributions. The
Portfolio's past
performance does not
necessarily indicate how it
will perform in the future.
KNOW YOUR INDEX
THE LEHMAN BROTHERS
MUNICIPAL BOND INDEX -- 3
YEAR is an unmanaged index
that tracks the
performance of municipal
bonds with remaining
maturities of three years
or less.
INVESTOR A SHARES
YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
[STATED AS PERCENTAGES]
<TABLE>
<CAPTION>
INVESTOR A SHARES
-----------------
<S> <C>
'1996' 3.51
'97' 4.96
'98' 4.65
</TABLE>
The bar chart does not reflect any sales
charges on purchases of the Portfolio's
Investor A Shares. If sales charges were
included, returns would be lower than
those shown.
Best quarter: 2.32% for the
quarter ending
September 30, 1998
Worst quarter: -0.01% for the
quarter ending
March 31, 1996
AVERAGE ANNUAL TOTAL
RETURNS
for the periods ended
December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION*
<S> <C> <C>
Investor A Shares
(with 2.50% sales charge) 2.04% 3.36%
Lehman Brothers Municipal Bond Index -- 3 Year 5.21% 5.39%
</TABLE>
* July 10, 1995 for Investor A Shares; June 30, 1995 for the Lehman Brothers
Municipal Bond Index -- 3 Year.
6
<PAGE> 273
SHORT-INTERMEDIATE
RISK/RETURN SUMMARY MUNICIPAL PORTFOLIO
FEES AND EXPENSES
<TABLE>
<S> <C> <C>
SHAREHOLDER FEES
(FEES YOU PAY DIRECTLY) INVESTOR A SHARES
The table on this page shows
the fees and expenses that you pay
if you buy and hold Investor A
Shares of the Short-Intermediate
Municipal Portfolio.
Maximum sales charge (load) to buy shares,
shown as a % of the offering price 2.50%(1)
Maximum deferred sales charge (load) shown
as a % of the offering price or sale
price, whichever is less None
ANNUAL PORTFOLIO OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS) INVESTOR A SHARES
Management Fees .55%
Distribution (12b-1) and Service Fees .30%(2)
Other Expenses .36%(2)
Total Annual Portfolio Operating Expenses 1.21%(2)
</TABLE>
(1) Reduced sales charges may be available.
See "Distribution Arrangements/Sales
Charges" below.
(2) Distribution (12b-1) and Service Fees,
Other Expenses and Total Annual
Portfolio Operating Expenses for the
Portfolio's Investor A Shares for the
current fiscal year are expected to be
less than the amounts shown above
because certain of the Portfolio's
service providers are voluntarily
waiving a portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers or
reimbursements are being made in order
to keep the annual fees and expenses
for the Portfolio's Investor A Shares
at a certain level. DISTRIBUTION
(12B-1) AND SERVICE FEES, OTHER
EXPENSES AND TOTAL ANNUAL PORTFOLIO
OPERATING EXPENSES, AFTER TAKING THESE
FEE WAIVERS AND EXPENSE REIMBURSEMENTS
INTO ACCOUNT, ARE EXPECTED TO BE .25%,
.22% AND 1.02%, RESPECTIVELY, FOR
INVESTOR A SHARES. These fee waivers
and expense reimbursements may be
revised or cancelled at any time.
7
<PAGE> 274
SHORT-INTERMEDIATE
RISK/RETURN SUMMARY MUNICIPAL PORTFOLIO
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then sell
all of your shares at the
end of those periods. The
example also assumes that
your investment has a 5%
return each year and the
Portfolio's operating
expenses remain the same.
Although your actual costs
may be higher or lower,
based on these assumptions
your costs would be:
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
INVESTOR A SHARES $370 $624 $898 $1,679
</TABLE>
8
<PAGE> 275
[Scales
Icon]
MISSOURI TAX-EXEMPT
RISK/RETURN SUMMARY BOND PORTFOLIO
WHAT ARE MUNICIPAL
SECURITIES?
State and local
governments issue
municipal securities
to raise money to
finance public works,
to repay outstanding
obligations, to raise
funds for general
operating expenses and
to make loans to other
public institutions.
Some municipal
securities, known as
private activity
bonds, are backed by
private entities and
are used to finance
various non-public
projects. Municipal
securities, which can
be issued as bonds,
notes or commercial
paper, usually have
fixed interest rates,
although some have
interest rates that
change from time to
time.
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to seek as high a
level of interest income exempt from federal income tax as
is consistent with conservation of capital.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio normally invests at least 80% of its total
assets in municipal securities that pay interest that is
exempt from federal income tax, and at least 65% of its
total assets in Missouri municipal securities, which are
securities issued by the State of Missouri and other
government issuers and that pay interest which is exempt
from both federal income tax and Missouri state income tax.
Municipal securities purchased by the Portfolio may include
general obligation securities, revenue securities and
private activity bonds. General obligation securities are
secured by the issuer's full faith, credit and taxing power.
Revenue securities are usually payable only from revenues
derived from specific facilities or revenue sources. Private
activity bonds are usually revenue obligations since they
are typically payable by the private user of the facilities
financed by the bonds. The interest on private activity
bonds may be subject to the federal alternative minimum tax.
Investments in private activity bonds will not be treated as
investments in municipal securities for purposes of the 80%
requirement stated above.
In selecting municipal securities for the Portfolio, the
Adviser favors those sectors of the municipal market that
offer the most favorable returns. The Adviser emphasizes
municipal securities that offer both a high credit quality
rating and a high degree of liquidity.
The Portfolio will invest only in investment grade municipal
securities. These are securities which have one of the four
highest ratings assigned by a national rating agency, such
as Standard & Poor's Ratings Group or Moody's Investors
Service, Inc., or are unrated securities determined by the
Adviser to be of comparable quality. Short-term municipal
securities purchased by the Portfolio, such as municipal
notes and tax-exempt commercial paper, will have one of the
two highest ratings assigned by a national rating agency or
will be unrated securities that the Adviser has determined
to be of comparable quality. Occasionally, the rating of a
security held by the Portfolio may be downgraded below the
minimum required rating. 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 Portfolio's average weighted maturity will vary from
time to time depending on current economic and market
conditions and the Adviser's assessment of probable changes
in interest rates.
</TABLE>
9
<PAGE> 276
MISSOURI TAX-EXEMPT
RISK/RETURN SUMMARY BOND PORTFOLIO
PORTFOLIO MANAGER
Peter Merzian is the
person primarily
responsible for the
day-to-day management
of the Portfolio. Mr.
Merzian, a Senior
Associate, has been
with MVA since 1993
and has managed the
Portfolio since that
time.
<TABLE>
<S> <C>
PRINCIPAL RISK CONSIDERATIONS
The prices of debt securities, including municipal
securities, tend to move in the opposite direction to
interest rates. When rates are rising, the prices of debt
securities tend to fall. When rates are falling, the prices
of debt securities tend to rise. Generally, the longer the
time until maturity, the more sensitive the price of a debt
security is to interest rate changes. Changes in interest
rates also may cause certain municipal securities held by
the Portfolio to be paid off much sooner or later than
expected. In the event that a security is paid off sooner
than expected because of a decline in interest rates, the
Portfolio may be unable to recoup all of its initial
investment and will also suffer from having to reinvest in
lower-yielding securities. In the event of a later than
expected payment because of a rise in interest rates, the
value of the obligation will decrease, and the Portfolio
will also suffer from the inability to invest in
higher-yielding securities.
The value of debt securities also depends on the ability of
issuers to make principal and interest payments. If an
issuer can't meet its payment obligations or if its credit
rating is lowered, the value of its debt securities will
fall. The ability of a state or local government issuer to
make payments can be affected by many factors, including
economic conditions, the flow of tax revenues and changes in
the level of federal, state or local aid. Some municipal
securities are payable only from limited revenue sources or
by private entities.
The Portfolio is not diversified, which means that it can
invest a large percentage of its assets in a small number of
issuers. As a result, a change in the value of any one
investment held by the Portfolio may affect the overall
value of the Portfolio more than it would affect a
diversified portfolio that holds more investments. Because
the Portfolio invests primarily in Missouri municipal
securities, it also is likely to be especially susceptible
to economic, political and regulatory events that affect
Missouri.
The Adviser evaluates the rewards and risks presented by all
securities purchased by the Portfolio and how they may
advance the Portfolio's investment objective. It is
possible, however, that these evaluations will prove to be
inaccurate.
</TABLE>
10
<PAGE> 277
MISSOURI TAX-EXEMPT
RISK/RETURN SUMMARY BOND PORTFOLIO
KNOW YOUR INDEX
THE LEHMAN BROTHERS
MUNICIPAL BOND INDEX is an
unmanaged index that
tracks the performance of
municipal bonds.
RETURN HISTORY(+)
The bar chart and table on
this page show the
Portfolio's annual returns
and long-term performance,
thereby giving some
indication of the risk of
investing in the Portfolio.
The bar chart shows how the
performance of the
Portfolio's Investor A
Shares has varied from year
to year. The table shows
how the Portfolio's average
annual returns for one
year, five years, ten years
and since inception compare
to those of a broad-based
market index. Both the bar
chart and table assume
reinvestment of all
dividends and
distributions. The
Portfolio's past
performance does not
necessarily indicate how it
will perform in the future.
INVESTOR A SHARES
YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
[STATED AS PERCENTAGES]
<TABLE>
<CAPTION>
'1991' 11.52
- ------ -----
<S> <C>
'92' 8.75
'93' 11.63
'94' -5.78
'95' 16.89
'96' 2.90
'97' 8.08
'98' 5.11
</TABLE>
The returns for Investor B Shares
differed from the returns shown in the
bar chart because the two classes bear
different expenses. The bar chart does
not reflect any sales charges on
purchases of the Portfolio's Investor A
Shares. If sales charges were included,
returns would be lower than those shown.
Best quarter: 7.53% for the
quarter ending
March 31, 1995
Worst quarter: -5.61% for the
quarter ending
March 31, 1994
AVERAGE ANNUAL TOTAL
RETURNS
for the periods ended
December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION*
<S> <C> <C> <C>
Investor A Shares
(with 4.75% sales charge) 0.10% 4.16% 7.08%
Investor B Shares**
(with applicable contingent deferred sales charge) (0.64)% 4.36% 7.27%
Lehman Brothers Municipal Bond Index 6.48% 6.22% 8.26%
</TABLE>
+ The Portfolio commenced operations on July 15, 1988 as a separate
investment portfolio (the "Predecessor Portfolio") of The ARCH Tax-Exempt
Trust. On October 2, 1995, the Predecessor Portfolio was reorganized as a
new portfolio of the Fund. Prior to the reorganization, the Predecessor
Portfolio offered and sold shares that were similar to the Fund's Investor
A Shares and Investor B Shares. Annual returns for periods prior to
October 2, 1995 reflect the performance of the Predecessor Portfolio.
* September 28, 1990 for Investor A Shares; September 30, 1990 for the
Lehman Brothers Municipal Bond Index.
** Investor B Shares of the Portfolio commenced operations on March 1, 1995
as Investor B Shares of the Predecessor Portfolio. Average annual total
returns for prior periods reflect the performance of the Predecessor
Portfolio's Investor A Shares which has been restated to reflect the
applicable contingent deferred sales charges payable on redemptions of
Investor B Shares within 6 years of the date of purchase. Investor B
Shares are subject to distribution and service fees at a maximum annual
rate of 1.00% of the Portfolio's Investor B Share assets. Had the
performance of Investor A Shares been restated to reflect these
distribution and service fees, average annual total returns would have
been lower.
11
<PAGE> 278
MISSOURI TAX-EXEMPT
RISK/RETURN SUMMARY BOND PORTFOLIO
FEES AND EXPENSES
<TABLE>
<S> <C> <C> <C>
SHAREHOLDER FEES INVESTOR A INVESTOR B
(FEES YOU PAY DIRECTLY) SHARES SHARES
The table on this page shows the fees
and expenses that you pay if you
buy and hold Investor A Shares or
Investor B Shares of the Missouri
Tax-Exempt Bond Portfolio.
Maximum sales charge (load) to
buy shares, shown as a % of the
offering price 4.75%(1) None
Maximum deferred sales charge
(load) shown as a % of the
offering price or sale price,
whichever is less None 5.00%(2)
ANNUAL PORTFOLIO OPERATING
EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM INVESTOR A INVESTOR B
THE PORTFOLIO'S ASSETS) SHARES SHARES
Management Fees .45% .45%
Distribution (12b-1) and Service
Fees .30%(3) 1.00%
Other Expenses .31%(3) .31%(3)
Total Annual Portfolio Operating
Expenses 1.06%(3) 1.76%(3)
</TABLE>
(1) Reduced sales charges may be available.
See "Distribution Arrangements/Sales
Charges" below.
(2) This amount applies if you sell your
shares in the first year after purchase
and gradually declines until it is
eliminated after six years. After eight
years, your Investor B Shares will
automatically convert to Investor A
Shares. See "Distribution Arrangements/
Sales Charges" below.
(3) Distribution (12b-1) and Service Fees
for the Portfolio's Investor A Shares
and Other Expenses and Total Annual
Portfolio Operating Expenses for the
Portfolio's Investor A Shares and
Investor B Shares for the current
fiscal year are expected to be less
than the amounts shown above because
certain of the Portfolio's service
providers are voluntarily waiving a
portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers
and/or reimbursements are being made in
order to keep the annual fees and
expenses for the Portfolio's Investor A
Shares and Investor B Shares at certain
levels. DISTRIBUTION (12b-1) AND
SERVICE FEES, AFTER TAKING THESE FEE
WAIVERS AND EXPENSE REIMBURSEMENTS INTO
ACCOUNT, ARE EXPECTED TO BE .20% FOR
INVESTOR A SHARES, AND OTHER EXPENSES
AND TOTAL ANNUAL PORTFOLIO OPERATING
EXPENSES, AFTER TAKING THESE FEE
WAIVERS AND EXPENSE REIMBURSEMENTS INTO
ACCOUNT, ARE EXPECTED TO BE .21% AND
.86%, RESPECTIVELY, FOR INVESTOR A
SHARES AND .21% AND 1.66%,
RESPECTIVELY, FOR INVESTOR B SHARES.
These fee waivers and expense
reimbursements may be revised or
cancelled at any time.
12
- -
<PAGE> 279
MISSOURI TAX-EXEMPT
RISK/RETURN SUMMARY BOND PORTFOLIO
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then sell
all of your shares at the
end of those periods. The
example also assumes that
your investment has a 5%
return each year, the
Portfolio's operating
expenses remain the same and
your Investor B Shares
automatically convert to
Investor A Shares after
eight years. Although your
actual costs may be higher
or lower, based on these
assumptions your costs would
be:
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
INVESTOR A SHARES $578 $796 $1,032 $1,708
INVESTOR B SHARES $679 $854 $1,154 $1,889
If you hold Investor B
Shares, you would pay the
following expenses if you
did not sell
your shares:
$179 $554 $ 954 $1,889
</TABLE>
13
<PAGE> 280
[Scales
Icon]
NATIONAL MUNICIPAL
RISK/RETURN SUMMARY BOND PORTFOLIO
WHAT ARE MUNICIPAL
SECURITIES?
State and local
governments issue
municipal securities
to raise money to
finance public works,
to repay outstanding
obligations, to raise
funds for general
operating expenses and
to make loans to other
public institutions.
Some municipal
securities, known as
private activity
bonds, are backed by
private entities and
are used to finance
various non-public
projects. Municipal
securities, which can
be issued as bonds,
notes or commercial
paper, usually have
fixed interest rates,
although some have
interest rates that
change from time to
time.
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to seek as high a
level of current income exempt from regular federal income
tax as is consistent with conservation of capital.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio normally invests at least 80% of its total
assets in municipal securities that pay interest which is
exempt from federal income tax. Municipal securities
purchased by the Portfolio may include general obligation
securities, revenue securities and private activity bonds.
General obligation securities are secured by the issuer's
full faith, credit and taxing power. Revenue securities are
usually payable only from revenues derived from specific
facilities or revenue sources. Private activity bonds are
usually revenue obligations since they are typically payable
by the private user of the facilities financed by the bonds.
The interest on private activity bonds may be subject to the
federal alternative minimum tax. Investments in private
activity bonds will not be treated as investments in
municipal securities for purposes of the 80% requirement
stated above.
In selecting municipal securities for the Portfolio, the
Adviser favors those sectors of the municipal market that
offer the most favorable returns. The Adviser emphasizes
municipal securities that offer both a high credit quality
rating and a high degree of liquidity. The Adviser also
attempts to maintain a broad geographic diversification for
the Portfolio, with emphasis on no particular state. The
Portfolio's average weighted maturity generally will be
longer (10 years or less) than that for the
Short-Intermediate Municipal Portfolio.
The Portfolio will invest only in investment grade municipal
securities. These are securities which have one of the four
highest ratings assigned by a national rating agency, such
as Standard & Poor's Ratings Group or Moody's Investors
Service, Inc., or are unrated securities determined by the
Adviser to be of comparable quality. Short-term municipal
securities purchased by the Portfolio, such as municipal
notes and tax-exempt commercial paper, will have one of the
two highest ratings assigned by a national rating agency or
will be unrated securities that the Adviser has determined
to be of comparable quality. Occasionally, the rating of a
security held by the Portfolio may be downgraded below the
minimum required rating. 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 Portfolio's average weighted maturity will vary from
time to time depending on current economic and market
conditions and the Adviser's assessment of probable changes
in interest rates.
</TABLE>
14
<PAGE> 281
NATIONAL MUNICIPAL
RISK/RETURN SUMMARY BOND PORTFOLIO
<TABLE>
<S> <C>
PRINCIPAL RISK CONSIDERATIONS
The prices of debt securities, including municipal
securities, tend to move in the opposite direction to
interest rates. When rates are rising, the prices of debt
securities tend to fall. When rates are falling, the prices
of debt securities tend to rise. Generally, the longer the
time until maturity, the more sensitive the price of a debt
security is to interest rate changes. Changes in interest
rates also may cause certain municipal securities held by
the Portfolio to be paid off much sooner or later than
expected. In the event that a security is paid off sooner
than expected because of a decline in interest rates, the
Portfolio may be unable to recoup all of its initial
investment and may also suffer from having to reinvest in
lower-yielding securities. In the event of a later than
expected payment because of a rise in interest rates, the
value of the obligation will decrease, and the Portfolio may
also suffer from the inability to invest in higher-yielding
securities.
The value of debt securities also depends on the ability of
issuers to make principal and interest payments. If an
issuer can't meet its payment obligations or if its credit
rating is lowered, the value of its debt securities will
fall. The ability of a state or local government issuer to
make payments can be affected by many factors, including
economic conditions, the flow of tax revenues and changes in
the level of federal, state or local aid. Some municipal
securities are payable only from limited revenue sources or
by private entities.
The Adviser evaluates the rewards and risks presented by all
securities purchased by the Portfolio and how they may
advance the Portfolio's investment objective. It is
possible, however, that these evaluations will prove to be
inaccurate.
</TABLE>
PORTFOLIO MANAGER
Peter Merzian is the
person primarily
responsible for the
day-to-day management
of the Portfolio. Mr.
Merzian, a Senior
Associate, has been
with MVA since 1993
and has served as
portfolio manager of
the Portfolio since it
commenced operations
in 1996.
15
<PAGE> 282
NATIONAL MUNICIPAL
RISK/RETURN SUMMARY BOND PORTFOLIO
RETURN HISTORY
The bar chart and table on
this page show the
Portfolio's annual returns
and long-term performance,
thereby giving some
indication of the risk of
investing in the Portfolio.
The bar chart shows how the
performance of the
Portfolio's Investor A
Shares has varied from year
to year. The table shows
how the Portfolio's average
annual returns for one year
and since inception compare
to those of a broad-based
market index. Both the bar
chart and table assume
reinvestment of all
dividends and
distributions. The
Portfolio's past
performance does not
necessarily indicate how it
will perform in the future.
KNOW YOUR INDEX
THE LEHMAN BROTHERS
MUNICIPAL BOND INDEX -- 10
YEAR is an unmanaged index
that tracks the
performance of municipal
bonds with remaining
maturities of 10 years or
less.
INVESTOR A SHARES
YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
[STATED AS PERCENTAGES]
<TABLE>
<CAPTION>
'1997' 9.94
- ------ ----
<S> <C>
'98' 5.94
</TABLE>
The returns for Investor B Shares
differed from the returns shown in the
bar chart because the two classes bear
different expenses. The bar chart does
not reflect any sales charges on
purchases of the Portfolio's Investor A
Shares. If sales charges were included,
returns would be lower than those shown.
Best quarter: 3.72% for the
quarter ending
September 30, 1997
Worst quarter: -0.39% for the
quarter ending
March 31, 1997
AVERAGE ANNUAL TOTAL
RETURNS
for the periods ended
December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION*
<S> <C> <C>
Investor A Shares
(with 4.75% sales charge) 0.92% 5.21%
Investor B Shares
(with applicable contingent deferred sales charge) 0.10% 5.60%
Lehman Brothers Municipal Bond Index -- 10 Year 6.76% 7.44%
</TABLE>
* November 18, 1996 for Investor A Shares and Investor B Shares; November 30,
1996 for the Lehman Brothers Municipal Bond Index -- 10 Year.
16
<PAGE> 283
NATIONAL MUNICIPAL
RISK/RETURN SUMMARY BOND PORTFOLIO
FEES AND EXPENSES
<TABLE>
<S> <C> <C> <C>
SHAREHOLDER FEES INVESTOR A INVESTOR B
(FEES YOU PAY DIRECTLY) SHARES SHARES
The table on this page shows the
fees and expenses that you pay if
you buy and hold Investor A Shares or
Investor B Shares of the
National Municipal Bond
Portfolio.
Maximum sales charge (load) to
buy shares, shown as a % of the
offering price 4.75%(1) None
Maximum deferred sales charge
(load) shown as a % of the
offering price or sale price,
whichever is less None 5.00%(2)
ANNUAL PORTFOLIO OPERATING
EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM INVESTOR A INVESTOR B
THE PORTFOLIO'S ASSETS) SHARES SHARES
Management Fees .55% .55%
Distribution (12b-1) and Service
Fees .30%(3) 1.00%
Other Expenses .31%(3) .31%(3)
Total Annual Portfolio Operating
Expenses 1.16%(3) 1.86%(3)
</TABLE>
(1) Reduced sales charges may be available.
See "Distribution Arrangements/Sales
Charges" below.
(2) This amount applies if you sell your
shares in the first year after purchase
and gradually declines until it is
eliminated after six years. After eight
years, your Investor B Shares will
automatically convert to Investor A
Shares. See "Distribution Arrangements/
Sales Charges" below.
(3) Distribution (12b-1) and Service Fees
for the Portfolio's Investor A Shares
and Other Expenses and Total Annual
Portfolio Operating Expenses for the
Portfolio's Investor A Shares and
Investor B Shares for the current
fiscal year are expected to be less
than the amounts shown above because
certain of the Portfolio's service
providers are voluntarily waiving a
portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers or
reimbursements are being made in order
to keep the annual fees and expenses
for the Portfolio's Investor A Shares
and Investor B Shares at certain
levels. DISTRIBUTION (12b-1) AND
SERVICE FEES, AFTER TAKING THESE FEE
WAIVERS AND EXPENSE REIMBURSEMENTS INTO
ACCOUNT, ARE EXPECTED TO BE .20% FOR
INVESTOR A SHARES, AND OTHER EXPENSES
AND TOTAL ANNUAL PORTFOLIO OPERATING
EXPENSES, AFTER TAKING THESE FEE
WAIVERS AND EXPENSE REIMBURSEMENTS INTO
ACCOUNT, ARE EXPECTED TO BE .20% AND
.95%, RESPECTIVELY, FOR INVESTOR A
SHARES AND .20% AND 1.75%,
RESPECTIVELY, FOR INVESTOR B SHARES.
These fee waivers and expense
reimbursements may be revised or
cancelled at any time.
17
- -
<PAGE> 284
NATIONAL MUNICIPAL
RISK/RETURN SUMMARY BOND PORTFOLIO
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then sell
all of your shares at the
end of those periods. The
example also assumes that
your investment has a 5%
return each year, the
Portfolio's operating
expenses remain the same and
your Investor B Shares
automatically convert to
Investor A Shares after
eight years. Although your
actual costs may be higher
or lower, based on these
assumptions your costs would
be:
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
INVESTOR A SHARES $588 $826 $1,083 $1,817
INVESTOR B SHARES $689 $885 $1,206 $1,997
If you hold Investor B
Shares, you would pay the
following expenses if you
did not sell your shares: $189 $585 $1,006 $1,997
</TABLE>
18
<PAGE> 285
[Scale
Icon]
RISK/RETURN SUMMARY ADDITIONAL INFORMATION ON RISK
The principal risks of investing in each Portfolio are described on the
previous pages. The following supplements that discussion.
TEMPORARY DEFENSIVE POSITIONS
Each Portfolio may temporarily hold investments that are not part of its main
investment strategy to try to avoid losses during unfavorable market
conditions. These investments may include cash (which will not earn any
income) and taxable obligations, including money market instruments and debt
securities issued or guaranteed by the U.S. Government or its agencies. This
strategy could prevent a Portfolio from achieving its investment objective.
OTHER TYPES OF INVESTMENTS
This prospectus describes each Portfolio's principal investment strategies
and the particular types of securities in which each Portfolio principally
invests. Each Portfolio may, from time to time, make other types of
investments and pursue other investment strategies in support of its overall
investment goal. These supplemental investment strategies -- and the risks
involved -- are described in detail in the Statement of Additional
Information ("SAI"), which is referred to on the back cover of this
prospectus.
YEAR 2000 RISKS
As with other mutual funds, financial and business organizations and
individuals around the world, the Portfolios could be adversely affected if
the computer systems used by the Adviser and the Portfolios' other service
providers do not properly process and calculate date-related information and
data from and after January 1, 2000. This possibility is commonly known as
the Year 2000 or "Y2K" problem. The Adviser is taking steps to address the
Y2K problem with respect to the computer systems that it uses and to obtain
assurances that comparable steps are being taken by the Portfolios' other
major service providers. At this time, however, there can be no assurance
that these steps will be sufficient to avoid any adverse impact on the
Portfolios. The Y2K problem could have a negative impact on the issuers of
securities in which the Portfolios invest, which could hurt the Portfolios'
investment returns.
19
<PAGE> 286
[Magnifying]
[Glass Icon]
DISTRIBUTION ARRANGEMENTS/
YOUR ACCOUNT SALES CHARGES
SHARE CLASSES
Each Portfolio offers Investor A Shares and each Portfolio except the
Short-Intermediate Municipal Portfolio offers Investor B Shares. The primary
difference between the share classes is the sales charge structure and
distribution/service fee arrangement.
<TABLE>
<S> <C> <C>
TYPES OF CHARGES INVESTOR A SHARES INVESTOR B SHARES
Sales Charge (Load) A front-end sales charge is A contingent deferred sales charge
assessed at the time of your (CDSC) is assessed on shares
purchase. redeemed within six years of
purchase. Investor B Shares
automatically convert to
Investor A Shares eight years
after purchase.
Distribution (12b-1) and Service Subject to annual distribution and Subject to annual distribution and
Fees shareholder servicing fees shareholder servicing fees
of up to 0.30% of a Portfolio's of up to 1.00% of a Portfolio's
average daily net assets average daily net assets
attributable to its Investor A attributable to its Investor B
Shares. Shares.
</TABLE>
20
<PAGE> 287
DISTRIBUTION ARRANGEMENTS/
YOUR ACCOUNT SALES CHARGES
CALCULATION OF SALES CHARGES
INVESTOR A SHARES
MISSOURI TAX-EXEMPT BOND AND NATIONAL MUNICIPAL BOND PORTFOLIOS
<TABLE>
<CAPTION>
SALES CHARGE SALES CHARGE DEALERS'
AS A % OF THE AS A % OF REALLOWANCE
AMOUNT OF OFFERING PRICE NET ASSET VALUE AS A % OF
TRANSACTION PER SHARE PER SHARE OFFERING PRICE
<S> <C> <C> <C>
Less than $50,000 4.75% 4.99% 4.25%
-----------------------------------------------------------------------------------------
$50,000 but less than $100,000 4.50% 4.71% 4.00%
-----------------------------------------------------------------------------------------
$100,000 but less than $250,000 3.50% 3.63% 3.00%
-----------------------------------------------------------------------------------------
$250,000 but less than $500,000 2.50% 2.56% 2.00%
-----------------------------------------------------------------------------------------
$500,000 but less than $1 million 2.00% 2.04% 1.50%
-----------------------------------------------------------------------------------------
$1 million or more 0.50% 0.50% 0.40%
</TABLE>
SHORT-INTERMEDIATE MUNICIPAL PORTFOLIO
<TABLE>
<CAPTION>
SALES CHARGE SALES CHARGE DEALERS'
AS A % OF THE AS A % OF REALLOWANCE
AMOUNT OF OFFERING PRICE NET ASSET VALUE AS A % OF
TRANSACTION PER SHARE PER SHARE OFFERING 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% 0.85%
----------------------------------------------------------------------------------------
$1 million or more 0.50% 0.50% 0.40%
</TABLE>
The Fund's distributor reserves the right to pay the entire sales charge on
purchases of Investor A Shares to dealers. In addition, the Fund's
distributor may from time to time implement programs under which a
broker-dealer's sales force may be eligible to win nominal awards for certain
sales efforts. If any such program is made available to any broker-dealer, it
will be made available to all broker-dealers on the same terms. Payments made
under such programs are made by the Fund's distributor out of its own assets
and not out of the assets of the Portfolios. These programs will not change
the price of Investor A Shares or the amount that the Portfolios will receive
from such sales.
21
<PAGE> 288
DISTRIBUTION ARRANGEMENTS/
YOUR ACCOUNT SALES CHARGES
CALCULATION OF SALES CHARGES
INVESTOR B SHARES
<TABLE>
<S> <C> <C>
For purposes of calculating the CDSC, all YEARS CDSC AS A % OF
purchases made during a calendar month are SINCE DOLLAR AMOUNT
considered to be made on the first day of that PURCHASE SUBJECT TO CHARGE
month. The CDSC is based on the value of the 0-1 5.0%
Investor B Shares on the date that they are sold 1-2 4.0%
or the original cost of the shares, whichever is 2-3 3.0%
lower. To keep your CDSC as low as possible each 3-4 3.0%
time you sell shares, the Fund will first sell 4-5 2.0%
any shares in your account that are not subject 5-6 1.0%
to a CDSC. If there are not enough of these, the more than 6 None
Fund will sell the shares that have the lowest
CDSC.
</TABLE>
SALES CHARGE REDUCTIONS
INVESTOR A SHARES
Additional purchases of Investor A Shares by existing Investor A shareholder
accounts at March 31, 1999 in the Missouri Tax-Exempt Bond and National
Municipal Bond Portfolios are eligible for reduced sales charges. See the SAI
or call the Fund's distributor at 1-800-452-2724 for further information.
You may also reduce the sales charge on Investor A Shares through:
- RIGHTS OF ACCUMULATION. You can add the value of the Investor A Shares
that you already own in any Portfolio of the Fund that charges a sales
load to your next investment in Investor A Shares for purposes of
calculating the sales charge.
- QUANTITY DISCOUNTS. As the dollar amount of your purchase increases, your
sales charge may decrease (see the tables on page 21). In addition, the
Fund will combine purchases made on the same day by you and your immediate
family members when calculating applicable sales charges.
- LETTER OF INTENT. You can purchase Investor A Shares of any Portfolio of
the Fund that charges a sales load over a 13-month period and pay the same
sales charge you would have paid if all shares were purchased at once. The
Fund's transfer agent will hold in escrow 5% of your total investment (for
payment of a higher sales load in case you do not purchase the full amount
indicated on the application) until the full amount is received. To
participate, complete the "Letter of Intent" section on your account
application.
- REINVESTMENT PRIVILEGE. You can reinvest some or all of the money that you
receive when you sell Investor A Shares of a Portfolio in Investor A
Shares of any Portfolio of the Fund within 60 days without paying a sales
charge.
22
<PAGE> 289
DISTRIBUTION ARRANGEMENTS/
YOUR ACCOUNT SALES CHARGES
PURCHASE OF INVESTOR A
SHARES AT NET ASSET
VALUE
From time to time, the
Fund's distributor may
offer investors the
option to purchase
Investor A Shares at
net asset value
without payment of a
front-end sales
charge. To qualify,
you must pay for the
shares with the
redemption proceeds
from a non-affiliated
mutual fund. In
addition, you must
have paid a front-end
sales charge on the
shares you redeem. The
purchase of Investor A
Shares must occur
within 30 days of the
prior redemption, and
you must show evidence
of the redemption
transaction. At the
time of purchase, your
broker-dealer or other
financial institution
must notify the Fund
that your transaction
qualifies for a
purchase at net asset
value.
SALES CHARGE WAIVERS
INVESTOR A SHARES
In addition, there's no sales charge when you buy
Investor A Shares if:
- You buy shares by reinvesting your dividends and
capital gains distributions.
- You're an officer or director of the Fund (or an
immediate family member of any such individual).
- You're a director, a current or retired employee
or a participant in an employee benefit or
retirement plan of Mercantile Bancorporation Inc.
or the Fund's distributor or any of their
affiliates (or an immediate family member of any
such individual).
- You're a broker, dealer or agent who has a sales
agreement with the Fund's distributor (or an
employee or immediate family member of any such
individual).
- You buy shares pursuant to a wrap-free program
offered by a broker-dealer or other financial
institution.
- You buy shares with the proceeds of Trust Shares
or Institutional Shares of a Portfolio redeemed in
connection with a rollover of benefits paid by a
qualified retirement or employee benefit plan or a
distribution on behalf of any other qualified
account administered by Mercantile Bank or its
affiliates or correspondents within 60 days of
receipt of such payment.
- You buy shares through a payroll deduction
program.
- You're an employee of any sub-adviser to the Fund.
- You were a holder of a Southwestern Bell VISA card
formerly issued by Mercantile Bank of Southern
Illinois, N.A. and you participated in the Fund's
Automatic Investment Program.
- You're exchanging Trust Shares of a Portfolio
received from the distribution of assets held in a
qualified trust, agency or custodian account with
Mercantile Bank or any of its affiliates or
correspondents.
- You're another investment company distributed by
the Fund's distributor or its affiliates.
If you think you qualify for any of these waivers,
please call the Fund at 1-800-452-2724 before buying
any shares.
23
<PAGE> 290
DISTRIBUTION ARRANGEMENTS/
YOUR ACCOUNT SALES CHARGES
SALES CHARGE WAIVERS
INVESTOR B SHARES
No CDSC is assessed on redemptions of Investor B Shares if:
- The shares were purchased with reinvested dividends or capital gains
distributions.
- The shares were purchased through an exchange of Investor B Shares of
another Portfolio.
- The redemption represents a distribution from a qualified retirement plan
under Section 403(b)(7) of the Internal Revenue Code, due to death,
disability or the attainment of a specified age.
- The redemption is in connection with the death or disability of the
shareholder.
- You participate in the Automatic Withdrawal Plan and your annual
withdrawals do not exceed 12% of your account's value.
- Your account falls below the Portfolio's minimum account size, and the Fund
liquidates your account (see page 30).
- The redemption results from a tax-free return of an excess contribution,
pursuant to Section 408(d)(4) or (5) of the Internal Revenue Code.
DISTRIBUTION AND SERVICE FEES
Investor A Shares of the Portfolios pay distribution (12b-1) and shareholder
service fees at an annual rate of up to 0.30% of each Portfolio's Investor A
Share assets. Investor B Shares of the Portfolios pay distribution (12b-1)
and shareholder service fees at an annual rate of up to 1.00% of each
Portfolio's Investor B Share assets. The Fund has adopted separate
distribution and service plans under Rule 12b-1 that allow each Portfolio to
pay fees from its Investor A Share or Investor B Share assets for selling and
distributing Investor A Shares or Investor B Shares, as the case may be, and
for services provided to shareholders. Because 12b-1 fees are paid on an
ongoing basis, over time they increase the cost of your investment and may
cost more than other sales charges.
CONVERTING INVESTOR B SHARES TO INVESTOR A SHARES
Eight years after you buy Investor B Shares of a Portfolio, they will
automatically convert to Investor A Shares of the Portfolio. This allows you
to benefit from the lower annual expenses of Investor A Shares.
CHOOSING BETWEEN INVESTOR A SHARES AND INVESTOR B SHARES
In deciding whether to buy Investor A Shares or Investor B Shares, you should
consider how long you plan to hold the shares. Over time, the higher fees on
Investor B Shares may equal or exceed the initial sales charge and fees for
Investor A Shares. Investor A Shares may be a better choice if you qualify to
have the sales charges reduced or eliminated, or if you plan to sell your
shares within one or two years. Consult your financial adviser for help in
choosing the appropriate share class.
24
<PAGE> 291
YOUR ACCOUNT EXPLANATION OF SALES PRICE
<TABLE>
<S> <C>
Shares of each class in a Portfolio are sold at their net
asset value (NAV) plus, in the case of Investor A Shares, a
front-end sales charge, if applicable. This is commonly
referred to as the "public offering price."
The NAV for each class of shares of a Portfolio is
determined as of the close of regular trading on the New
York Stock Exchange (currently 4:00 p.m., Eastern time) on
every business day. The NAV for a class of shares is
determined by adding the value of the Portfolio's
investments, cash and other assets attributable to a
particular share class, subtracting the Portfolio's
liabilities attributable to that class and then dividing the
result by the total number of shares in the class that are
outstanding.
- Each Portfolio's investments are valued according to
market value. When a market quote is not readily available,
the security's value is based on "fair value" as
determined by MVA under the supervision of the Fund's
Board of Directors.
- If you properly place a purchase order (see "How to Buy
Shares" on page 26) that is delivered to the Fund before
4:00 p.m. (Eastern time) on any business day, the order
receives the share price determined for your share class
as of 4:00 p.m. that day. If the order is received after
4:00 p.m., it will receive the price determined on the
next business day. You must pay for your shares no later
than 4:00 p.m. three business days after placing the
order, or the order will be cancelled.
</TABLE>
BUSINESS DAYS DEFINED
A business day is any
day that both the New
York Stock Exchange
and the Federal
Reserve Bank of St.
Louis are open for
business. Currently,
the Fund observes the
following holidays:
New Year's Day, Martin
Luther King Jr. Day,
Presidents' Day, Good
Friday, Memorial Day
(observed),
Independence Day
(observed), Labor Day,
Columbus Day,
Veterans' Day,
Thanksgiving and
Christmas.
25
<PAGE> 292
YOUR ACCOUNT HOW TO BUY SHARES
<TABLE>
<CAPTION>
TO OPEN TO ADD TO
MINIMUM INVESTMENTS YOUR ACCOUNT YOUR ACCOUNT
<S> <C> <C>
Regular accounts $1,000 $100
------------------------------------------------------------
Sweep program
through your
financial institution None None
------------------------------------------------------------
Wrap fee program
through your
financial institution None None
------------------------------------------------------------
Payroll Deduction
Program* None $25
------------------------------------------------------------
$1,000 minimum
Automatic Exchange account
Program* $5,000 balance
------------------------------------------------------------
Automatic Investment
Program* $50 $50
</TABLE>
*See Investor Programs below.
Investing in the Mercantile
Tax-Exempt Bond Portfolios is
quick and convenient. You can
purchase Investor A Shares or
Investor B Shares in any of the
following ways:
- THROUGH A BROKER-DEALER
ORGANIZATION. You can
purchase shares through any
broker-dealer organization
that has a sales agreement
with the Fund's distributor.
The broker-dealer
organization is responsible
for sending your purchase
order to the Fund.
- THROUGH A FINANCIAL
ORGANIZATION. You can
purchase shares through any
financial organization that
has entered into a servicing
agreement with the Fund. The
financial organization is
responsible for sending your
purchase order to the Fund.
- DIRECTLY FROM THE FUND BY MAIL. Just complete an account application and
send it, along with a check for at least the minimum purchase amount, to:
Mercantile Mutual Funds, Inc., P.O. Box 78069 -- Tram 001/128/41-6, St.
Louis, Missouri 63178. Remember to specify whether you're buying Investor
A Shares or Investor B Shares. To make additional investments once you've
opened your account, send your check to the address above together with
the detachable form that's included with your Fund statement or
confirmation of a prior transaction or a letter stating the amount of your
investment, the name of the Portfolio you want to invest in and your
account number.
In addition, you may call the Fund at 1-800-452-2724 for more information on
how to buy shares.
26
<PAGE> 293
YOUR ACCOUNT HOW TO SELL SHARES
SELLING RECENTLY
PURCHASED SHARES
If you attempt to
sell shares you
recently purchased
with a personal
check, the Fund
may delay
processing your
request until it
collects payment
for those shares.
This process may
take up to 15
days, so if you
plan to sell
shares shortly
after purchasing
them, you may want
to consider
purchasing shares
with a certified
or bank check or
via electronic
transfer to avoid
delays.
<TABLE>
<S> <C>
You can arrange to get money out of your account by selling
some or all of your shares. This is known as "redeeming"
your shares. You can redeem your shares in the following
ways:
THROUGH A BROKER-DEALER OR OTHER FINANCIAL ORGANIZATION
If you purchased your shares through a broker-dealer or
other financial organization, your redemption order should
be placed through the same organization. The organization is
responsible for sending your redemption order to the Fund on
a timely basis.
BY MAIL
Send your written redemption request to: Mercantile Mutual
Funds, Inc., P.O. Box 78069 -- Tram 001/128/41-6, St. Louis,
Missouri 63178. Your request must include the name of the
Portfolio, the number of shares or the dollar amount you
want to sell, your account number, your social security or
tax identification number and the signature of each
registered owner of the account. Your request also must be
accompanied by any share certificates that are properly
endorsed for transfer. Additional documents may be required
for certain types of shareholders, such as corporations,
partnerships, executors, trustees, administrators or
guardians.
The Fund's transfer agent may require a signature guarantee
unless the redemption proceeds are payable to the
shareholder of record and the redemption is either mailed to
the shareholder's address of record or electronically
transferred to the account designated on the original
account application. A signature guarantee helps prevent
fraud, and you may obtain one from most banks and
broker-dealers. Contact your broker-dealer or other
financial organization or the Fund for more information on
signature guarantees.
BY TELEPHONE
You may redeem your shares by telephone if you have selected
that option on your account application. Call the Fund at
1-800-452-2724 with your request. You may have your proceeds
mailed to your address or transferred electronically to the
bank account designated on your account application. If you
have not previously selected the telephone privilege, you
may add this feature by providing written instructions to
the Fund's transfer agent. If you have difficulty getting
through to the Fund because of unusual market conditions,
consider selling your shares by mail.
You may sell your Portfolio shares at any time. Your shares
will be sold at the NAV next determined after the Fund
accepts your order (see above). The proceeds of the sale of
Investor B Shares will be reduced by the applicable CDSC.
Your proceeds ordinarily are sent electronically or mailed
by check within three business days. If your account holds
both Investor A Shares and Investor B Shares, be sure to
specify which shares you are selling. Otherwise, Investor A
Shares will be sold first.
</TABLE>
27
<PAGE> 294
YOUR ACCOUNT INVESTOR PROGRAMS
It's also easy to buy or sell shares of the Portfolios by using one of the
programs described below.
AUTOMATIC INVESTMENT PROGRAM
You may open an account or make additional investments to an existing account
for as little as $50 a month with the Fund's Automatic Investment Program
(AIP). Under the AIP, you specify the dollar amount to be automatically
withdrawn each month from your bank checking account and invested in your
Portfolio account. Purchases of Investor A Shares or Investor B Shares will
occur on the 5th or 20th day (or the next business day after the 5th or the
20th) of each month at the net asset value plus any front-end sales charge,
if applicable, next determined on the day the order is effected. To take
advantage of the AIP, complete the AIP authorization form included with your
account application or contact your broker-dealer or other financial
organization.
AIP lets you take advantage of "dollar cost averaging," a long-term
investment technique designed to help investors reduce their average cost per
share over time. Instead of trying to time the market, you can invest a fixed
dollar amount each month. So, you buy fewer Portfolio shares when prices are
high and more when prices are low. Because dollar cost averaging involves
regular investing over time, regardless of share price, it may not be
appropriate for all investors.
In addition, dollar cost averaging does not guarantee a profit or protect
against loss in a steadily declining market. To be effective, dollar cost
averaging usually should be followed on a sustained, consistent basis. Even
then, however, there can be no guarantee of the success of this technique,
and it will not prevent a loss if an investor ultimately redeems his or her
shares at a price that is lower than the original purchase price.
EXCHANGES
The exchange privilege enables you to exchange Investor A Shares of one
Portfolio for Investor A Shares (or in certain limited circumstances, Trust
or Institutional Shares) of another Portfolio and to exchange Investor B
Shares of one Portfolio for Investor B Shares of another Portfolio. Just sign
up for the exchange privilege on your account application and contact your
broker-dealer or other financial organization when you want to exchange
shares. You also may exchange shares by telephoning the Fund directly (call
1-800-452-2724) if you have elected this privilege on your account
application. The exchange privilege may be exercised only in those states
where the class of shares of the Portfolio being acquired may be legally
sold.
When exchanging Investor A Shares of a Portfolio that has no sales charge or
a lower sales charge for Investor A Shares of a Portfolio with a higher sales
charge, you will pay the difference.
You may exchange Investor B Shares without paying a CDSC on the exchange. The
holding period of the shares originally held and redeemed will be added to
the holding period of the new shares acquired through the exchange.
28
<PAGE> 295
YOUR ACCOUNT INVESTOR PROGRAMS
AUTOMATIC EXCHANGE PROGRAM
This program lets you automatically exchange shares of one Portfolio for
shares of another Portfolio on a regular basis, as long as the shares are of
the same class. Because you're making regular purchases, the Automatic
Exchange Program enables you to take advantage of dollar cost averaging. (See
"Automatic Investment Program" above.)
To participate, you must make a minimum initial purchase of $5,000 and
maintain a minimum account balance of $1,000. In addition, you must complete
the authorization form included with your account application or available
from your broker-dealer or other financial organization. In order to change
instructions with respect to the Automatic Exchange Program or to discontinue
the program, you must send written instructions to your broker-dealer or
other financial organization or to the Fund.
AUTOMATIC WITHDRAWAL PLAN
If the net asset value of your account equals $10,000 or more, you may take
advantage of the Fund's Automatic Withdrawal Plan (AWP). With the AWP, you
can have monthly, quarterly, semi-annual or annual redemptions of at least
$50 from your Portfolio account sent to you via check or to your bank account
electronically on the 5th or 20th day of the applicable month of withdrawal.
No CDSC will be charged on withdrawals of Investor B Shares made through the
AWP that don't annually exceed 12% of your account's value.
To participate in the AWP, complete the AWP application included with your
account application or contact your broker-dealer or other financial
organization. A signature guarantee will be required. You may terminate your
participation in the AWP upon 30 days' notice to your broker-dealer or other
financial organization or to the Fund.
PAYROLL DEDUCTION PROGRAM
You can make regular investments from your paycheck. The minimum investment
is $25 per pay period. Call the Fund at 1-800-452-2724 for an application and
further information. The Fund may terminate the program at any time.
29
<PAGE> 296
YOUR ACCOUNT GENERAL TRANSACTION POLICIES
The Fund reserves the right to:
- Vary or waive any minimum investment requirement.
- Refuse any order to buy shares.
- Reject any exchange request.
- Change or cancel the procedures for selling or exchanging shares by
telephone at any time.
- Redeem all shares in your account if your balance falls below $500. If,
within 60 days of the Fund's written request, you have not increased your
account balance, you may be required to redeem your shares. The Fund will
not require you to redeem shares if the value of your account drops below
$500 due to fluctuations in net asset value.
- Send redemption proceeds within seven days after receiving a request, if
an earlier payment could adversely affect a Portfolio.
- Modify or terminate the Automatic Exchange, Automatic Investment and
Automatic Withdrawal programs at any time.
- Modify or terminate the exchange privilege after 60 days' written notice
to shareholders.
- Make a "redemption in kind." Under abnormal conditions that may make
payment in cash unwise, the Fund may offer partial or complete payment in
portfolio securities rather than cash at such securities'
then-market-value equal to the redemption price. In such cases, you may
incur brokerage costs in converting these securities to cash.
If you elect telephone privileges on the account application or in a letter
to the Fund, you may be responsible for any fraudulent telephone orders as
long as the Fund has taken reasonable precautions to verify your identity.
Also, your broker-dealer or other financial organization may establish
policies that differ from those of the Funds. For example, the organization
may charge transaction fees, set higher minimum investments, or impose
certain limitations on purchasing or redeeming shares in addition to those
identified in this prospectus. Contact your broker-dealer or other financial
organization for details.
30
<PAGE> 297
[Chart
Icon]
DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Portfolios pay their shareholders dividends from the Portfolios'
respective net investment income and distribute any net capital gains the
Portfolios have realized.
Dividends are declared daily and paid monthly. Capital gains, if any, are
distributed once a year. It's expected that each Portfolio's annual
distributions will be primarily income dividends.
Dividends on each share class of the Portfolios are determined in the same
manner and are paid in the same amount. However, each share class bears all
expenses associated with that particular class. So, because Investor B Shares
have higher distribution and service fees than Investor A Shares, the
dividends paid to Investor B shareholders will be lower than those paid to
Investor A shareholders.
All of your dividends and capital gains distributions with respect to a
particular Portfolio will be reinvested in additional shares of the same
class unless you instruct otherwise on your account application or have
redeemed all shares you held in the Portfolio. In such cases, dividends and
distributions will be paid in cash.
31
<PAGE> 298
- ----------------------
You will be advised at least annually regarding the federal income tax treatment
and, if you own shares of the Missouri Tax-Exempt Bond Portfolio, the Missouri
state income tax treatment, of dividends and distributions made to you. You
should save your account statements because they contain information you will
need to calculate your capital gains or losses upon your ultimate sale or
exchange of shares in the Portfolios.
- ----------------------
DISTRIBUTIONS AND TAXES
TAXATION
As with any investment, you should consider the tax
implications of an investment in the Portfolios. The
following is only a brief summary of some of the
important tax considerations generally affecting the
Portfolios and their shareholders under current law,
which may be subject to change in the future. Consult
your tax adviser with specific reference to your own tax
situation.
- It is expected that the Portfolios will distribute
dividends derived from interest earned on exempt
securities, and these "exempt-interest dividends" will
be exempt income for shareholders for federal income
tax purposes. However, distributions, if any, derived
from net capital gains of each Portfolio will generally
be taxable to you as capital gains. Dividends, if any,
derived from short-term capital gain or taxable
interest income will be taxable to you as ordinary
income.
- You should note that if you purchase shares just prior
to a capital gain distribution, the purchase price will
reflect the amount of the upcoming distribution, but
you will be taxed on the entire amount of the
distribution received, even though, as an economic
matter, the distribution simply constitutes a return of
capital. This is known as "buying into a dividend."
- You will recognize taxable gain or loss on a sale,
exchange or redemption of your shares, including an
exchange for shares of another Portfolio, based on the
difference between your tax basis in the shares and the
amount you receive for them. Any loss realized on
shares held for six months or less will be treated as a
long-term capital loss to the extent of any capital
gain dividends that were received on the shares. If you
receive an exempt-interest dividend with respect to any
share and the share is held by you for six months or
less, any loss on the sale or exchange of the share
will be disallowed to the extent of such dividend
amount.
- You should note that a portion of the exempt-interest
dividends paid by each Portfolio may constitute an item
of tax preference for purposes of determining federal
alternative minimum tax liability. Exempt-interest
dividends will also be considered along with other
adjusted gross income in determining whether any Social
Security or railroad retirement payments received by
you are subject to federal income taxes.
- The Missouri Tax-Exempt Bond Portfolio anticipates that
the dividends that it pays that are attributable to
interest earned by the Portfolio will also be exempt
from Missouri state income taxes. Dividends paid by the
Short-Intermediate Municipal and National Municipal
Bond Portfolios that are attributable to interest
earned by the Portfolios may be taxable to shareholders
under state or local law.
For more information regarding the taxation of the
Portfolios, consult the SAI under the heading "Additional
Information Concerning Taxes." You also should consult
your tax adviser for information regarding state and
local tax consequences with respect to your specific
situation.
32
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[Open Book
Icon]
MANAGEMENT OF THE FUND
THE ADVISER
MVA, subject to the general supervision of the Fund's Board of Directors, is
responsible for the day-to-day management of the Portfolios in accordance
with each Portfolio's respective investment objective and policies. This
includes making investment decisions, buying and selling securities and
overseeing the administration and recordkeeping for each Portfolio.
In exchange for these services, MVA receives an investment advisory fee,
which is calculated daily and paid monthly, according to the average daily
net assets of each Portfolio. For the fiscal year ended November 30, 1998,
the Portfolios paid MVA advisory fees as follows:
<TABLE>
<CAPTION>
INVESTMENT ADVISORY FEES
PORTFOLIO AS A % OF NET ASSETS
<S> <C>
------------------------------
Short-Intermediate Municipal
Portfolio .33%
------------------------------
Missouri Tax-Exempt Bond Portfolio .45%
------------------------------
National Municipal Bond Portfolio .34%
---------------------------------------------------------------------
</TABLE>
33
<PAGE> 300
[Open Hand
Icon]
FINANCIAL HIGHLIGHTS
INTRODUCTION
The financial highlights tables presented below are intended to help you
understand the financial performance of each Portfolio's Investor A Shares
and/or Investor B Shares for the past five years (or, if shorter, the period
since the Portfolio began operations or the particular shares were first
offered). Certain information reflects financial results for a single
Investor A Share or Investor B Share in each Portfolio. The total returns in
the tables represent the rate that an investor would have earned (or lost) on
an investment in either Investor A Shares or Investor B Shares, assuming
reinvestment of all dividends and distributions. This information has been
audited by KPMG LLP, independent auditors, whose report, along with the
Portfolios' financial statements, are included in the Fund's Annual Report to
Shareholders, and are incorporated by reference into the SAI.
34
<PAGE> 301
FINANCIAL HIGHLIGHTS SHORT-INTERMEDIATE MUNICIPAL PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
JULY 10, 1995 TO
FOR THE YEARS ENDED NOVEMBER 30, NOVEMBER 30,
1998 1997 1996 1995(a)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.11 $ 10.08 $ 10.08 $ 10.00
--------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.35 0.37 0.40 --
Net realized and unrealized gains
from investments 0.15 0.03 -- 0.08
--------------------------------------------------------------------------------------------
Total from Investment Activities 0.50 0.40 0.40 0.08
--------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.35) (0.37) (0.40) --
--------------------------------------------------------------------------------------------
Total Distributions (0.35) (0.37) (0.40) --
--------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.26 $ 10.11 $ 10.08 $ 10.08
--------------------------------------------------------------------------------------------
Total Return (excludes sales
charges) 5.16% 4.12% 4.02% 0.80%(b)
RATIOS/SUPPLEMENTARY DATA:
Net assets at end of period (000) $ 32 $ 16 $ 51 $ --(c)
Ratio of expenses to average net
assets 0.89% 0.62% 0.56% 0.00%(d)
Ratio of net investment income to
average net assets 3.54% 3.78% 3.83% 0.00%(d)
Ratio of expenses to average net
assets* 1.21% 1.32% 1.26% 0.00%(d)
Portfolio turnover** 18.58% 0.00% 0.00% 0.00%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Only one Investor A Share, worth $10.08, was outstanding as of November
30, 1995.
(d) Annualized.
35
<PAGE> 302
FINANCIAL HIGHLIGHTS MISSOURI TAX-EXEMPT BOND PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
FOR THE
SIX MONTHS ENDED FOR THE YEARS ENDED
FOR THE YEARS ENDED NOVEMBER 30, NOVEMBER 30, MAY 31,
1998 1997 1996 1995(d) 1995(a) 1994
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 11.87 $ 11.69 $ 11.74 $ 11.52 $ 11.13 $ 11.54
-----------------------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.52 0.53 0.55 0.27 0.55 0.55
Net realized and unrealized gains
(losses) from investments 0.21 0.18 (0.05) 0.22 0.40 (0.37)
-----------------------------------------------------------------------------------------------------------------
Total from Investment Activities 0.73 0.71 0.50 0.49 0.95 0.18
-----------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.52) (0.53) (0.55) (0.27) (0.55) (0.55)
Net realized gains -- -- -- -- (0.01) (0.04)
-----------------------------------------------------------------------------------------------------------------
Total Distributions (0.52) (0.53) (0.55) (0.27) (0.56) (0.59)
-----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 12.08 $ 11.87 $ 11.69 $ 11.74 $ 11.52 $ 11.13
-----------------------------------------------------------------------------------------------------------------
Total Return (excludes sales
charges) 6.31% 6.27% 4.41% 4.32%(b) 8.91% 1.53%
RATIOS/SUPPLEMENTARY DATA:
Net assets at end of period (000) $23,611 $23,722 $25,144 $24,726 $24,318 $27,919
Ratio of expenses to average net
assets 0.86% 0.86% 0.85% 0.95%(c) 0.84% 0.65%
Ratio of net investment income to
average net assets 4.38% 4.57% 4.75% 4.64%(c) 5.02% 4.75%
Ratio of expenses to average net
assets* 1.06% 1.06% 1.05% 1.18%(c) 1.18% 1.12%
Portfolio turnover** 6.14% 3.50% 3.66% 1.55% -- 20.00%
</TABLE>
* During the period, certain fees were voluntary reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) On September 27, 1994, the Portfolio redesignated Investor Shares as
"Investor A" Shares.
(b) Not annualized.
(c) Annualized.
(d) Upon reorganizing as a portfolio of the Fund on October 2, 1995, the
Missouri Tax-Exempt Bond Portfolio changed its fiscal year end from May
31 to November 30.
36
<PAGE> 303
FINANCIAL HIGHLIGHTS MISSOURI TAX-EXEMPT BOND PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
FOR THE
SIX MONTHS ENDED MARCH 1, 1995
FOR YEARS ENDED NOVEMBER 30, NOVEMBER 30, TO MAY 31,
1998 1997 1996 1995(e) 1995(a)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.86 $11.68 $11.74 $11.52 $11.19
--------------------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.43 0.44 0.45 0.22 0.11
Net realized and unrealized gains
(losses) on investments 0.21 0.18 (0.06) 0.22 0.33
--------------------------------------------------------------------------------------------------------------
Total from Investment Activities 0.64 0.62 0.39 0.44 0.44
--------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.43) (0.44) (0.45) (0.22) (0.11)
--------------------------------------------------------------------------------------------------------------
Total Distributions (0.43) (0.44) (0.45) (0.22) (0.11)
--------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $12.07 $11.86 $11.68 $11.74 $11.52
--------------------------------------------------------------------------------------------------------------
Total Return (excludes sales
charges) 5.47% 5.43% 3.48% 3.88%(b) 8.61%(c)
RATIOS/SUPPLEMENTARY DATA:
Net assets at end of period (000) $2,496 $1,398 $ 675 $ 433 $ 94
Ratio of expenses to average net
assets 1.66% 1.66% 1.65% 1.77%(d) 1.76%(d)
Ratio of net investment income to
average net assets 3.57% 3.76% 3.96% 3.82%(d) 4.00%(d)
Ratio of expenses to average net
assets* 1.76% 1.76% 1.75% 1.87%(d) 1.88%(d)
Portfolio turnover** 6.14% 3.50% 3.66% 1.55% --
</TABLE>
* During the period, certain fees were voluntary reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) On September 27, 1994, the Portfolio redesignated Investor Shares as
"Investor A" Shares and authorized the issuance of a third series of
shares designated as "Investor B" Shares. These financial highlights of
Investor B Shares cover the period from March 1, 1995 (commencement of
operations) through May 31, 1995.
(b) Not annualized.
(c) Represents the total return for Investor A Shares from June 1, 1994 to
February 28, 1995, plus the total return for Investor B Shares from March
1, 1995 to May 31, 1995.
(d) Annualized.
(e) Upon reorganizing as a portfolio of the Fund on October 2, 1995, the
Missouri Tax-Exempt Bond Portfolio changed its fiscal year end from May
31 to November 30.
37
<PAGE> 304
FINANCIAL HIGHLIGHTS NATIONAL MUNICIPAL BOND PORTFOLIO
<TABLE>
<CAPTION>
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
NOVEMBER 18, NOVEMBER 18,
FOR THE YEARS ENDED 1996 TO FOR THE YEARS ENDED 1996 TO
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
1998 1997 1996(a) 1998 1997 1996(a)
INVESTOR INVESTOR INVESTOR INVESTOR INVESTOR INVESTOR
A SHARES A SHARES A SHARES B SHARES B SHARES B SHARES
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.27 $ 10.05 $ 10.00 $ 10.29 $ 10.05 $ 10.00
--------------------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.44 0.52 0.02 0.36 0.44 0.02
Net realized and unrealized gains
from investments 0.30 0.22 0.05 0.30 0.24 0.05
--------------------------------------------------------------------------------------------------------------
Total from Investment Activities 0.74 0.74 0.07 0.66 0.68 0.07
--------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.44) (0.52) (0.02) (0.36) (0.44) (0.02)
Net realized gains (0.35) -- -- (0.35) -- --
--------------------------------------------------------------------------------------------------------------
Total Distributions (0.79) (0.52) (0.02) (0.71) (0.44) (0.02)
--------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.22 $ 10.27 $ 10.05 $ 10.24 $ 10.29 $ 10.05
--------------------------------------------------------------------------------------------------------------
Total Return (excludes sales
charge) 7.56% 7.61% 0.73%(b) 6.69% 7.01% 0.70%(b)
RATIOS/SUPPLEMENTARY DATA:
Net assets at end of period (000) $ 1,162 $ 717 $ 1 $ 503 $ 408 $ 1
Ratio of expenses to average net
assets 0.85% 0.35% 0.37%(c) 1.56% 1.17% 1.10%(c)
Ratio of net investment income to
average net assets 4.18% 4.71% 9.08%(c) 3.51% 4.08% 8.35%(c)
Ratio of expenses to average net
assets* 1.16% 1.17% 1.07%(c) 1.86% 1.89% 1.80%(c)
Portfolio turnover** 18.30% 83.94% -- 18.30% 83.94% --
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
38
<PAGE> 305
[Back Cover Page]
Where to find more information
You'll find more information about the Mercantile Tax-Exempt Bond Portfolios in
the following documents:
Annual and semi-annual reports
The Fund's annual and semi-annual reports contain more information about each
Portfolio and a discussion about the market conditions and investment strategies
that had a significant effect on each Portfolio's performance during the last
fiscal year.
Statement of Additional Information (SAI)
The SAI contains detailed information about the Portfolios and their policies.
By law, it's incorporated by reference into (considered to be part of) this
prospectus.
You can get a free copy of these documents, request other information about the
Portfolios and make shareholder inquiries by calling the Fund at 1-800-452-2724
or by writing to:
Mercantile Mutual Funds, Inc.
P.O. Box 78069
St. Louis, Missouri 63175
If you buy your shares through a broker-dealer or other financial institution,
you may contact your institution for more information.
You can write to the Securities and Exchange Commission (SEC) Public Reference
Section and ask them to mail you information about the Portfolios, including the
SAI. They'll charge you a fee for this service. You can also visit the SEC
Public Reference Room and copy the documents while you're there. For information
about the operation of the Public Reference Room, call the SEC.
Public Reference Section of the SEC
Washington, DC 20549-6009
1-800-SEC-0330
Reports and other information about the Mercantile Tax-Exempt Bond Portfolios
are also available on the SEC's website at http://www.sec.gov.
The Fund's Investment Company Act File No. is 811-3567
-35-
<PAGE> 306
Mercantile Mutual Funds, Inc.
PROSPECTUS
MARCH 31, 1999
STOCK 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
International Equity Portfolio
Investor A Shares and Investor B Shares
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved any shares of these Portfolios or determined if this
prospectus is truthful or complete. Anyone who tells you otherwise is committing
a criminal offense.
<PAGE> 307
CONTENTS
<TABLE>
<S> <C> <C>
RISK/RETURN SUMMARY
LOGO
LOGO
3 Overview
4 Balanced Portfolio
9 Equity Income Portfolio
13 Equity Index Portfolio
17 Growth & Income Equity Portfolio
21 Growth Equity Portfolio
25 Small Cap Equity Portfolio
29 Small Cap Equity Index Portfolio
32 International Equity Portfolio
36 Additional Information on Risk
YOUR ACCOUNT
LOGO
LOGO
37 Distribution Arrangements/Sales Charges
42 Explanation of Sales Price
43 How to Buy Shares
44 How to Sell Shares
45 Investor Programs
47 General Transaction Policies
DISTRIBUTIONS AND TAXES
LOGO
LOGO
48 Dividends and Distributions
49 Taxation
MANAGEMENT OF THE FUND
LOGO
LOGO
50 The Adviser
50 The Sub-Adviser
FINANCIAL HIGHLIGHTS
LOGO
LOGO
51 Introduction
52 Balanced Portfolio
54 Equity Income Portfolio
55 Equity Index Portfolio
56 Growth & Income Equity Portfolio
58 Growth Equity Portfolio
59 Small Cap Equity Portfolio
61 International Equity Portfolio
</TABLE>
2
<PAGE> 308
logo
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RISK/RETURN SUMMARY OVERVIEW
<TABLE>
<S> <C>
This prospectus describes the Mercantile Stock Portfolios,
eight investment portfolios offered by Mercantile Mutual
Funds, Inc. (the "Fund"). The Fund was formerly known as The
ARCH Fund(R), Inc. On the following pages, you will find
important information about each Portfolio, including:
- A description of the Portfolio's investment objective
(sometimes referred to as its goal);
- The Portfolio's principal investment strategies (the steps
it takes to try to meet its goal);
- The principal risks associated with the Portfolio (factors
that may prevent it from meeting its goal);
- The Portfolio's past performance (how successful it's been
in meeting its goal); and
- The fees and expenses (including sales charges) you pay as
an investor in the Portfolio.
WHO MAY WANT TO INVEST IN The Mercantile Stock Portfolios may be appropriate for
THE MERCANTILE STOCK investors who seek capital growth over the long term and are
PORTFOLIOS? comfortable with the risks of stock markets. The Portfolios
may NOT be appropriate for investors who are investing for
short-term goals or are mainly seeking current income.
Before investing in a Portfolio, you should carefully
consider:
- Your own investment goals
- The amount of time you are willing to leave your money
invested
- How much risk you are willing to take.
THE INVESTMENT ADVISER Mississippi Valley Advisors Inc. ("MVA" or the "Adviser")
serves as the investment adviser to each Portfolio. Founded
in 1987, MVA is a subsidiary of Mercantile Bancorporation
Inc., a regional banking and financial services
organization, and has its main office at One Mercantile
Center, Seventh and Washington Streets, St. Louis, Missouri
63101. As of December 31, 1998, MVA had approximately $9.9
billion in assets under management, including the Fund's
assets, which were approximately $4.3 billion.
An investment in the Portfolios is not a Mercantile Bank
deposit and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government
agency. You could lose money by investing in the Portfolios.
</TABLE>
3
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<PAGE> 309
logo
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RISK/RETURN SUMMARY BALANCED PORTFOLIO
TOTAL RETURN consists
of net income
(dividend and/or
interest income from
Portfolio securities,
less expenses of the
Portfolio) and capital
gains and losses, both
realized and
unrealized, from
Portfolio securities.
INVESTMENT GRADE BONDS
are those of medium
credit quality or
better as determined
by a national rating
agency, such as
Standard & Poor's
Ratings Group (bonds
rated BBB or better)
and Moody's Investors
Service, Inc. (bonds
rated Baa or higher).
The higher the credit
rating, the less
likely it is that the
bond issuer will
default on its
principal and interest
payments.
PORTFOLIO MANAGER
Peter Merzian, a
senior associate of
MVA, is responsible
for the day-to-day
management of the
Portfolio. He has been
with MVA since 1993
and has managed the
Portfolio since May
1996. He also manages
the Fund's three
municipal bond
portfolios.
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to maximize total
return through a combination of growth of capital and
current income consistent with the preservation of capital.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio invests in a combination of equity securities
(such as stocks), fixed-income securities (such as bonds)
and money market instruments in weightings the Adviser
believes will offer attractive total returns over time. In
making asset allocation decisions, the Adviser evaluates
forecasts for inflation, interest rates and long-term
corporate earnings growth. The Adviser then examines the
potential effect of these factors on each asset group over a
one- to three-year time period using its own dynamic
computer models. These models show the statistical impact of
the Adviser's economic outlook upon the future returns of
each asset group. The Adviser periodically will increase or
decrease the Portfolio's allocations to equities and
fixed-income securities based on which class appears
relatively more attractive than the other. For example, if
the Adviser expects more rapid economic growth leading to
better corporate earnings, it will increase the Portfolio's
holdings of equity securities and reduce its holdings of
fixed-income securities and money market instruments.
In selecting equity securities, the Adviser considers
historical and projected earnings, the price/earnings
relationship and company growth and asset value. In
selecting fixed-income securities, the Adviser seeks those
issues representing the best value among various sectors,
and also considers credit quality, prevailing interest rates
and liquidity.
Under normal market conditions, the Portfolio invests at
least 25% of its total assets in fixed-income securities and
no more than 75% of its total assets in equity securities.
The actual percentages will vary from time to time based on
the Adviser's economic and market outlooks. The Portfolio's
equity securities will consist mainly of common stocks, and
its fixed-income securities will consist mainly of
investment grade bonds, including U.S. Government
securities. Occasionally, the rating of a fixed-income
security held by the Portfolio may be downgraded. 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.
</TABLE>
4
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<PAGE> 310
logo
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RISK/RETURN SUMMARY BALANCED PORTFOLIO
<TABLE>
<S> <C>
PRINCIPAL RISK CONSIDERATIONS
The Portfolio invests in stocks and other equity securities,
which may decline in value over short or extended periods of
time. Equity markets tend to be cyclical; there are times
when stock prices generally increase, and other times when
they generally decrease. This could cause the value of your
investment in the Portfolio to fluctuate.
The Portfolio also invests in fixed-income securities, which
lose value when interest rates increase (but increase in
value when interest rates decline). Longer-term fixed-income
securities are more susceptible to these fluctuations in
interest rates than short-term fixed-income securities.
Changes in interest rates may cause certain fixed-income
securities, such as callable securities and mortgage-backed
securities, to be paid off much sooner or later than
expected. In the event that a security is paid off sooner
than expected because of a decline in interest rates, the
Portfolio may be unable to recoup all of its initial
investment and will also suffer from having to reinvest in
lower-yielding securities. In the event of a later than
expected payment because of a rise in interest rates, the
value of the obligation will decrease, and the Portfolio
will suffer from the inability to invest in higher-yielding
securities. Fixed-income securities are subject to other
risks, including the risk that the issuer will be unable to
make payments of principal and interest.
The Adviser evaluates the rewards and risks presented by all
securities purchased by the Portfolio and how they may
advance the Portfolio's investment objective. It is
possible, however, that these evaluations will prove to be
inaccurate.
</TABLE>
5
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<PAGE> 311
RISK/RETURN SUMMARY BALANCED PORTFOLIO
RETURN HISTORY
The bar chart and table on
this page show the
Portfolio's annual returns
and long-term performance,
thereby giving some
indication of the risk of
investing in the Portfolio.
The bar chart shows how the
performance of the
Portfolio's Investor A
Shares has varied from year
to year. The table shows
how the Portfolio's average
annual returns for one
year, five years and since
inception compare to those
of broad-based market
indexes. Both the bar chart
and table assume
reinvestment of all
dividends and
distributions. The
Portfolio's past
performance does not
necessarily indicate how it
will perform in the future.
KNOW YOUR INDEX
THE S&P 500 INDEX is an
unmanaged index comprised
of 500 widely held common
stocks listed on the New
York Stock Exchange, the
American Stock Exchange and
NASDAQ.
THE LEHMAN BROTHERS
AGGREGATE BOND INDEX is an
unmanaged index made up of
Lehman Brothers' Government/
Corporate Bond Index, its
Mortgage Backed Securities
Index and its Asset Backed
Securities Index.
INVESTOR A SHARES
YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
[STATED IN PERCENTAGES]
<TABLE>
<CAPTION>
BALANCED PORTFOLIO
------------------
<S> <C>
'1994' -2.11
'95' 26.30
'96' 11.93
'97' 18.02
'98' 11.11
</TABLE>
The returns for Investor B Shares
differed from the returns shown in the
bar chart because the two classes bear
different expenses. The bar chart does
not reflect any sales charges on
purchases of the Portfolio's Investor A
Shares. If sales charges were included,
returns would be lower than those shown.
Best quarter: 10.78% for the
quarter ending
December 31, 1998
Worst quarter: -7.39% for the
quarter ending
September 30, 1998
AVERAGE ANNUAL TOTAL
RETURNS
for the periods ended
December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION*
<S> <C> <C> <C>
Investor A Shares
(with 5.50% sales charge) 5.03% 11.38% 10.69%
Investor B Shares**
(with applicable contingent deferred sales
charge) 5.34% 11.88% 11.12%
S&P 500 Index 28.60% 24.05% 21.73%
Lehman Brothers Aggregate Bond Index 8.69% 7.27% 7.27%
</TABLE>
* April 1, 1993 for Investor A Shares; March 31, 1993 for the S&P 500 Index
and the Lehman Brothers Aggregate Bond Index.
** Investor B Shares of the Portfolio commenced operations on March 1, 1995.
Average annual total returns for prior periods reflect the performance of
the Portfolio's Investor A Shares which has been restated to reflect the
applicable contingent deferred sales charges payable on redemptions of
Investor B Shares within six years of the date of purchase. Investor B
Shares are subject to distribution and service fees at a maximum annual
rate of 1.00% of the Portfolio's Investor B Share assets. Had the
performance of Investor A Shares been restated to reflect these
distribution and service fees, average annual total returns would have
been lower.
6
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<PAGE> 312
RISK/RETURN SUMMARY BALANCED PORTFOLIO
FEES AND EXPENSES
<TABLE>
<S> <C> <C> <C>
SHAREHOLDER FEES INVESTOR A INVESTOR B
(FEES YOU PAY DIRECTLY) SHARES SHARES
The table on this page shows the fees and
expenses that you pay if you buy and hold
Investor A Shares or Investor B Shares of the
Balanced Portfolio.
Maximum sales charge (load) to
buy shares, shown as a % of the
offering price 5.50%(1) None
Maximum deferred sales charge
(load) shown as a % of the
offering price or sale price,
whichever is less None 5.00%(2)
ANNUAL PORTFOLIO OPERATING
EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM INVESTOR A INVESTOR B
THE PORTFOLIO'S ASSETS) SHARES SHARES
Management Fees .75% .75%
Distribution (12b-1) and Service
Fees .30% 1.00%
Other Expenses .31%(3) .31%(3)
Total Annual Portfolio Operating
Expenses 1.36%(3) 2.06%(3)
</TABLE>
(1) Reduced sales charges may be available.
See "Distribution Arrangements/Sales
Charges" below.
(2) This amount applies if you sell your
shares in the first year after purchase
and gradually declines until it is
eliminated after six years. After eight
years, your Investor B Shares will
automatically convert to Investor A
Shares. See "Distribution Arrangements/
Sales Charges" below.
(3) Other Expenses and Total Annual
Portfolio Operating Expenses for the
Portfolio's Investor A Shares and
Investor B Shares for the current
fiscal year are expected to be less
than the amounts shown above because
certain of the Portfolio's service
providers are voluntarily waiving a
portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers
and/or reimbursements are being made in
order to keep the annual fees and
expenses for the Portfolio's Investor A
Shares and Investor B Shares at certain
levels. OTHER EXPENSES AND TOTAL ANNUAL
PORTFOLIO OPERATING EXPENSES, AFTER
TAKING THESE FEE WAIVERS AND EXPENSE
REIMBURSEMENTS INTO ACCOUNT, ARE
EXPECTED TO BE .22% AND 1.27%,
RESPECTIVELY, FOR INVESTOR A SHARES AND
.22% AND 1.97%, RESPECTIVELY, FOR
INVESTOR B SHARES. These fee waivers
and expense reimbursements may be
revised or cancelled at any time.
7
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<PAGE> 313
RISK/RETURN SUMMARY BALANCED PORTFOLIO
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then sell
all of your shares at the
end of those periods. The
example also assumes that
your investment has a 5%
return each year, the
Portfolio's operating
expenses remain the same and
your Investor B Shares
automatically convert to
Investor A Shares after
eight years. Although your
actual costs may be higher
or lower, based on these
assumptions your costs would
be:
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
INVESTOR A SHARES $681 $957 $1,254 $2,095
INVESTOR B SHARES $709 $946 $1,308 $2,210
If you hold Investor B
Shares, you would pay the
following expenses if you
did not sell your shares:
$209 $646 $1,108 $2,210
</TABLE>
8
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<PAGE> 314
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EQUITY INCOME
PORTFOLIO
RISK/RETURN SUMMARY
MARKET CAPITALIZATION
is a common measure of
the size of a company.
It is the market price
of a share of the
company's stock
multiplied by the
number of outstanding
shares.
VALUE STOCKS are those
that appear to be
underpriced based on
valuation measures,
such as lower
price-to-earnings and
price-to-book value
ratios.
PORTFOLIO MANAGER
MVA's Equity Committee
is responsible for the
day-to-day management
of the Portfolio. The
Committee has managed
the Portfolio since
1998.
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to seek to provide
an above-average level of income consistent with long-term
capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio invests primarily in the common stocks of
value companies with large market capitalizations
(generally, $5 billion or higher). In selecting these
stocks, the Adviser evaluates a number of quantitative
factors, including dividend yield, current and future
earnings potential compared to stock prices and total return
potential. The Adviser also examines other measures of
valuation, including cash flow, asset value and book value.
Under normal market conditions, the Portfolio invests at
least 65% of its total assets in income-producing
(dividend-paying) equity securities, primarily common
stocks. These stocks generally will be listed on a national
stock exchange or will be unlisted stocks with established
over-the-counter markets. Many such stocks may offer
above-average levels of income as compared to the S&P 500
Index.
PRINCIPAL RISK CONSIDERATIONS
The Portfolio invests in stocks and other equity securities,
which may decline in value over short or extended periods of
time. Equity markets tend to be cyclical; there are times
when stock prices generally increase, and other times when
they generally decrease. This could cause the value of your
investment in the Portfolio to fluctuate. In addition, the
Portfolio is subject to the additional risk that the value
stocks it typically holds may not perform as well as other
types of stocks, such as growth stocks.
The Adviser evaluates the rewards and risks presented by all
securities purchased by the Portfolio and how they may
advance the Portfolio's investment objective. It is
possible, however, that these evaluations will prove to be
inaccurate.
</TABLE>
9
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EQUITY INCOME
PORTFOLIO
RISK/RETURN SUMMARY
RETURN HISTORY
The bar chart and table on
this page show the
Portfolio's annual returns
and long-term performance,
thereby giving some
indication of the risk of
investing in the Portfolio.
The bar chart shows the
performance of the
Portfolio's Investor A
Shares during the last
calendar year. The table
shows how the Portfolio's
average annual returns for
one year and since
inception compare to those
of a broad-based market
index. Both the bar chart
and table assume
reinvestment of all
dividends and
distributions. The
Portfolio's past
performance does not
necessarily indicate how it
will perform in the future.
KNOW YOUR INDEX
THE RUSSELL 1000 VALUE
INDEX is an unmanaged index
that measures the
performance of the stocks
in the Russell 1000 Index
with less than average
growth orientation.
Companies in this Index
generally have low price to
book and price/earnings
ratios, higher dividend
yields and lower forecasted
growth values. The Russell
1000 Index consists of the
1,000 largest U.S.
companies as ranked by
total market
capitalization.
INVESTOR A SHARES
YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
[STATED IN PERCENTAGES]
<TABLE>
<CAPTION>
EQUITY INCOME PORTFOLIO
-----------------------
<S> <C>
'1998' 10.09
</TABLE>
The return for Investor B Shares differed
from the return shown in the bar chart
because the two classes bear different
expenses. The bar chart does not reflect
any sales charges on purchases of the
Portfolio's Investor A Shares. If these
sales charges were included, the return
would be lower than that shown.
Best quarter: 14.36% for the
quarter ending
June 30, 1997
Worst quarter: -8.77% for the
quarter ending
September 30, 1998
AVERAGE ANNUAL TOTAL
RETURNS
for the periods ended
December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION*
<S> <C> <C>
Investor A Shares
(with 5.50% sales charge) 4.04% 13.51%
Investor B Shares
(with applicable contingent deferred sales charge) 5.05% 14.65%
Russell 1000 Value Index 15.63% 23.26%
</TABLE>
* February 27, 1997 for Investor A Shares and Investor B Shares; February 28,
1997 for the Russell 1000 Value Index.
10
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<PAGE> 316
EQUITY INCOME
RISK/RETURN SUMMARY PORTFOLIO
FEES AND EXPENSES
<TABLE>
<S> <C> <C> <C>
SHAREHOLDER FEES INVESTOR A INVESTOR B
(FEES YOU PAY DIRECTLY) SHARES SHARES
The table on this page shows the fees and
expenses that you pay if you buy and hold
Investor A Shares or Investor B Shares of the
Equity Income Portfolio.
Maximum sales charge (load) to
buy shares, shown as a % of the
offering price 5.50%(1) None
Maximum deferred sales charge
(load) shown as a % of the
offering price or sale price,
whichever is less None 5.00%(2)
ANNUAL PORTFOLIO OPERATING
EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM INVESTOR A INVESTOR B
THE PORTFOLIO'S ASSETS) SHARES SHARES
Management Fees .75% .75%
Distribution (12b-1) and Service
Fees .30% 1.00%
Other Expenses .33%(3) .33%(3)
Total Annual Portfolio Operating
Expenses 1.38%(3) 2.08%(3)
</TABLE>
(1) Reduced sales charges may be available.
See "Distribution Arrangements/Sales
Charges" below.
(2) This amount applies if you sell your
shares in the first year after purchase
and gradually declines until it is
eliminated after six years. After eight
years, your Investor B Shares will
automatically convert to Investor A
Shares. See "Distribution Arrangements/
Sales Charges" below.
(3) Other Expenses and Total Annual
Portfolio Operating Expenses for the
Portfolio's Investor A Shares and
Investor B Shares for the current
fiscal year are expected to be less
than the amounts shown above because
certain of the Portfolio's service
providers are voluntarily waiving a
portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers
and/or reimbursements are being made in
order to keep the annual fees and
expenses for the Portfolio's Investor A
Shares and Investor B Shares at certain
levels. OTHER EXPENSES AND TOTAL ANNUAL
PORTFOLIO OPERATING EXPENSES, AFTER
TAKING THESE FEE WAIVERS AND EXPENSE
REIMBURSEMENTS INTO ACCOUNT, ARE
EXPECTED TO BE .22% AND 1.27%,
RESPECTIVELY, FOR INVESTOR A SHARES,
AND .22% AND 1.97%, RESPECTIVELY, FOR
INVESTOR B SHARES. These fee waivers
and expense reimbursements may be
revised or cancelled at any time.
11
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<PAGE> 317
EQUITY INCOME
RISK/RETURN SUMMARY PORTFOLIO
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then sell
all of your shares at the
end of those periods. The
example also assumes that
your investment has a 5%
return each year, the
Portfolio's operating
expenses remain the same and
your Investor B Shares
automatically convert to
Investor A Shares after
eight years. Although your
actual costs may be higher
or lower, based on these
assumptions your costs would
be:
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
INVESTOR A SHARES $683 $963 $1,264 $2,116
INVESTOR B SHARES $711 $952 $1,319 $2,231
If you hold Investor B
Shares, you would pay the
following expenses if you
did not sell your shares:
$211 $652 $1,119 $2,231
</TABLE>
12
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<PAGE> 318
logo
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RISK/RETURN SUMMARY EQUITY INDEX PORTFOLIO
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to seek to provide
investment results that, before the deduction of operating
expenses, approximate the price and yield performance of
U.S. publicly traded common stocks with large stock market
capitalizations, as represented by the Standard & Poor's 500
Index (the "S&P 500 Index").
The Portfolio's investment objective can be changed by the
Fund's Board of Directors without shareholder approval.
Shareholders will be given at least 30 days' written notice
before any such change occurs.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio uses an "indexing" strategy through the use of
computer models to approximate the investment performance of
the S&P 500 Index. The Portfolio invests substantially all
(at least 80%) of its total assets in securities listed in
the S&P 500 Index and typically will hold all 500 stocks
represented in the Index. In general, each stock's
percentage weighting in the Portfolio is based on its
weighting in the Index. When stocks are removed from or
added to the Index, those changes are reflected in the
Portfolio. The Portfolio periodically "rebalances" its
holdings as dictated by changes in shareholder purchase and
redemption activity and in the composition of the S&P 500
Index.
PRINCIPAL RISK CONSIDERATIONS
The Portfolio invests in stocks and other equity securities,
which may decline in value over short or extended periods of
time. Equity markets tend to be cyclical; there are times
when stock prices generally increase, and other times when
they generally decrease. This could cause the value of your
investment in the Portfolio to fluctuate. In addition, the
Portfolio is subject to the additional risk that the
large-capitalization stocks it typically holds may not
perform as well as other types of stocks, such as
small-capitalization stocks.
There is the additional risk that the Portfolio's investment
results may fail to match those of the S&P 500 Index.
</TABLE>
INDEXING is a strategy
whereby a Portfolio
attempts to weight its
securities to match
those of a broadly-
based securities index
in an attempt to
approximate the
index's performance.
The S&P 500 INDEX is
an unmanaged index
comprised of 500
widely held common
stocks listed on the
New York Stock
Exchange, the American
Stock Exchange and
NASDAQ.
13
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<PAGE> 319
RISK/RETURN SUMMARY EQUITY INDEX PORTFOLIO
RETURN HISTORY
The bar chart and table on
this page show the
Portfolio's annual returns
and long-term performance,
thereby giving some
indication of the risk of
investing in the Portfolio.
The bar chart shows the
performance of the
Portfolio's Investor A
Shares during the last
calendar year. The table
shows how the Portfolio's
average annual returns for
one year and since
inception compare to those
of the S&P 500 Index. Both
the bar chart and table
assume reinvestment of all
dividends and
distributions. The
Portfolio's past
performance does not
necessarily indicate how it
will perform in the future.
INVESTOR A SHARES
YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
[STATED IN PERCENTAGES]
<TABLE>
<CAPTION>
EQUITY INDEX PORTFOLIO
----------------------
<S> <C>
'1998' 27.76
</TABLE>
The bar chart does not reflect any sales
charges on purchases of the Portfolio's
Investor A Shares. If these sales charges
were included, the return would be lower
than that shown.
Best quarter: 20.97% for the
quarter ending
December 31, 1998
Worst quarter: -9.96% for the
quarter ending
September 30, 1998
AVERAGE ANNUAL TOTAL
RETURNS
for the periods ended
December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION*
<S> <C> <C>
Investor A Shares
(with 5.50% sales charge) 20.77% 26.26%
S&P 500 Index 28.60% 31.31%
</TABLE>
* May 1, 1997 for Investor A Shares; April 30, 1997 for the S&P 500 Index.
14
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RISK/RETURN SUMMARY EQUITY INDEX PORTFOLIO
FEES AND EXPENSES
<TABLE>
<S> <C> <C>
SHAREHOLDER FEES
(FEES YOU PAY DIRECTLY) INVESTOR A SHARES
The table on this page shows the fees and
expenses that you pay if you buy and hold
Investor A Shares of the Equity Index
Portfolio.
Maximum sales charge (load) to buy shares,
shown as a % of the offering price 5.50%(1)
Maximum deferred sales charge (load) shown
as a % of the offering price or sale
price, whichever is less None
ANNUAL PORTFOLIO OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS) INVESTOR A SHARES
Management Fees .30%
Distribution (12b-1) and Service Fees .30%
Other Expenses .43%(2)
Total Annual Portfolio Operating Expenses 1.03%(2)
</TABLE>
(1) Reduced sales charges may be available.
See "Distribution Arrangements/Sales
Charges" below.
(2) Other Expenses and Total Annual
Portfolio Operating Expenses for the
Portfolio's Investor A Shares for the
current fiscal year are expected to be
less than the amounts shown above
because certain of the Portfolio's
service providers are voluntarily
waiving a portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers
and/or reimbursements are being made in
order to keep the annual fees and
expenses for the Portfolio's Investor A
Shares at a certain level. OTHER
EXPENSES AND TOTAL ANNUAL PORTFOLIO
OPERATING EXPENSES, AFTER TAKING THESE
FEE WAIVERS AND EXPENSE REIMBURSEMENTS
INTO ACCOUNT, ARE EXPECTED TO BE .25%
AND .85%, RESPECTIVELY, FOR INVESTOR A
SHARES. These fee waivers and expense
reimbursements may be revised or
cancelled at any time.
15
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<PAGE> 321
RISK/RETURN SUMMARY EQUITY INDEX PORTFOLIO
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then sell
all of your shares at the
end of those periods. The
example also assumes that
your investment has a 5%
return each year and the
Portfolio's operating
expenses remain the same.
Although your actual costs
may be higher or lower,
based on these assumptions
your costs would be:
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
INVESTOR A SHARES $649 $860 $1,087 $1,740
</TABLE>
16
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<PAGE> 322
logo
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GROWTH & INCOME
EQUITY PORTFOLIO
RISK/RETURN SUMMARY
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to provide long-term
capital growth, with income a secondary consideration.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio invests primarily in common stocks. The
Adviser selects stocks based on a number of factors related
to historical and projected earnings and the price/earnings
relationship as well as company growth and asset value,
consistency of earnings growth and earnings quality.
Stocks purchased for the Portfolio generally will be listed
on a national stock exchange or will be unlisted securities
with an established over-the-counter market. These stocks
tend to pay dividends, so many of the Portfolio's
investments may produce some income. Nevertheless, income is
not the primary factor in the stock selection process.
PRINCIPAL RISK CONSIDERATIONS
The Portfolio invests in stocks and other equity securities,
which may decline in value over short or extended periods of
time. Equity markets tend to be cyclical; there are times
when stock prices generally increase, and other times when
they generally decrease. This could cause the value of your
investment in the Portfolio to fluctuate.
The Adviser evaluates the rewards and risks presented by all
securities purchased by the Portfolio and how they may
advance the Portfolio's investment objective. It is
possible, however, that these evaluations will prove to be
inaccurate.
</TABLE>
PORTFOLIO MANAGER
MVA's Equity Committee
is responsible for the
day-to-day management
of the Portfolio. The
Committee has managed
the Portfolio since
1998.
17
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<PAGE> 323
GROWTH & INCOME
EQUITY PORTFOLIO
RISK/RETURN SUMMARY
RETURN HISTORY
The bar chart and table on
this page show the
Portfolio's annual returns
and long-term performance,
thereby giving some
indication of the risk of
investing in the Portfolio.
The bar chart shows how the
performance of the
Portfolio's Investor A
Shares has varied from year
to year. The table shows
how the Portfolio's average
annual returns for one
year, five years, ten years
and since inception compare
to those of a broad-based
market index. Both the bar
chart and table assume
reinvestment of all
dividends and
distributions. The
Portfolio's past
performance does not
necessarily indicate how it
will perform in the future.
KNOW YOUR INDEX
THE S&P 500 INDEX is an
unmanaged index comprised
of 500 widely held common
stocks listed on the New
York Stock Exchange, the
American Stock Exchange and
NASDAQ.
INVESTOR A SHARES
YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
[STATED IN PERCENTAGES]
<TABLE>
<CAPTION>
GROWTH & INCOME EQUITY PORTFOLIO
--------------------------------
<S> <C>
'1989' 26.81
'90' -1.40
'91' 26.66
'92' 10.61
'93' 9.61
'94' -0.42
'95' 34.12
'96' 18.88
'97' 27.21
'98' 12.73
</TABLE>
The returns for Investor B Shares
differed from the returns shown in the
bar chart, because the two classes bear
different expenses. The bar chart does
not reflect any sales charges on
purchases of the Portfolio's Investor A
Shares. If these sales charges were
included, returns would be lower than
those shown.
Best quarter: 18.12% for the
quarter ending
December 31, 1998
Worst quarter: -14.42% for the
quarter ending
September 30, 1998
AVERAGE ANNUAL TOTAL
RETURNS
for periods ended
December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS 10 YEARS INCEPTION*
<S> <C> <C> <C> <C>
Investor A Shares
(with 5.50% sales charge) 6.88% 16.65% 15.28% 15.02%
Investor B Shares**
(with applicable contingent deferred sales
charge) 6.94% 17.16% 15.58% 15.29%
S&P 500 Index 28.60% 24.05% 19.19% 18.93%
</TABLE>
* June 2, 1988 for Investor A Shares; May 31, 1988 for the S&P 500 Index.
** Investor B Shares of the Portfolio commenced operations on March 1, 1995.
Average annual total returns for prior periods reflect the performance of
the Portfolio's Investor A Shares which has been restated to reflect the
applicable contingent deferred sales charges payable on redemptions of
Investor B Shares within six years of the date of purchase. Investor B
Shares are subject to distribution and service fees at a maximum annual
rate of 1.00% of the Portfolio's Investor B Share assets. Had the
performance of Investor A Shares been restated to reflect these
distribution and service fees, average annual total returns would have
been lower.
18
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<PAGE> 324
GROWTH & INCOME
RISK/RETURN SUMMARY EQUITY PORTFOLIO
FEES AND EXPENSES
<TABLE>
<S> <C> <C> <C>
SHAREHOLDER FEES INVESTOR A INVESTOR B
(FEES YOU PAY DIRECTLY) SHARES SHARES
The table on this page shows the fees and
expenses that you pay if you buy and hold
Investor A Shares or Investor B Shares of the
Growth & Income Equity Portfolio.
Maximum sales charge (load) to
buy shares, shown as a % of the
offering price 5.50%(1) None
Maximum deferred sales charge
(load) shown as a % of the
offering price or sale price,
whichever is less None 5.00%(2)
ANNUAL PORTFOLIO OPERATING
EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM INVESTOR A INVESTOR B
THE PORTFOLIO'S ASSETS) SHARES SHARES
Management Fees .55% .55%
Distribution (12b-1) and Service
Fees .30% 1.00%
Other Expenses .29%(3) .29%(3)
Total Annual Portfolio Operating
Expenses 1.14%(3) 1.84%(3)
</TABLE>
(1) Reduced sales charges may be available.
See "Distribution Arrangements/Sales
Charges" below.
(2) This amount applies if you sell your
shares in the first year after purchase
and gradually declines until it is
eliminated after six years. After eight
years, your Investor B Shares will
automatically convert to Investor A
Shares. See "Distribution Arrangements/
Sales Charges" below.
(3) Other Expenses and Total Annual
Portfolio Operating Expenses for the
Portfolio's Investor A Shares and
Investor B Shares for the current
fiscal year are expected to be less
than the amounts shown above because
certain of the Portfolio's service
providers are voluntarily waiving a
portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers
and/or reimbursements are being made in
order to keep the annual fees and
expenses for the Portfolio's Investor A
Shares and Investor B Shares at certain
levels. OTHER EXPENSES AND TOTAL ANNUAL
PORTFOLIO OPERATING EXPENSES, AFTER
TAKING THESE FEE WAIVERS AND EXPENSE
REIMBURSEMENTS INTO ACCOUNT, ARE
EXPECTED TO BE .19% AND 1.04%,
RESPECTIVELY, FOR INVESTOR A SHARES AND
.19% AND 1.74%, RESPECTIVELY, FOR
INVESTOR B SHARES. These fee waivers
and expense reimbursements may be
revised or cancelled at any time.
19
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<PAGE> 325
GROWTH & INCOME
RISK/RETURN SUMMARY EQUITY PORTFOLIO
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then sell
all of your shares at the
end of those periods. The
example also assumes that
your investment has a 5%
return each year, the
Portfolio's operating
expenses remain the same and
your Investor B Shares
automatically convert to
Investor A Shares after
eight years. Although your
actual costs may be higher
or lower, based on these
assumptions your costs would
be:
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
INVESTOR A SHARES $660 $892 $1,143 $1,860
INVESTOR B SHARES $687 $879 $1,195 $1,975
If you hold Investor B
Shares, you would pay the
following expenses if you
did not sell
your shares:
$187 $579 $ 995 $1,975
</TABLE>
20
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<PAGE> 326
logo
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GROWTH EQUITY
PORTFOLIO
RISK/RETURN SUMMARY
GROWTH STOCKS offer
strong revenue and
earnings potential and
accompanying capital
growth, with less
dividend income than
value stocks.
PORTFOLIO MANAGER
MVA's Equity Committee
is responsible for the
day-to-day management
of the Portfolio. The
Committee has managed
the Portfolio since
1998.
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is capital
appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio invests primarily in the common stocks of
growth companies. In selecting securities for the Portfolio,
the Adviser evaluates a company's earnings history and the
risk and volatility of the company's business. The Adviser
also considers other factors, such as product position and
the ability to increase market share, but the ability to
increase company earnings is the primary consideration.
Under normal market conditions, the Portfolio invests at
least 65% of its total assets in common stocks or other
equity securities, such as preferred stocks, rights and
warrants. Typically, the Portfolio's stocks are those of
large- and medium-capitalization companies that are listed
on the New York Stock Exchange, the American Stock Exchange
or NASDAQ.
PRINCIPAL RISK CONSIDERATIONS
The Portfolio invests in stocks and other equity securities,
which may decline in value over short or extended periods of
time. Equity markets tend to be cyclical; there are times
when stock prices generally increase, and other times when
they generally decrease. This could cause the value of your
investment in the Portfolio to fluctuate. In addition, the
Portfolio is subject to the additional risk that the growth
stocks it typically holds may not perform as well as other
types of stocks, such as value stocks.
The Adviser evaluates the rewards and risks presented by all
securities purchased by the Portfolio and how they may
advance the Portfolio's investment objective. It is
possible, however, that these evaluations will prove to be
inaccurate.
</TABLE>
21
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<PAGE> 327
GROWTH EQUITY
PORTFOLIO
RISK/RETURN SUMMARY
RETURN HISTORY(+)
The bar chart and table on
this page show the
Portfolio's annual returns
and long-term performance,
thereby giving some
indication of the risk of
investing in the Portfolio.
The bar chart shows how the
performance of the
Portfolio's Investor A
Shares has varied from year
to year. The table shows
how the Portfolio's average
annual returns for one
year, five years and since
inception compare to those
of a broad-based market
index. Both the bar chart
and table assume
reinvestment of dividends
and distributions. The
Portfolio's past
performance does not
necessarily indicate how it
will perform in the future.
KNOW YOUR INDEX
THE S&P 500 INDEX is an
unmanaged index comprised
of 500 widely held common
stocks listed on the New
York Stock Exchange, the
American Stock Exchange and
NASDAQ.
INVESTOR A SHARES
YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
[STATED IN PERCENTAGES]
<TABLE>
<CAPTION>
GROWTH EQUITY PORTFOLIO
-----------------------
<S> <C>
'1994' -2.06
'95' 44.17
'96' 17.49
'97' 26.98
'98' 29.44
</TABLE>
The returns for Investor B Shares
differed from the returns shown in the
bar chart, because the two classes bear
different expenses. The bar chart does
not reflect any sales charges on
purchases of the Portfolio's Investor A
Shares. If sales charges were included,
returns would be lower than those shown.
Best quarter: 25.08% for the
quarter ending
December 31, 1998
Worst quarter: -11.84% for the
quarter ending
September 30, 1998
AVERAGE ANNUAL TOTAL
RETURNS
for the periods ended
December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION*
<S> <C> <C> <C>
Investor A Shares
(with 5.50% sales charge) 22.30% 20.83% 17.13%
Investor B Shares**
(with applicable contingent deferred sales charge) 23.67% 21.96% 18.03%
S&P 500 Index 28.60% 24.05% 21.60%
</TABLE>
+ The Portfolio commenced operations on January 4, 1993 as the Arrow Equity
Portfolio, a separate investment portfolio (the "Predecessor Portfolio")
of Arrow Funds. On November 21, 1997, the Predecessor Portfolio was
reorganized as a new portfolio of the Fund. Prior to the reorganization,
the Predecessor Portfolio offered and sold shares that were similar to the
Fund's Investor A Shares. Annual returns for periods prior to November 21,
1997 reflect the performance of the Predecessor Portfolio.
* January 4, 1993 for Investor A Shares; December 31, 1992 for the S&P 500
Index.
** Investor B Shares of the Portfolio commenced operations on February 23,
1998. Average annual total returns for prior periods reflect the
performance of the Portfolio's Investor A Shares which has been restarted
to reflect the applicable contingent deferred sales charges payable on
redemptions of Investor B Shares within six years of the date of purchase.
Investor B Shares are subject to distribution and service fees at a
maximum annual rate of 1.00% of the Portfolio's Investor B Share assets.
Had the performance of Investor A Shares been restated to reflect these
distribution and service fees, average annual total returns would have
been lower.
22
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<PAGE> 328
GROWTH EQUITY
RISK/RETURN SUMMARY PORTFOLIO
FEES AND EXPENSES
<TABLE>
<S> <C> <C> <C>
SHAREHOLDER FEES INVESTOR A INVESTOR B
(FEES YOU PAY DIRECTLY) SHARES SHARES
The table on this page shows the fees and
expenses that you pay if you buy and hold
Investor A Shares or Investor B Shares of the
Growth Equity Portfolio.
Maximum sales charge (load) to
buy shares, shown as a % of the
offering price 5.50%(1) None
Maximum deferred sales charge
(load) shown as a % of the
offering price or sale price,
whichever is less None 5.00%(2)
ANNUAL PORTFOLIO OPERATING
EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM INVESTOR A INVESTOR B
THE PORTFOLIO'S ASSETS) SHARES SHARES
Management Fees .75% .75%
Distribution (12b-1) and Service
Fees .30% 1.00%
Other Expenses .40%(3) .40%(3)
Total Annual Portfolio Operating
Expenses 1.45%(3) 2.15%(3)
</TABLE>
(1) Reduced sales charges may be available.
See "Distribution Arrangements/Sales
Charges" below.
(2) This amount applies if you sell your
shares in the first year after purchase
and gradually declines until it is
eliminated after six years. After eight
years, your Investor B Shares will
automatically convert to Investor A
Shares. See "Distribution Arrangements/
Sales Charges" below.
(3) Other Expenses and Total Annual
Portfolio Operating Expenses for the
Portfolio's Investor A Shares and
Investor B Shares for the current
fiscal year are expected to be less
than the amounts shown above because
certain of the Portfolio's service
providers are voluntarily waiving a
portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers
and/or reimbursements are being made in
order to keep the annual fees and
expenses for the Portfolio's Investor A
Shares and Investor B Shares at certain
levels. OTHER EXPENSES AND TOTAL ANNUAL
PORTFOLIO OPERATING EXPENSES, AFTER
TAKING THESE FEE WAIVERS AND EXPENSE
REIMBURSEMENTS INTO ACCOUNT, ARE
EXPECTED TO BE .22% AND 1.27%,
RESPECTIVELY, FOR INVESTOR A SHARES AND
.22% AND 1.97%, RESPECTIVELY, FOR
INVESTOR B SHARES. These fee waivers
and expense reimbursements may be
revised or cancelled at any time.
23
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<PAGE> 329
GROWTH EQUITY
RISK/RETURN SUMMARY PORTFOLIO
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then sell
all of your shares at the
end of those periods. The
example also assumes that
your investment has a 5%
return each year, the
Portfolio's operating
expenses remain the same and
your Investor B Shares
automatically convert to
Investor A Shares after
eight years. Although your
actual costs may be higher
or lower, based on these
assumptions your costs would
be:
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
INVESTOR A SHARES $689 $983 $1,299 $2,190
INVESTOR B SHARES $718 $973 $1,354 $2,305
If you hold Investor B
Shares, you would pay the
following expenses if you
did not sell your shares:
$218 $673 $1,154 $2,305
</TABLE>
24
<PAGE> 330
logo
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SMALL CAP
EQUITY PORTFOLIO
RISK/RETURN SUMMARY
PORTFOLIO MANAGER
Robert J. Anthony,
Senior Associate at
MVA, is responsible
for the day-to-day
management of this
Portfolio. He has been
with MVA for 25 years
and has managed the
Portfolio since its
inception in 1992.
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is capital
appreciation.
PRINCIPAL INVESTMENT STRATEGIES
Under normal conditions, the Portfolio invests at least 65%
of its total assets in the common stocks of small- to
medium-sized companies with market capitalizations from $100
million to $2 billion at the time of purchase and which the
Adviser believes have above-average prospects for capital
appreciation. Stocks purchased by the Portfolio may be
listed on a national securities exchange or may be unlisted
securities with or without an established over-the-counter
market.
The Portfolio also may invest a portion of its assets in
larger companies that the Adviser believes offer improved
growth possibilities because of rejuvenated management,
product changes or other developments likely to stimulate
earnings or asset growth. The Portfolio also may invest in
stocks the Adviser believes are undervalued or in initial
public offerings (IPOs) of new companies that demonstrate
the potential for price appreciation. The Adviser selects
stocks based on a number of factors, including historical
and projected earnings, asset value, potential for price
appreciation and earnings growth, and quality of the
products manufactured or services offered.
PRINCIPAL RISK CONSIDERATIONS
The Portfolio invests in stocks and other equity securities,
which may decline in value over short or extended periods of
time. Equity markets tend to be cyclical; there are times
when stock prices generally increase, and other times when
they generally decrease. This could cause the value of your
investment in the Portfolio to fluctuate.
Compared to larger-capitalization stocks,
small-capitalization stocks tend to carry greater risk and
exhibit greater price volatility because their businesses
may not be well-established. In addition, some smaller
companies may have specialized or limited product lines,
markets or financial resources and may be dependent on
one-person management. All of these factors increase risk
and may result in more significant losses than the other
Mercantile Stock Portfolios. In an effort to reduce the
risks inherent in smaller-company stocks, the Portfolio's
holdings are diversified over a number of companies and
industry groups.
The Adviser evaluates the rewards and risks presented by all
securities purchased by the Portfolio and how they may
advance the Portfolio's investment objective. It is
possible, however, that these evaluations will prove to be
inaccurate.
</TABLE>
25
- -
<PAGE> 331
SMALL CAP
EQUITY PORTFOLIO
RISK/RETURN SUMMARY
RETURN HISTORY
The bar chart and table on
this page show the
Portfolio's annual returns
and long-term performance,
thereby giving some
indication of the risk of
investing in the Portfolio.
The bar chart shows how the
performance of the
Portfolio's Investor A
Shares has varied from year
to year. The table shows
how the Portfolio's average
annual returns for one
year, five years and since
inception compare to those
of a broad-based market
index. Both the bar chart
and the table assume
reinvestment of all
dividends and
distributions. The
Portfolio's past
performance does not
necessarily indicate how it
will perform in the future.
KNOW YOUR INDEX
THE RUSSELL 2000 INDEX is
an unmanaged index
comprised of the 2,000
smallest of the 3,000
largest U.S. companies
based on market
capitalization.
INVESTOR A SHARES
YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
[STATED IN PERCENTAGES]
<TABLE>
<CAPTION>
SMALL CAP EQUITY PORTFOLIO
--------------------------
<S> <C>
'1993' 23.58
'94' 2.26
'95' 17.14
'96' 10.50
'97' 20.51
'98' -8.09
</TABLE>
The returns for Investor B Shares
differed from the returns shown in the
bar chart, because the two classes bear
different expenses. The bar chart does
not reflect any sales charges on
purchases of the Portfolio's Investor A
Shares. If these sales charges were
included, returns would be lower than
those shown.
Best quarter: 18.56% for the
quarter ending
December 31, 1992
Worst quarter: -24.80% for the
quarter ending
September 30, 1998
AVERAGE ANNUAL TOTAL
RETURNS
for the periods ended
December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION*
<S> <C> <C> <C>
Investor A Shares
(with 5.50% sales charge) (13.14)% 6.75% 10.91%
Investor B Shares**
(with applicable contingent deferred sales
charge) (13.25)% 7.24% 11.41%
Russell 2000 Index (2.55)% 11.87% 13.86%
</TABLE>
* May 6, 1992 for Investor A Shares; April 30, 1992 for the Russell 2000
Index.
** Investor B Shares of the Portfolio commenced operations on March 1, 1995.
Average annual total returns for prior periods reflect the performance of
the Portfolio's Investor A Shares which has been restated to reflect the
applicable contingent deferred sales charges payable on redemptions of
Investor B Shares within six years of the date of purchase. Investor B
Shares are subject to distribution and service fees at a maximum annual
rate of 1.00% of the Portfolio's Investor B Share assets. Had the
performance of Investor A Shares been restated to reflect these
distribution and service fees, average annual total returns would have
been lower.
26
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<PAGE> 332
SMALL CAP
EQUITY PORTFOLIO
RISK/RETURN SUMMARY
FEES AND EXPENSES
<TABLE>
<S> <C> <C> <C>
SHAREHOLDER FEES INVESTOR A INVESTOR B
(FEES YOU PAY DIRECTLY) SHARES SHARES
The table on this page shows the fees and
expenses that you pay if you buy and hold
Investor A Shares or Investor B Shares of the
Small Cap Equity Portfolio.
Maximum sales charge (load) to
buy shares, shown as a % of the
offering price 5.50%(1) None
Maximum deferred sales charge
(load) shown as a % of the
offering price or sale price,
whichever is less None 5.00%(2)
ANNUAL PORTFOLIO OPERATING
EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM INVESTOR A INVESTOR B
THE PORTFOLIO'S ASSETS) SHARES SHARES
Management Fees .75% .75%
Distribution (12b-1) and Service
Fees .30% 1.00%
Other Expenses .30%(3) .30%(3)
Total Annual Portfolio Operating
Expenses 1.35%(3) 2.05%(3)
</TABLE>
(1) Reduced sales charges may be available.
See "Distribution Arrangements/Sales
Charges" below.
(2) This amount applies if you sell your
shares in the first year after purchase
and gradually declines until it is
eliminated after six years. After eight
years, your Investor B Shares will
automatically convert to Investor A
Shares. See "Distribution Arrangements/
Sales Charges" below.
(3) Other Expenses and Total Annual
Portfolio Operating Expenses for the
Portfolio's Investor A Shares and
Investor B Shares for the current
fiscal year are expected to be less
than the amounts shown above because
certain of the Portfolio's service
providers are voluntarily waiving a
portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers
and/or reimbursements are being made in
order to keep the annual fees and
expenses for the Portfolio's Investor A
Shares and Investor B Shares at certain
levels. OTHER EXPENSES AND TOTAL ANNUAL
PORTFOLIO OPERATING EXPENSES, AFTER
TAKING THESE FEE WAIVERS AND EXPENSE
REIMBURSEMENTS INTO ACCOUNT, ARE
EXPECTED TO BE .20% AND 1.25%,
RESPECTIVELY, FOR INVESTOR A SHARES AND
.20% AND 1.95%, RESPECTIVELY, FOR
INVESTOR B SHARES. These fee waivers
and expense reimbursements may be
revised or cancelled at any time.
27
- -
<PAGE> 333
SMALL CAP
EQUITY PORTFOLIO
RISK/RETURN SUMMARY
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then sell
all of your shares at the
end of those periods. The
example also assumes that
your investment has a 5%
return each year, the
Portfolio's operating
expenses remain the same and
your Investor B Shares
automatically convert to
Investor A Shares after
eight years. Although your
actual costs may be higher
or lower, based on these
assumptions your costs would
be:
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
INVESTOR A SHARES $680 $954 $1,249 $2,085
INVESTOR B SHARES $708 $943 $1,303 $2,200
If you hold Investor B
Shares, you would pay the
following expenses if you
did not sell your shares:
$208 $643 $1,103 $2,200
</TABLE>
28
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<PAGE> 334
logo
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SMALL CAP EQUITY
INDEX PORTFOLIO
RISK/RETURN SUMMARY
INDEXING is a strategy
whereby a Portfolio
attempts to weight its
securities to match
those of a broadly-
based securities index
in an attempt to
approximate the
index's performance.
THE S&P SMALLCAP 600
INDEX is an unmanaged
index that tracks the
performance of 600
domestic companies
traded on the New York
Stock Exchange, the
American Stock
Exchange and NASDAQ.
The S&P SmallCap 600
Index is heavily
weighted with the
stocks of small
companies.
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to provide
investment results that, before deduction of operating
expenses, approximate the price and yield performance of
U.S. common stocks with smaller stock market
capitalizations, as represented by the S&P SmallCap 600
Index.
The Portfolio's investment objective can be changed by the
Fund's Board of Directors without shareholder approval.
Shareholders will be given at least 30 days' written notice
before any such change occurs.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio uses an "indexing" strategy through the use of
computer models to approximate the investment performance of
the S&P SmallCap 600 Index. The Portfolio will invest at
least 80% of its total assets in securities listed in the
S&P SmallCap 600 Index and typically will hold all 600
stocks represented in the Index. Under certain
circumstances, however, the Portfolio may not hold all 600
stocks in the Index because of shareholder activity or
changes in the Index. In general, each stock's percentage
weighting in the Portfolio is based on its weighting in the
S&P SmallCap 600 Index. When stocks are removed from or
added to the Index, those changes are reflected in the
Portfolio. The Portfolio periodically "rebalances" its
holdings as dictated by changes in shareholder purchase and
redemption activity and in the composition of the S&P
SmallCap 600 Index.
PRINCIPAL RISK CONSIDERATIONS
The Portfolio invests in stocks and other equity securities,
which may decline in value over short or extended periods of
time. Equity markets tend to be cyclical; there are times
when stock prices generally increase, and other times when
they generally decrease. This could cause the value of your
investment in the Portfolio to fluctuate.
In addition, the Portfolio is subject to the additional risk
that the small-capitalization stocks that it holds may not
perform as well as other types of stocks. Compared to
larger-capitalization stocks, small-capitalization stocks
tend to carry greater risk and exhibit greater price
volatility because their businesses may not be
well-established. In addition, some smaller companies may
have specialized or limited product lines, markets or
financial resources and may be dependent on one-person
management. All of these factors increase risk and may
result in more significant losses than the other Mercantile
Stock Portfolios. By typically investing in all 600 stocks
in the Index, the Portfolio remains broadly diversified,
which may reduce some of this risk. There is the additional
risk that the Portfolio's investment results may fail to
match those of the S&P SmallCap 600 Index.
RETURN HISTORY
The Portfolio does not have a long-term performance record
because it has been in operation for less than one calendar
year.
</TABLE>
29
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<PAGE> 335
SMALL CAP EQUITY
INDEX PORTFOLIO
RISK/RETURN SUMMARY
FEES AND EXPENSES
<TABLE>
<S> <C> <C>
SHAREHOLDER FEES
(FEES YOU PAY DIRECTLY) INVESTOR A SHARES
The table on this page shows the fees and
expenses that you pay if you buy and hold
Investor A Shares of the Small Cap Equity
Index Portfolio.
Maximum sales charge (load) to buy shares,
shown as a % of the offering price 5.50%(1)
Maximum deferred sales charge (load) shown
as a % of the offering price or sale
price, whichever is less None
ANNUAL PORTFOLIO OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS) INVESTOR A SHARES
Management Fees .40%
Distribution (12b-1) and Service Fees .30%
Other Expenses .49%(2)
Total Annual Portfolio Operating Expenses 1.19%(2)
</TABLE>
(1) Reduced sales charges may be available.
See "Distribution Arrangements/Sales
Charges" below.
(2) Other Expenses and Total Annual
Portfolio Operating Expenses for the
Portfolio's Investor A Shares for the
current fiscal year are estimated to be
less than the amounts shown above
because certain of the Portfolio's
service providers are voluntarily
waiving a portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers
and/or reimbursements are being made in
order to keep the annual fees and
expenses for the Portfolio's Investor A
Shares at a certain level. OTHER
EXPENSES AND TOTAL ANNUAL PORTFOLIO
OPERATING EXPENSES, AFTER TAKING THESE
FEE WAIVERS AND EXPENSE REIMBURSEMENTS
INTO ACCOUNT, ARE ESTIMATED TO BE .32%
AND 1.02%, RESPECTIVELY, FOR INVESTOR A
SHARES. These fee waivers and expense
reimbursements may be revised or
cancelled at any time.
30
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<PAGE> 336
SMALL CAP EQUITY
RISK/RETURN SUMMARY INDEX PORTFOLIO
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then sell
all of your shares at the
end of those periods. The
example also assumes that
your investment has a 5%
return each year and the
Portfolio's operating
expenses remain the same.
Although your actual costs
may be higher or lower,
based on these assumptions
your costs would be:
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
INVESTOR A SHARES $665 $907 $1,168 $1,914
</TABLE>
31
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<PAGE> 337
logo
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INTERNATIONAL EQUITY
RISK/RETURN SUMMARY PORTFOLIO
SUB-ADVISER/
PORTFOLIO MANAGER
MVA has appointed Clay
Finlay, Inc. ("Clay
Finlay" or the
"Sub-Adviser") as sub-
adviser to assist in
the day-to-day
management of the
Portfolio. Frances
Dakers, a principal
and senior portfolio
manager of Clay
Finlay, is responsible
for the management of
the Portfolio. Ms.
Dakers has been with
Clay Finlay since
January 1982 and has
managed the Portfolio
since it began
operations in 1994.
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to provide capital
growth consistent with reasonable investment risk.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio invests primarily in foreign common stocks,
most of which will be denominated in foreign currencies.
During normal market conditions, the Portfolio will invest
substantially all (at least 80%) of its total assets in the
securities of companies that derive more than 50% of their
gross revenues outside the United States or have more than
50% of their assets outside the United States. Under normal
market conditions, the Portfolio invests in equity
securities from at least three foreign countries. Generally,
at least 50% of the Portfolio's total assets will be
invested in securities of companies located either in the
developed countries of Western Europe or in Japan. The
Portfolio also may invest in other developed countries and
in countries with emerging markets or economies.
By investing in various foreign stocks, the Portfolio
attempts to achieve broad diversification and to take
advantage of differences between economic trends and the
performance of securities markets in different countries,
regions and geographic areas. In selecting stocks, the Sub-
Adviser uses a screening tool to determine which companies
represent the best values relative to their long-term growth
prospects and local markets. The Sub-Adviser also uses
fundamental analysis by evaluating balance sheets, market
share and strength of management.
PRINCIPAL RISK CONSIDERATIONS
Investing in foreign companies involves different risks than
investing in U.S. companies due to such factors as currency
exchange rate volatility, government restrictions, different
accounting standards and political instability. The
multinational character of the Portfolio's investments
should reduce the effect that events in any one country or
geographic area will have on overall performance. However,
negative results from one foreign market may offset gains
from another market or may negatively affect other foreign
markets. The risks associated with foreign investments are
heightened when investing in emerging markets. The
governments and economies of emerging market countries
feature greater instability than those of more developed
countries. Such investments tend to fluctuate in price more
widely and to be less liquid than other foreign investments.
As with U.S. equity markets, foreign equity markets tend to
be cyclical. There are times when stock prices generally
increase, and other times when they generally decrease.
The Adviser evaluates the rewards and risks presented by all
securities purchased by the Portfolio and how they may
advance the Portfolio's investment objective. It is
possible, however, that these evaluations will prove to be
inaccurate.
</TABLE>
32
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<PAGE> 338
INTERNATIONAL EQUITY
PORTFOLIO
RISK/RETURN SUMMARY
RETURN HISTORY
The bar chart and table on
this page show the
Portfolio's annual returns
and long-term performance,
thereby giving some
indication of the risk of
investing in the Portfolio.
The bar chart shows how the
performance of the
Portfolio's Investor A
Shares has varied from year
to year. The table shows
how the Portfolio's average
annual returns for one year
and since inception compare
to those of a broad-based
market index. Both the bar
chart and table assume
reinvestment of all
dividends and
distributions. The
Portfolio's past
performance does not
necessarily indicate how it
will perform in the future.
KNOW YOUR INDEX
THE MORGAN STANLEY CAPITAL
INTERNATIONAL EUROPE,
AUSTRALASIA AND FAR EAST
INDEX, OR EAFE INDEX, is an
unmanaged index consisting
of companies in Australia,
New Zealand, Europe and the
Far East.
INVESTOR A SHARES
YEAR-BY-YEAR TOTAL
RETURNS
(AS OF DECEMBER 31
EACH YEAR)
[STATED IN PERCENTAGES]
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY PORTFOLIO
------------------------------
<S> <C>
'1995' 9.41
'96' 9.98
'97' 4.68
'98' 17.36
</TABLE>
The returns for Investor B Shares
differed from the returns shown in the
bar chart, because the two classes bear
different expenses. The bar chart does
not reflect any sales charges on
purchases of the Portfolio's Investor A
Shares. If these sales charges were
included, returns would be lower than
those shown.
Best quarter: 19.35% for the
quarter ending
December 31, 1998
Worst quarter: -17.12% for the
quarter ending
September 30, 1998
AVERAGE ANNUAL TOTAL
RETURNS
for the periods ended
December 31, 1998
<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION*
<S> <C> <C>
Investor A Shares
(with 5.50% sales charge) 10.93% 7.32%
Investor B Shares**
(with applicable contingent deferred sales charge) 11.64% 7.67%
EAFE Index 18.23% 7.25%
</TABLE>
* May 2, 1994, for Investor A Shares; April 30, 1994 for EAFE Index.
** Investor B Shares of the Portfolio commenced operations on March 1, 1995.
Average annual total returns for prior periods reflect the performance of
the Portfolio's Investor A Shares which has been restated to reflect the
applicable contingent deferred sales charges payable on redemptions of
Investor B Shares within six years of the date of purchase. Investor B
Shares are subject to distribution and service fees at a maximum annual
rate of 1.00% of the Portfolio's Investor B Share assets. Had the
performance of Investor A Shares been restated to reflect these
distribution and service fees, average annual total returns would have
been lower.
33
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<PAGE> 339
INTERNATIONAL EQUITY
RISK/RETURN SUMMARY PORTFOLIO
FEES AND EXPENSES
<TABLE>
<S> <C> <C> <C>
SHAREHOLDER FEES INVESTOR A INVESTOR B
(FEES YOU PAY DIRECTLY) SHARES SHARES
The table on this page shows the fees and
expenses that you pay if you buy and hold
Investor A Shares or Investor B Shares of the
International Equity Portfolio.
Maximum sales charge (load) to
buy shares, shown as a % of the
offering price 5.50%(1) None
Maximum deferred sales charge
(load) shown as a % of the
offering price or sale price,
whichever is less None 5.00%(2)
ANNUAL PORTFOLIO OPERATING
EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM INVESTOR A INVESTOR B
THE PORTFOLIO'S ASSETS) SHARES SHARES
Management Fees 1.00% 1.00%
Distribution (12b-1) and Service
Fees .30% 1.00%
Other Expenses .45%(3) .45%(3)
Total Annual Portfolio Operating
Expenses 1.75%(3) 2.45%(3)
</TABLE>
(1) Reduced sales charges may be available.
See "Distribution Arrangements/Sales
Charges" below.
(2) This amount applies if you sell your
shares in the first year after purchase
and gradually declines until it is
eliminated after six years. After eight
years, your Investor B Shares will
automatically convert to Investor A
Shares. See "Distribution Arrangements/
Sales Charges" below.
(3) Other Expenses and Total Annual
Portfolio Operating Expenses for the
Portfolio's Investor A Shares and
Investor B Shares for the current
fiscal year are expected to be less
than the amounts shown above because
certain of the Portfolio's service
providers are voluntarily waiving a
portion of their fees and/or
reimbursing the Portfolio for certain
other expenses. These fee waivers
and/or reimbursements are being made in
order to keep the annual fees and
expenses for the Portfolio's Investor A
Shares and Investor B Shares at certain
levels. OTHER EXPENSES AND TOTAL ANNUAL
PORTFOLIO OPERATING EXPENSES, AFTER
TAKING THESE FEE WAIVERS AND EXPENSE
REIMBURSEMENTS INTO ACCOUNT, ARE
EXPECTED TO BE .28% AND 1.58%
RESPECTIVELY, FOR INVESTOR A SHARES AND
.28% AND 2.28%, RESPECTIVELY, FOR
INVESTOR B SHARES. These fee waivers
and expense reimbursements may be
revised or cancelled at any time.
34
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<PAGE> 340
INTERNATIONAL EQUITY
RISK/RETURN SUMMARY PORTFOLIO
This example will help you
compare the cost of
investing in the Portfolio
with the cost of investing
in other mutual funds. The
example assumes that you
invest $10,000 for the time
periods shown, reinvest all
of your dividends and
distributions, and then sell
all of your shares at the
end of those periods. The
example also assumes that
your investment has a 5%
return each year, the
Portfolio's operating
expenses remain the same and
your Investor B Shares
automatically convert to
Investor A Shares after
eight years. Although your
actual costs may be higher
or lower, based on these
assumptions your costs would
be:
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
INVESTOR A SHARES $718 $1,071 $1,447 $2,499
INVESTOR B SHARES $748 $1,064 $1,506 $2,614
If you hold Investor B
Shares, you would pay the
following expenses if you
did not sell
your shares:
$248 $ 764 $1,306 $2,614
</TABLE>
35
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<PAGE> 341
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RISK/RETURN SUMMARY ADDITIONAL INFORMATION ON RISK
The principal risks of investing in each Portfolio are described on the
previous pages. The following supplements that discussion.
SECURITIES LENDING
To obtain interest income, the Portfolios may lend their securities to
broker-dealers, banks or institutional borrowers pursuant to agreements
requiring that the loans be continuously secured by collateral equal at all
times in value to at least the market value of the securities loaned. There
is the risk that, when lending portfolio securities, the securities may not
be available to the Portfolio on a timely basis. Therefore, the Portfolio may
lose the opportunity to sell the securities at a desirable price.
Additionally, in the event that a borrower of securities would file for
bankruptcy or become insolvent, disposition of the securities may be delayed
pending court action.
TEMPORARY DEFENSIVE POSITIONS
Each Portfolio may temporarily hold investments that are not part of its main
investment strategy to try to avoid losses during unfavorable market
conditions. These investments may include cash (which will not earn any
income), money market instruments, short-term debt securities issued or
guaranteed by the U.S. Government or its agencies and, in the case of the
International Equity Portfolio, debt obligations of U.S. companies having
their principal business activities in the U.S. This strategy could prevent a
Portfolio from achieving its investment objective and could reduce the
Portfolio's return and affect its performance during a market upswing.
OTHER TYPES OF INVESTMENTS
This prospectus describes each Portfolio's principal investment strategies
and the particular types of securities in which each Portfolio principally
invests. Each Portfolio may, from time to time, make other types of
investments and pursue other investment strategies in support of its overall
investment goal. These supplemental investment strategies - and the risks
involved - are described in detail in the Statement of Additional Information
("SAI"), which is referred to on the back cover of this prospectus.
YEAR 2000 RISKS
As with other mutual funds, financial and business organizations and
individuals around the world, the Portfolios could be adversely affected if
the computer systems used by the Adviser and the Portfolios' other service
providers do not properly process and calculate date-related information and
data from and after January 1, 2000. This possibility is commonly known as
the Year 2000 or "Y2K" problem. The Adviser is taking steps to address the
Y2K problem with respect to the computer systems that it uses and to obtain
assurances that comparable steps are being taken by the Portfolios' other
major service providers. At this time, however, there can be no assurance
that these steps will be sufficient to avoid any adverse impact on the
Portfolios. The Y2K problem could have a negative impact on the issuers of
securities in which the Portfolios invest, which could hurt the Portfolios'
investment returns.
36
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<PAGE> 342
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DISTRIBUTION ARRANGEMENTS/
YOUR ACCOUNT SALES CHARGES
SHARE CLASSES
Each Portfolio offers Investor A Shares and each Portfolio except the Equity
Index Portfolio and Small Cap Equity Index Portfolio offers Investor B
Shares. The primary difference between the share classes is the sales charge
structure and distribution/service fee arrangement.
<TABLE>
<S> <C> <C>
TYPES OF CHARGES INVESTOR A SHARES INVESTOR B SHARES
Sales Charge (Load) A front-end sales charge is A contingent deferred sales charge
assessed at the time of your (CDSC) is assessed on shares
purchase. redeemed within six years of
purchase. Investor B Shares
automatically convert to Investor
A Shares eight years after
purchase.
Distribution (12b-1) and Service Subject to annual distribution and Subject to annual distribution and
Fees shareholder servicing fees shareholder servicing fees
of up to 0.30% of a Portfolio's of up to 1.00% of a Portfolio's
average daily net assets average daily net assets
attributable to its Investor A attributable to its Investor B
Shares. Shares.
</TABLE>
37
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<PAGE> 343
DISTRIBUTION ARRANGEMENTS/
YOUR ACCOUNT SALES CHARGES
CALCULATION OF SALES CHARGES
INVESTOR A SHARES
STOCK PORTFOLIOS
<TABLE>
<CAPTION>
SALES CHARGE SALES CHARGE DEALERS'
AS A % OF THE AS A % OF REALLOWANCE
AMOUNT OF OFFERING PRICE NET ASSET VALUE AS A % OF
TRANSACTION PER SHARE PER SHARE OFFERING PRICE
<S> <C> <C> <C>
Less than $50,000 5.50% 5.82% 5.00%
-----------------------------------------------------------------------------------------
$50,000 but less than $100,000 4.50% 4.71% 4.00%
-----------------------------------------------------------------------------------------
$100,000 but less than $250,000 3.50% 3.63% 3.00%
-----------------------------------------------------------------------------------------
$250,000 but less than $500,000 2.50% 2.56% 2.00%
-----------------------------------------------------------------------------------------
$500,000 but less than $1 million 2.00% 2.04% 1.50%
-----------------------------------------------------------------------------------------
$1 million or more 0.50% 0.50% 0.40%
</TABLE>
The Fund's distributor reserves the right to pay the entire sales charge on
purchases of Investor A Shares to dealers. In addition, the Fund's
distributor may from time to time implement programs under which a
broker-dealer's sales force may be eligible to win nominal awards for certain
sales efforts. If any such program is made available to any broker-dealer, it
will be made available to all broker-dealers on the same terms. Payments made
under such programs are made by the Fund's distributor out of its own assets
and not out of the assets of the Portfolios. These programs will not change
the price of Investor A Shares or the amount that the Portfolios will receive
from such sales.
38
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<PAGE> 344
DISTRIBUTION ARRANGEMENTS/
SALES CHARGES
YOUR ACCOUNT
CALCULATION OF SALES CHARGES
INVESTOR B SHARES
<TABLE>
<S> <C> <C>
For purposes of calculating the CDSC, all NUMBER OF CDSC AS A % OF
purchases made during a calendar month are YEARS SINCE DOLLAR AMOUNT
considered to be made on the first day of that PURCHASE SUBJECT TO THE CHARGE
month. The CDSC is based on the value of the 0-1 5.0%
Investor B Shares on the date that they are sold 1-2 4.0%
or the original cost of the shares, whichever is 2-3 3.0%
lower. To keep your CDSC as low as possible each 3-4 3.0%
time you sell shares, the Fund will first sell 4-5 2.0%
any shares in your account that are not subject 5-6 1.0%
to a CDSC. If there are not enough of these, the more than 6 None
Fund will sell the shares that have the lowest
CDSC.
</TABLE>
SALES CHARGE REDUCTIONS
INVESTOR A SHARES
Additional purchases of Investor A Shares by existing Investor A shareholder
accounts at March 31, 1999 are eligible for reduced sales charges. See the
SAI or call the Fund's distributor at 1-800-452-2724 for further information.
You may also reduce the sales charge on Investor A Shares through:
- RIGHTS OF ACCUMULATION. You can add the value of the Investor A Shares
that you already own in any Portfolio of the Fund that charges a sales
load to your next investment in Investor A Shares for purposes of
calculating the sales charge.
- QUANTITY DISCOUNTS. As the dollar amount of your purchase increases, your
sales charge may decrease (see the table on page 38). In addition, the
Fund will combine purchases made on the same day by you and your immediate
family members when calculating applicable sales charges.
- LETTER OF INTENT. You can purchase Investor A Shares of any Portfolio of
the Fund that charges a sales load over a 13-month period and pay the same
sales charge you would have paid if all shares were purchased at once. The
Fund's transfer agent will hold in escrow 5% of your total investment (for
payment of a higher sales load in case you do not purchase the full amount
indicated on the application) until the full amount is received. To
participate, complete the "Letter of Intent" section on your account
application.
- REINVESTMENT PRIVILEGE. You can reinvest some or all of the money that you
receive when you sell Investor A Shares of a Portfolio in Investor A
Shares of any Portfolio of the Fund within 60 days without paying a sales
charge.
39
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<PAGE> 345
DISTRIBUTION ARRANGEMENTS/
SALES CHARGES
YOUR ACCOUNT
PURCHASE OF INVESTOR A
SHARES AT NET ASSET
VALUE
From time to time, the
Fund's distributor may
offer investors the
option to purchase
Investor A Shares at
net asset value
without payment of a
front-end sales
charge. To qualify,
you must pay for the
shares with the
redemption proceeds
from a non-affiliated
mutual fund. In
addition, you must
have paid a front-end
sales charge on the
shares you redeem. The
purchase of Investor A
Shares must occur
within 30 days of the
prior redemption, and
you must show evidence
of the redemption
transaction. At the
time of purchase, your
broker-dealer or other
financial institution
must notify the Fund
that your transaction
qualifies for a
purchase at net asset
value.
<TABLE>
<S> <C>
SALES CHARGE WAIVERS
INVESTOR A SHARES
In addition, there's no sales charge when you buy Investor A
Shares if:
- You buy shares by reinvesting your dividends and capital
gains distributions.
- You're an officer or director of the Fund (or an immediate
family member of any such individual).
- You're a director, a current or retired employee or a
participant in an employee benefit or retirement plan of
Mercantile Bancorporation Inc. or the Fund's distributor
or any of their affiliates (or an immediate family member
of any such individual).
- You're a broker, dealer or agent who has a sales agreement
with the Fund's distributor (or an employee or immediate
family member of any such individual).
- You buy shares pursuant to a wrap-fee program offered by a
broker-dealer or other financial institution.
- You buy shares with the proceeds of Trust Shares or
Institutional Shares of a Portfolio redeemed in connection
with a rollover of benefits paid by a qualified retirement
or employee benefit plan or a distribution on behalf of
any other qualified account administered by Mercantile
Bank or its affiliates or correspondents within 60 days of
receipt of such payment.
- You buy shares through a payroll deduction program.
- You're an employee of any sub-adviser to the Fund.
- You were a holder of a Southwestern Bell VISA card
formerly issued by Mercantile Bank of Southern Illinois,
N.A. and you participated in the Fund's Automatic
Investment Program.
- You're exchanging Trust Shares of a Portfolio received
from the distribution of assets held in a qualified trust,
agency or custodian account with Mercantile Bank or any of
its affiliates or correspondents.
- You're another investment company distributed by the
Fund's distributor or its affiliates.
If you think you qualify for any these waivers, please call
the Fund at 1-800-452-2724 before buying any shares.
</TABLE>
40
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<PAGE> 346
DISTRIBUTION ARRANGEMENTS/
YOUR ACCOUNT SALES CHARGES
SALES CHARGE WAIVERS
INVESTOR B SHARES
No CDSC is assessed on redemptions of Investor B Shares if:
- The shares were purchased with reinvested dividends or capital gains
distributions.
- The shares were purchased through an exchange of Investor B Shares of
another Portfolio.
- The redemption represents a distribution from a qualified retirement plan
under Section 403(b)(7) of the Internal Revenue Code, due to death,
disability or the attainment of a specified age.
- The redemption is in connection with the death or disability of the
shareholder.
- You participate in the Automatic Withdrawal Plan and your annual
withdrawals do not exceed 12% of your account's value.
- Your account falls below the Portfolio's minimum account size, and the Fund
liquidates your account (see page 47).
- The redemption results from a tax-free return of an excess contribution,
pursuant to Section 408(d)(4) or (5) of the Internal Revenue Code.
DISTRIBUTION AND SERVICE FEES
Investor A Shares of the Portfolios pay distribution (12b-1) and shareholder
service fees at an annual rate of up to 0.30% of each Portfolio's Investor A
Share assets. Investor B Shares of the Portfolios pay distribution (12b-1)
and shareholder service fees at an annual rate of up to 1.00% of each
Portfolio's Investor B Share assets. The Fund has adopted separate
distribution and service plans under Rule 12b-1 that allow each Portfolio to
pay fees from its Investor A Share or Investor B Share assets for selling and
distributing Investor A Shares or Investor B Shares, as the case may be, and
for services provided to shareholders. Because 12b-1 fees are paid on an
ongoing basis, over time they increase the cost of your investment and may
cost more than other sales charges.
CONVERTING INVESTOR B SHARES TO INVESTOR A SHARES
Eight years after you buy Investor B Shares of a Portfolio, they will
automatically convert to Investor A Shares of the Portfolio. This allows you
to benefit from the lower annual expenses of Investor A Shares.
CHOOSING BETWEEN INVESTOR A SHARES AND INVESTOR B SHARES
In deciding whether to buy Investor A Shares or Investor B Shares, you should
consider how long you plan to hold the shares. Over time, the higher fees on
Investor B Shares may equal or exceed the initial sales charge and fees for
Investor A Shares. Investor A Shares may be a better choice if you qualify to
have the sales charges reduced or eliminated, or if you plan to sell your
shares within one or two years. Consult your financial adviser for help in
choosing the appropriate share class.
41
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<PAGE> 347
YOUR ACCOUNT EXPLANATION OF SALES PRICE
<TABLE>
<S> <C>
Shares of each class in a Portfolio are sold at their net
asset value (NAV) plus, in the case of Investor A Shares, a
front-end sales charge, if applicable. This is commonly
referred to as the "public offering price."
The NAV for each class of shares of a Portfolio is
determined as of the close of regular trading on the New
York Stock Exchange (currently 4:00 p.m., Eastern time) on
every business day. The NAV for a class of shares is
determined by adding the value of the Portfolio's
investments, cash and other assets attributable to a
particular share class, subtracting the Portfolio's
liabilities attributable to that class and then dividing the
result by the total number of shares in the class that are
outstanding.
- Each Portfolio's investments are valued according to
market value. When a market quote is not readily available,
the security's value is based on "fair value" as
determined by MVA (or Clay Finlay, with respect to the
International Equity Portfolio) under the supervision of
the Fund's Board of Directors. Foreign securities acquired
by the International Equity Portfolio may be valued in
foreign markets on days when the Portfolio's NAV is not
calculated. In such cases, the NAV of the Portfolio's
shares may be significantly affected on days when
investors cannot buy and sell Portfolio shares.
- If you properly place a purchase order (see "How to Buy
Shares" on page 43) that is delivered to the Fund before
4:00 p.m. (Eastern time) on any business day, the order
receives the share price determined for your share class
as of 4:00 p.m. that day. If the order is received after
4:00 p.m., it will receive the price determined on the
next business day. You must pay for your shares no later
than 4:00 p.m. three business days after placing the
order, or the order will be cancelled.
</TABLE>
<TABLE>
<S> <C>
BUSINESS DAYS DEFINED
A business day is any day
that both the New York Stock
Exchange and the Federal
Reserve Bank of St. Louis
are open for business.
Currently, the Fund observes
the following holidays: New
Year's Day, Martin Luther
King Jr. Day, Presidents'
Day, Good Friday, Memorial
Day (observed), Independence
Day (observed), Labor Day,
Columbus Day, Veterans' Day,
Thanksgiving and Christmas.
</TABLE>
42
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<PAGE> 348
YOUR ACCOUNT HOW TO BUY SHARES
<TABLE>
<CAPTION>
TO OPEN TO ADD TO
MINIMUM INVESTMENTS YOUR ACCOUNT YOUR ACCOUNT
<S> <C> <C>
Regular accounts $1,000 $100
------------------------------------------------------------
Sweep program
through your
financial institution None None
------------------------------------------------------------
Wrap fee program
through your
financial institution None None
------------------------------------------------------------
Payroll Deduction
Program* None $25
------------------------------------------------------------
Automatic Exchange $1,000 minimum
Program* $5,000 account
balance
------------------------------------------------------------
Automatic
Investment Program* $50 $50
</TABLE>
* See Investor Programs below.
Investing in the Mercantile Stock
Portfolios is quick and
convenient. You can purchase
Investor A Shares or Investor B
Shares in any of the following
ways:
- THROUGH A BROKER-DEALER
ORGANIZATION. You can purchase
shares through any broker-
dealer organization that has a
sales agreement with the
Fund's distributor. The
broker-dealer organization is
responsible for sending your
purchase order to the Fund.
- THROUGH A FINANCIAL
ORGANIZATION. You can purchase
shares through any financial
organization that has entered
into a servicing agreement
with the Fund. The financial
organization is responsible
for sending your purchase
order to the Fund.
- DIRECTLY FROM THE FUND BY MAIL. Just complete an account application and
send it, along with a check for at least the minimum purchase amount, to:
Mercantile Mutual Funds, Inc., P.O. Box 78069 -- Tram 001/128/41-6, St.
Louis, Missouri 63178. Remember to specify whether you're buying Investor A
Shares or Investor B Shares. To make additional investments once you've
opened your account, send your check to the address above together with the
detachable form that's included with your Fund statement or confirmation of
a prior transaction or a letter stating the amount of your investment, the
name of the Portfolio you want to invest in and your account number.
In addition, you may call the Fund at 1-800-452-2724 for more information on how
to buy shares.
43
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<PAGE> 349
YOUR ACCOUNT HOW TO SELL SHARES
SELLING RECENTLY
PURCHASED SHARES
If you attempt to
sell shares you
recently purchased
with a personal
check, the Fund may
delay processing
your request until
it collects payment
for those shares.
This process may
take up to 15 days,
so if you plan to
sell shares shortly
after purchasing
them, you may want
to consider
purchasing shares
with a certified or
bank check or via
electronic transfer
to avoid delays.
<TABLE>
<S> <C>
You can arrange to get money out of your account by selling
some or all of your shares. This is known as "redeeming"
your shares. You can redeem your shares in the following
ways:
THROUGH A BROKER-DEALER OR OTHER FINANCIAL ORGANIZATION
If you purchased your shares through a broker-dealer or
other financial organization, your redemption order should
be placed through the same organization. The organization is
responsible for sending your redemption order to the Fund on
a timely basis.
BY MAIL
Send your written redemption request to: Mercantile Mutual
Funds, Inc., P.O. Box 78069 -- Tram 001/128/41-6, St. Louis,
Missouri 63178. Your request must include the name of the
Portfolio, the number of shares or the dollar amount you
want to sell, your account number, your social security or
tax identification number and the signature of each
registered owner of the account. Your request also must be
accompanied by any share certificates that are properly
endorsed for transfer. Additional documents may be required
for certain types of shareholders, such as corporations,
partnerships, executors, trustees, administrators or
guardians.
The Fund's transfer agent may require a signature guarantee
unless the redemption proceeds are payable to the
shareholder of record and the redemption is either mailed to
the shareholder's address of record or electronically
transferred to the account designated on the original
account application. A signature guarantee helps prevent
fraud, and you may obtain one from most banks and
broker-dealers. Contact your broker-dealer or other
financial organization or the Fund for more information on
signature guarantees.
BY TELEPHONE
You may redeem your shares by telephone if you have selected
that option on your account application. Call the Fund at
1-800-452-2724 with your request. You may have your proceeds
mailed to your address or transferred electronically to the
bank account designated on your account application. If you
have not previously selected the telephone privilege, you
may add this feature by providing written instructions to
the Fund's transfer agent. If you have difficulty getting
through to the Fund because of unusual market conditions,
consider selling your shares by mail.
You may sell your Portfolio shares at any time. Your shares
will be sold at the NAV next determined after the Fund
accepts your order (see above). The proceeds of the sale of
Investor B Shares will be reduced by the applicable CDSC.
Your proceeds ordinarily are sent electronically or mailed
by check within three business days. If your account holds
both Investor A Shares and Investor B Shares, be sure to
specify which shares you are selling. Otherwise, Investor A
Shares will be sold first.
</TABLE>
44
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<PAGE> 350
YOUR ACCOUNT INVESTOR PROGRAMS
It's also easy to buy or sell shares of the Portfolios by using one of the
programs described below.
AUTOMATIC INVESTMENT PROGRAM
You may open an account or make additional investments to an existing account
for as little as $50 a month with the Fund's Automatic Investment Program
(AIP). Under the AIP, you specify the dollar amount to be automatically
withdrawn each month from your bank checking account and invested in your
Portfolio account. Purchases of Investor A Shares or Investor B Shares will
occur on the 5th or 20th day (or the next business day after the 5th or 20th)
of each month at the net asset value plus any front-end sales charge, if
applicable, next determined on the day the order is effected. To take
advantage of the AIP, complete the AIP authorization form included with your
account application or contact your broker-dealer or other financial
organization.
AIP lets you take advantage of "dollar cost averaging," a long-term
investment technique designed to help investors reduce their average cost per
share over time. Instead of trying to time the market, you can invest a fixed
dollar amount each month. So, you buy fewer Portfolio shares when prices are
high and more when prices are low. Because dollar cost averaging involves
regular investing over time, regardless of share price, it may not be
appropriate for all investors.
In addition, dollar cost averaging does not guarantee a profit or protect
against loss in a steadily declining market. To be effective, dollar cost
averaging usually should be followed on a sustained, consistent basis. Even
then, however, there can be no guarantee of the success of this technique,
and it will not prevent a loss if an investor ultimately redeems his or her
shares at a price that is lower than the original purchase price.
EXCHANGES
The exchange privilege enables you to exchange Investor A Shares of one
Portfolio for Investor A Shares (or in certain limited circumstances, Trust
or Institutional Shares) of another Portfolio and to exchange Investor B
Shares of one Portfolio for Investor B Shares of another Portfolio. Just sign
up for the exchange privilege on your account application and contact your
broker-dealer or other financial organization when you want to exchange
shares. You also may exchange shares by telephoning the Fund directly (call
1-800-452-2724) if you have elected this privilege on your account
application. The exchange privilege may be exercised only in those states
where the class of shares of the Portfolio being acquired may be legally
sold.
When exchanging Investor A Shares of a Portfolio that has no sales charge or
a lower sales charge for Investor A Shares of a Portfolio with a higher sales
charge, you will pay the difference.
You may exchange Investor B Shares without paying a CDSC on the exchange. The
holding period of the shares originally held and redeemed will be added to
the holding period of the new shares acquired through the exchange.
45
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<PAGE> 351
YOUR ACCOUNT INVESTOR PROGRAMS
AUTOMATIC EXCHANGE PROGRAM
This program lets you automatically exchange shares of one Portfolio for
shares of another Portfolio on a regular basis, as long as the shares are of
the same class. Because you're making regular purchases, the Automatic
Exchange Program enables you to take advantage of dollar cost averaging. (See
"Automatic Investment Program" above.)
To participate, you must make a minimum initial purchase of $5,000 and
maintain a minimum account balance of $1,000. In addition, you must complete
the authorization form included with your account application or available
from your broker-dealer or other financial organization. In order to change
instructions with respect to the Automatic Exchange Program or to discontinue
the program, you must send written instructions to your broker-dealer or
other financial organization or to the Fund.
AUTOMATIC WITHDRAWAL PLAN
If the net asset value of your account equals $10,000 or more, you may take
advantage of the Fund's Automatic Withdrawal Plan (AWP). With the AWP, you
can have monthly, quarterly, semi-annual or annual redemptions of at least
$50 from your Portfolio account sent to you via check or to your bank account
electronically on the 5th or 20th day of the applicable month of withdrawal.
No CDSC will be charged on withdrawals of Investor B Shares made through the
AWP that don't annually exceed 12% of your account's value.
To participate in the AWP, complete the AWP application included with your
account application or contact your broker-dealer or other financial
organization. A signature guarantee will be required. You may terminate your
participation in the AWP upon 30 days' notice to your broker-dealer or other
financial organization or to the Fund.
PAYROLL DEDUCTION PROGRAM
You can make regular investments from your paycheck. The minimum investment
is $25 per pay period. Call the Fund at 1-800-452-2724 for an application and
further information. The Fund may terminate the program at any time.
46
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<PAGE> 352
YOUR ACCOUNT GENERAL TRANSACTION POLICIES
The Fund reserves the right to:
- Vary or waive any minimum investment requirement.
- Refuse any order to buy shares.
- Reject any exchange request.
- Change or cancel the procedures for selling or exchanging shares by
telephone at any time.
- Redeem all shares in your account if your balance falls below $500. If,
within 60 days of the Fund's written request, you have not increased your
account balance, you may be required to redeem your shares. The Fund will
not require you to redeem shares if the value of your account drops below
$500 due to fluctuations in net asset value.
- Send redemption proceeds within seven days after receiving a request, if
an earlier payment could adversely affect a Portfolio.
- Modify or terminate the Automatic Exchange, Automatic Investment and
Automatic Withdrawal programs at any time.
- Modify or terminate the exchange privilege after 60 days' written notice
to shareholders.
- Make a "redemption in kind." Under abnormal conditions that may make
payment in cash unwise, the Fund may offer partial or complete payment in
portfolio securities rather than cash at such securities' then-market-
value equal to the redemption price. In such cases, you may incur
brokerage costs in converting these securities to cash.
If you elect telephone privileges on the account application or in a letter
to the Fund, you may be responsible for any fraudulent telephone orders as
long as the Fund has taken reasonable precautions to verify your identity.
Also, your broker-dealer or other financial organization may establish
policies that differ from those of the Fund. For example, the organization
may charge transaction fees, set higher minimum investments, or impose
certain limitations on purchasing or redeeming shares in addition to those
identified in this prospectus. Contact your broker-dealer or other financial
organization for details.
47
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<PAGE> 353
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DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Portfolios pay their shareholders dividends from the Portfolios'
respective net investment income and distribute any net capital gains the
Portfolios have realized.
Dividends for the Balanced, Equity Income, Equity Index, Growth & Income
Equity and Growth Equity Portfolios are declared and paid monthly. Dividends
for the Small Cap Equity, Small Cap Equity Index and International Equity
portfolios are declared and paid quarterly. Capital gains, if any, for all of
the Portfolios are distributed at least once a year. It's expected that each
Portfolio's annual distributions will normally - but not always - consist
primarily of capital gains and not ordinary income.
Dividends on each share class of the Portfolios are determined in the same
manner and are paid in the same amount. However, each share class bears all
expenses associated with that particular class. So, because Investor B Shares
have higher distribution and service fees than Investor A Shares, the
dividends paid to Investor B shareholders will be lower than those paid to
Investor A shareholders.
All of your dividends and capital gains distributions with respect to a
particular Portfolio will be reinvested in additional shares of the same
class unless you instruct otherwise on your account application or have
redeemed all shares you held in the Portfolio. In such cases, dividends and
distributions will be paid in cash.
48
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<PAGE> 354
DISTRIBUTIONS AND TAXES
You will be advised at
least annually
regarding the federal
income tax treatment
of dividends and
distributions made to
you. You should save
your account
statements because
they contain
information you will
need to calculate your
capital gains or
losses upon your
ultimate sale or
exchange of shares in
the Portfolios.
<TABLE>
<S> <C>
TAXATION
As with any investment, you should consider the tax
implications of an investment in the Portfolios. The
following is only a brief summary of some of the important
tax considerations generally affecting the Portfolios and
their shareholders under current law, which may be subject
to change in the future. Consult your tax adviser with
specific reference to your own tax situation.
- The Portfolios' distributions generally will be taxable to
shareholders as ordinary income and capital gains (which may
be taxable at different rates depending on the length of
time each Portfolio held the relevant assets). You will be
subject to income tax on these distributions whether they
are paid in cash or reinvested in additional shares.
- If you purchase shares just prior to a distribution, the
purchase price will reflect the amount of the upcoming
distribution, but you will be taxed on the entire amount
of the distribution received even though, as an economic
matter, the distribution simply constitutes a return of
capital. This is known as "buying into a dividend."
- You will recognize a taxable gain or loss on a sale,
exchange or redemption of your shares, including an exchange
for shares of another Portfolio, based on the difference
between your tax basis in the shares and the amount you
receive for them.
- Any loss realized on shares held for six months or less
will be treated as a long-term capital loss to the extent
that any capital gains distributions were received with
respect to the shares.
- Distributions on, and sales, exchanges and redemptions of,
shares held in an IRA or other tax-qualified plan will not
be currently taxable.
- The International Equity Portfolio is expected to be
subject to foreign withholding taxes with respect to
dividends or interest received from sources in foreign
countries. The Portfolio may make an election to treat a
proportionate amount of such taxes as a distribution to
each shareholder. This would allow each shareholder to
either (1) credit such proportionate amount of taxes
against U.S. federal income tax liability, or (2) take
such amount as an itemized deduction.
For more information regarding the taxation of the
Portfolios, consult the SAI under the heading "Additional
Information Concerning Taxes." You also should consult your
tax adviser for information regarding state and local tax
consequences and the applicability of any foreign taxes or
U.S. withholding taxes with respect to your specific
situation.
</TABLE>
49
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<PAGE> 355
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MANAGEMENT OF THE FUND
THE ADVISER
MVA, subject to the general supervision of the Fund's Board of Directors, is
responsible for the day-to-day management of the Portfolios in accordance
with each Portfolio's respective investment objective and policies. This
includes making investment decisions, buying and selling securities and
overseeing the administration and recordkeeping for each Portfolio.
In exchange for these services, MVA receives an investment advisory fee,
which is calculated daily and paid monthly, according to the average daily
net assets of each Portfolio. For the fiscal year ended November 30, 1998,
the Portfolios paid MVA advisory fees as follows:
<TABLE>
<CAPTION>
INVESTMENT ADVISORY FEES
PORTFOLIO AS A % OF NET ASSETS
<S> <C>
------------------------------
Balanced Portfolio .75%
------------------------------
Equity Income Portfolio .62%
------------------------------
Equity Index Portfolio .23%
------------------------------
Growth & Income Equity Portfolio .55%
------------------------------
Growth Equity Portfolio .75%
------------------------------
Small Cap Equity Portfolio .75%
------------------------------
Small Cap Equity Index Portfolio* .40%
------------------------------
International Equity Portfolio 1.00%
---------------------------------------------------------------------
</TABLE>
* The Small Cap Equity Index Portfolio commenced operations on December 30,
1998 and the fee shown is that which currently is in effect.
THE SUB-ADVISER
Clay Finlay, Inc., an experienced international investment manager, serves as
sub-adviser to the International Equity Portfolio and is responsible for the
management of the Portfolio's assets. Clay Finlay manages the Portfolio under
the guidance and direction of MVA and according to its sub-advisory agreement
with MVA. For its services, Clay Finlay receives from MVA a monthly fee based
on a percentage of the Portfolio's average daily net assets.
Founded in 1982, Clay Finlay is a registered investment adviser and a
wholly-owned subsidiary of United Asset Management Corporation, a financial
services holding company. Clay Finlay's principal office is located at 200
Park Avenue, 56th Floor, New York, NY 10166.
50
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<PAGE> 356
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FINANCIAL HIGHLIGHTS
INTRODUCTION
The financial highlights tables presented below are intended to help you
understand the financial performance of each Portfolio's Investor A Shares
and/or Investor B Shares for the past five years (or, if shorter, the period
since the Portfolio began operations or the particular shares were first
offered). Certain information reflects financial results for a single
Investor A Share or Investor B Share in each Portfolio. The total returns in
the tables represent the rate that an investor would have earned (or lost) on
an investment in either Investor A Shares or Investor B Shares, assuming
reinvestment of all dividends and distributions. This information has been
audited by KPMG LLP, independent auditors, whose report, along with the
Portfolios' financial statements, are included in the Fund's Annual Report to
Shareholders, and are incorporated by reference into the SAI. The Small Cap
Equity Index Portfolio did not conduct investment operations during the
periods covered by the tables.
51
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<PAGE> 357
FINANCIAL HIGHLIGHTS BALANCED PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
YEAR ENDED NOVEMBER 30,
1998 1997 1996 1995 1994(a)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.26 $12.58 $11.65 $ 9.61 $10.22
---------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.28 0.32 0.32 0.32 0.28
Net realized and unrealized gains
(losses) from investments 0.84 1.47 1.34 2.02 (0.47)
---------------------------------------------------------------------------------------
Total from Investment Activities 1.12 1.79 1.66 2.34 (0.19)
---------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.28) (0.40) (0.31) (0.30) (0.29)
Net realized gains (1.47) (0.71) (0.42) -- --
In excess of net realized gains -- -- -- -- (0.13)
---------------------------------------------------------------------------------------
Total Distributions (1.75) (1.11) (0.73) (0.30) (0.42)
---------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 12.63 $13.26 $12.58 $11.65 $ 9.61
---------------------------------------------------------------------------------------
Total Return (excludes sales
charges) 9.43% 15.38% 15.10% 24.85% (1.91)%
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000) $10,659 $9,923 $9,328 $8,348 $7,321
Ratio of expenses to average net
assets 1.26% 1.27% 1.27% 1.27% 1.27%
Ratio of net investment income to
average net assets 2.23% 2.57% 2.79% 2.98% 2.77%
Ratio of expenses to average net
assets* 1.36% 1.37% 1.37% 1.37% 1.39%
Portfolio turnover** 47.79% 43.60% 85.16% 58.16% 49.00%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) On September 27, 1994, the Portfolio redesignated Investor Shares as
"Investor A" Shares, and authorized the issuance of a series of shares
designated as "Investor B" Shares.
52
<PAGE> 358
FINANCIAL HIGHLIGHTS BALANCED PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MARCH 1, 1995 TO
YEAR ENDED NOVEMBER 30, NOVEMBER 30,
1998 1997 1996 1995(a)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $13.15 $12.49 $11.59 $10.13
------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.21 0.25 0.25 0.22
Net realized and unrealized gains
from investments 0.81 1.43 1.33 1.44
------------------------------------------------------------------------------------------
Total from Investment Activities 1.02 1.68 1.58 1.66
------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.20) (0.26) (0.26) (0.20)
In excess of net investment income -- (0.05) -- --
Net realized gains (1.47) (0.71) (0.42) --
------------------------------------------------------------------------------------------
Total Distributions (1.67) (1.02) (0.68) (0.20)
------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $12.50 $13.15 $12.49 $11.59
------------------------------------------------------------------------------------------
Total Return (excludes sales
charges) 8.63% 14.57% 14.35% 23.92%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000) $1,285 $ 522 $ 321 $ 36
Ratio of expenses to average net
assets 1.96% 1.96% 1.96% 1.93%(c)
Ratio of net investment income to
average net assets 1.57% 1.85% 2.09% 2.28%(c)
Ratio of expenses to average net
assets* 2.06% 2.06% 2.06% 2.03%(c)
Portfolio turnover** 47.79% 43.60% 85.16% 58.16%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Represents total return for Investor A Shares from December 1, 1994 to
February 28, 1995 plus total return for Investor B Shares from March 1,
1995 through November 30, 1995.
(c) Annualized.
53
<PAGE> 359
FINANCIAL HIGHLIGHTS EQUITY INCOME PORTFOLIO
<TABLE>
<CAPTION>
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
FEBRUARY 27, FEBRUARY 27,
YEAR ENDED 1997 TO YEAR ENDED 1997 TO
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
1998 1997(a) 1998 1997(a)
INVESTOR A INVESTOR A INVESTOR B INVESTOR B
SHARES SHARES SHARES SHARES
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.56 $ 10.00 $ 11.55 $ 10.00
----------------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.17 0.16 0.11(d) 0.10
Net realized and unrealized gains
from investments 0.98 1.57 0.97 1.57
----------------------------------------------------------------------------------------------------------
Total from Investment Activities 1.15 1.73 1.08 1.67
----------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.18) (0.16) (0.11) (0.10)
In excess of net investment income -- (0.01) -- (0.02)
Net realized gains (2.29) -- (2.29) --
----------------------------------------------------------------------------------------------------------
Total Distributions (2.47) (0.17) (2.40) (0.12)
----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.24 $ 11.56 $ 10.23 $ 11.55
----------------------------------------------------------------------------------------------------------
Total Return (excludes sales
charges) 11.69% 17.42%(b) 10.98% 16.75%(b)
RATIOS/SUPPLEMENTARY DATA:
Net assets at the end of period
(000) $ 1,709 $ 173 $ 520 $ 131
Ratio of expenses to average net
assets 1.15% 0.45%(c) 1.84% 1.14%(c)
Ratio of net investment income to
average net assets 1.51% 2.29%(c) 0.83% 1.53%(c)
Ratio of expenses to average net
assets* 1.38% 1.38%(c) 2.08% 2.07%(c)
Portfolio turnover** 98.32% 48.33% 98.32% 48.33%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Per share net investment income has been calculated using the daily
average share method.
54
<PAGE> 360
FINANCIAL HIGHLIGHTS EQUITY INDEX PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
YEAR ENDED MAY 1, 1997
NOVEMBER 30, TO NOVEMBER 30,
1998 1997(a)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.93 $ 10.00
------------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.09 0.07
Net realized and unrealized gains from
investments 2.64 1.94
------------------------------------------------------------------------------------------------------
Total from Investment Activities 2.73 2.01
------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.10) (0.07)
In excess of net investment income -- (0.01)
Net realized gains (0.02) --
------------------------------------------------------------------------------------------------------
Total Distributions (0.12) (0.08)
------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 14.54 $ 11.93
------------------------------------------------------------------------------------------------------
Total Return (excludes sales charges) 23.01% 20.14%(b)
RATIOS/SUPPLEMENTARY DATA:
Net assets at the end of period (000) $ 914 $ 206
Ratio of expenses to average net assets 0.86% 0.78%(c)
Ratio of net investment income to average net
assets 0.70% 1.02%(c)
Ratio of expenses to average net assets* 1.03% 1.21%(c)
Portfolio turnover** 14.83% 1.66%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
55
<PAGE> 361
FINANCIAL HIGHLIGHTS GROWTH & INCOME EQUITY PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
YEAR ENDED NOVEMBER 30,
1998 1997 1996 1995 1994(a)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 21.12 $ 18.67 $ 16.30 $ 12.70 $ 14.74
-------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.12 0.11 0.20 0.23 0.20
Net realized and unrealized gains
(losses) from investments 1.58 3.96 3.32 3.74 (0.17)
-------------------------------------------------------------------------------------------
Total from Investment Activities 1.70 4.07 3.52 3.97 0.03
-------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income (0.11) (0.13) (0.20) (0.23) (0.21)
In excess of net investment income (0.01) (0.03) (0.01) -- --
Net realized gains (3.57) (1.46) (0.94) (0.14) (0.18)
In excess of net realized gains -- -- -- -- (1.68)
-------------------------------------------------------------------------------------------
Total Distributions (3.69) (1.62) (1.15) (0.37) (2.07)
-------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 19.13 $ 21.12 $ 18.67 $ 16.30 $ 12.70
-------------------------------------------------------------------------------------------
Total Return (excludes sales
charges) 9.35% 23.90% 22.99% 31.95% 0.20%
RATIOS/SUPPLEMENTARY DATA:
Net Assets of end of period (000) $48,868 $46,372 $38,229 $25,082 $18,343
Ratio of expenses to average net
assets 1.04% 1.04% 1.05% 1.05% 1.05%
Ratio of net investment income to
average net assets 0.59% 0.60% 1.20% 1.59% 1.45%
Ratio of expenses to average net
assets* 1.14% 1.14% 1.15% 1.15% 1.15%
Portfolio turnover** 91.23% 57.11% 63.90% 58.50% 65.00%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) On September 27, 1994, the Portfolio redesignated Investor Shares as
"Investor A" Shares, and authorized the issuance of a series of shares
designated as "Investor B" Shares.
56
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<PAGE> 362
FINANCIAL HIGHLIGHTS GROWTH & INCOME EQUITY PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
YEAR ENDED NOVEMBER 30, MARCH 1, 1995 TO
1998 1997 1996 Nov. 30, 1995(a)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $20.94 $18.58 $16.23 $13.43
------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income (loss) (0.02)(d) (0.02) 0.11 0.14
Net realized and unrealized gains
from investments 1.57 3.93 3.30 2.81
------------------------------------------------------------------------------------------
Total from Investment Activities 1.55 3.91 3.41 2.95
------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income -- -- (0.11) (0.15)
In excess of net investment income (0.03) (0.09) (0.01) --
Net realized gains (3.57) (1.46) (0.94) --
------------------------------------------------------------------------------------------
Total Distributions (3.60) (1.55) (1.06) (0.15)
------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $18.89 $20.94 $18.58 $16.23
------------------------------------------------------------------------------------------
Total Return (excludes sales
charges) 8.59% 23.04% 22.29% 31.20%(b)
RATIOS/SUPPLEMENTARY DATA:
Net assets at the end of period
(000) $9,040 $6,349 $3,537 $ 781
Ratio of expenses to average net
assets 1.74% 1.73% 1.75% 1.75%(c)
Ratio of net investment income
(loss) to average net assets (0.10)% (0.11)% 0.49% 0.87%(c)
Ratio of expenses to average net
assets* 1.84% 1.83% 1.85% 1.85%(c)
Portfolio turnover** 91.23% 57.11% 63.90% 58.50%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Represents the total return for Investor A Shares from December 1, 1994
to February 28, 1995 plus the total return for Investor B Shares from
March 1, 1995 to November 30, 1995.
(c) Annualized.
(d) Per share net investment income has been calculated using daily average
share method.
57
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FINANCIAL HIGHLIGHTS GROWTH EQUITY PORTFOLIO
<TABLE>
<CAPTION>
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
OCT. 1, 1997 FEB. 23, 1998
YEAR ENDED THROUGH YEAR ENDED SEPTEMBER 30, THROUGH
NOV. 30, 1998 NOV. 30, 1997 1997 1996 1995 1994 NOV. 30, 1998
INVESTOR INVESTOR INVESTOR
A SHARES A SHARES(a) B Shares(b)
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $16.26 $18.75 $ 15.06 $ 13.80 $ 9.74 $ 10.02 $16.27
-------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT ACTIVITIES
Net investment income (loss) (0.04) (0.01) 0.08 0.12 0.10 0.07 (0.07)
Net realized and unrealized gains
(losses) on investments 3.70 (0.24) 4.75 1.32 4.05 (0.25) 3.61
-------------------------------------------------------------------------------------------------------------------------
Total from Investment
Activities 3.66 (0.25) 4.83 1.44 4.15 (0.18) 3.54
-------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net investment income -- -- (0.09) (0.11) (0.09) (0.07) --
Net realized gains -- (2.24) (1.05) (0.07) -- (0.03) --
-------------------------------------------------------------------------------------------------------------------------
Total Distributions -- (2.24) (1.14) (0.18) (0.09) (0.10) --
-------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $19.92 $16.26 $ 18.75 $ 15.06 $ 13.80 $ 9.74 $19.81
-------------------------------------------------------------------------------------------------------------------------
Total Return (excludes sales
charges) 22.53% (1.25)%(c) 33.85% 10.48% 42.90% (1.84)% 9.87%(c)
RATIOS/SUPPLEMENTARY DATA:
Net assets at end of period (000) $4,832 $3,467 $68,965 $55,573 $43,708 $30,282 $ 252
Ratio of expenses to average net
assets 1.35% 1.17%(d) 1.14% 1.17% 1.28% 1.36% 2.11%(d)
Ratio of net investment income
(loss) to average net assets (0.26)% (0.27)%(d) 0.44% 0.86% 0.90% 0.74% (1.08)%(d)
Ratio of expenses to average net
assets* 1.45% 1.42%(d) 1.39% 1.45% 1.58% 1.64% 2.22%(d)
Portfolio turnover** 54.33% 24.45% 42.00% 45.00% 45.00% 127.00% 54.33%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) The Portfolio commenced operations on January 4, 1993 as a portfolio of
Arrow Funds. Upon its reorganization as a new portfolio of the Fund on
November 21, 1997, the Growth Equity Portfolio changed its fiscal year
end from September 30 to November 30.
(b) Period from commencement of operations.
(c) Not annualized.
(d) Annualized.
58
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FINANCIAL HIGHLIGHTS SMALL CAP EQUITY PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
YEAR ENDED NOVEMBER 30,
1998 1997 1996 1995 1994(a)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 15.03 $ 13.40 $ 13.44 $ 11.99 $ 13.14
-------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income (loss) (0.06) (0.05) (0.01) -- (0.03)
Net realized and unrealized gains
(losses) from investments (1.89) 2.50 1.03 2.36 0.89
-------------------------------------------------------------------------------------------
Total from Investment Activities (1.95) 2.45 1.02 2.36 0.86
-------------------------------------------------------------------------------------------
DISTRIBUTIONS
In excess of net investment income -- -- (0.01) -- --
Net realized gains (1.19) (0.82) (1.05) (0.91) (1.78)
In excess of net realized gains (0.03) -- -- -- (0.23)
-------------------------------------------------------------------------------------------
Total Distributions (1.22) (0.82) (1.06) (0.91) (2.01)
-------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 11.86 $ 15.03 $ 13.40 $ 13.44 $ 11.99
-------------------------------------------------------------------------------------------
Total Return (excludes sales
charges) (14.19)% 19.45% 8.36% 21.47% 7.38%
RATIOS/SUPPLEMENTARY DATA:
Net Assets, End of Period (000) $11,601 $14,213 $13,889 $15,056 $10,899
Ratio of expenses to average net
assets 1.25% 1.25% 1.26% 1.26% 1.25%
Ratio of net investment income
(loss) to average net assets (0.45)% (0.29)% (0.13)% (0.12)% (0.44)%
Ratio of expenses to average net
assets* 1.35% 1.35% 1.36% 1.36% 1.36%
Portfolio turnover** 69.72% 80.23% 65.85% 83.13% 85.00%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) On September 27, 1994 the Portfolio redesignated Investor Shares as
"Investor A" Shares.
59
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<PAGE> 365
FINANCIAL HIGHLIGHTS SMALL CAP EQUITY PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MARCH 1, 1995 TO
YEAR ENDED NOVEMBER 30, NOVEMBER 30,
1998 1997 1996 1995(a)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.74 $13.24 $13.37 $11.83
---------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment loss (0.14) (0.13) (0.07) (0.03)
Net realized and unrealized gains
(losses) from investments (1.85) 2.45 0.99 1.57
---------------------------------------------------------------------------------------
Total from Investment Activities (1.99) 2.32 0.92 1.54
---------------------------------------------------------------------------------------
DISTRIBUTIONS
Net realized gains (1.18) (0.82) (1.05) --
In excess of net realized gains (0.04) -- -- --
---------------------------------------------------------------------------------------
Total Distributions (1.22) (0.82) (1.05) --
---------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 11.53 $14.74 $13.24 $13.37
---------------------------------------------------------------------------------------
Total Return (excludes sales
charges) (14.79)% 18.62% 7.63% 20.83%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000) $ 1,286 $1,503 $1,272 $ 603
Ratio of expenses to average net
assets 1.95% 1.95% 1.96% 1.96%(c)
Ratio of net investment loss to
average net assets (1.15)% (0.99)% (0.83)% (0.78)%(c)
Ratio of expenses to average net
assets* 2.05% 2.05% 2.06% 2.06%(c)
Portfolio turnover** 69.72% 80.23% 65.85% 83.13%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Represents the total return for Investor A Shares from December 1, 1994
to February 28, 1995 plus the total return for Investor B Shares from
March 1, 1995 through November 30, 1995.
(c) Annualized.
60
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<PAGE> 366
FINANCIAL HIGHLIGHTS INTERNATIONAL EQUITY PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
APRIL 4, 1994
YEAR ENDED NOVEMBER 30, TO NOV. 30,
1998 1997 1996 1995 1994(a)(b)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.99 $12.05 $10.76 $ 9.90 $10.00
----------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income (loss) 0.01 (0.02) 0.02 0.02 (0.01)
Net realized and unrealized gains
(losses) from investments and
foreign currency 1.77 0.32 1.27 0.86 (0.09)
----------------------------------------------------------------------------------------
Total from Investment Activities 1.78 0.30 1.29 0.88 (0.10)
----------------------------------------------------------------------------------------
DISTRIBUTIONS
In excess of net investment income (0.07) (0.05) -- -- --
Net realized gains (0.43) (0.31) -- (0.01) --
Tax return of capital -- -- -- (0.01) --
----------------------------------------------------------------------------------------
Total Distributions (0.50) (0.36) -- (0.02) --
----------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $13.27 $11.99 $12.05 $10.76 $ 9.90
----------------------------------------------------------------------------------------
Total Return (excludes sales
charges) 15.33% 2.58% 11.99% 8.89% (1.00)%(c)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000) $3,154 $2,854 $2,573 $1,568 $ 791
Ratio of expenses to average net
assets 1.58% 1.59% 1.44% 1.45% 1.55%(d)
Ratio of net investment income
(loss) to average net assets 0.02% (0.20%) 0.19% 0.07% (0.39)%(d)
Ratio of expenses to average net
assets* 1.75% 1.75% 1.75% 1.76% 1.89%(d)
Portfolio turnover** 88.95% 75.18% 77.63% 62.78% 21.00%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations. On April 4, 1994, the Portfolio
issued a series of shares which were designated as "Trust" Shares. In
addition, on May 2, 1994, the Portfolio issued a new series of Shares
which were designated as "Investor" Shares. The financial highlights
presented for April 4, 1994 to May 2, 1994 represent financial highlights
applicable to Trust Shares.
(b) On September 27, 1994, the Portfolio redesignated Investor Shares as
"Investor A" Shares.
(c) Not annualized.
(d) Annualized.
61
- -
<PAGE> 367
FINANCIAL HIGHLIGHTS INTERNATIONAL EQUITY PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MARCH 1, 1995
YEAR ENDED NOVEMBER 30, TO NOVEMBER 30,
1998 1997 1996 1995(a)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.77 $11.90 $10.71 $ 9.26
-----------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income (loss) (0.09) (0.09) (0.04) (0.03)
Net realized and unrealized gains
from investments and foreign
currency 1.74 0.30 1.23 1.48
-----------------------------------------------------------------------------------------
Total from Investment Activities 1.65 0.21 1.19 1.45
-----------------------------------------------------------------------------------------
DISTRIBUTIONS
In excess of net investment income (0.02) (0.03) -- --
Net realized gains (0.43) (0.31) -- --
-----------------------------------------------------------------------------------------
Total Distributions (0.45) (0.34) -- --
-----------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $12.97 $11.77 $11.90 $10.71
-----------------------------------------------------------------------------------------
Total Return (excludes sales
charges) 14.48% 1.82% 11.11% 8.38%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000) $ 624 $ 562 $ 437 $ 102
Ratio of expenses to average net
assets 2.28% 2.29% 2.14% 2.02%(c)
Ratio of net investment income
(loss) to average net assets (0.70)% (0.91)% (0.50)% (0.96)%(c)
Ratio of expenses to average net
assets* 2.45% 2.45% 2.46% 2.44%(c)
Portfolio turnover** 88.95% 75.18% 77.63% 62.78%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Represents the total return for Investor A Shares from December 1, 1994
to February 28, 1995 plus the total return for Investor B Shares from
March 1, 1995 through November 30, 1995.
(c) Annualized.
62
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<PAGE> 368
[Back Cover Page]
Where to find more information
You'll find more information about the Mercantile Stock Portfolios in the
following documents:
Annual and semi-annual reports
The Fund's annual and semi-annual reports contain more information about each
Portfolio and a discussion about the market conditions and investment strategies
that had a significant effect on each Portfolio's performance during the last
fiscal year.
Statement of Additional Information (SAI)
The SAI contains detailed information about the Portfolios and their policies.
By law, it's incorporated by reference into (considered to be part of) this
prospectus.
You can get a free copy of these documents, request other information about the
Portfolios and make shareholder inquiries by calling the Fund at 1-800-452-2724
or by writing to:
Mercantile Mutual Funds, Inc.
P.O. Box 78069
St. Louis, Missouri 63175
If you buy your shares through a broker-dealer or other financial institution,
you may contact your institution for more information.
You can write to the Securities and Exchange Commission (SEC) Public Reference
Section and ask them to mail you information about the Portfolios, including the
SAI. They'll charge you a fee for this service. You can also visit the SEC
Public Reference Room and copy the documents while you're there. For information
about the operation of the Public Reference Room, call the SEC.
Public Reference Section of the SEC
Washington, DC 20549-6009
1-800-SEC-0330
Reports and other information about the Mercantile Stock Portfolios are also
available on the SEC's website at http://www.sec.gov.
The Fund's Investment Company Act File No. is 811-3567
