<PAGE> 1
As filed with the Securities and Exchange Commission on January 29, 1999
Registration No. 2-79285/811-3567
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
POST-EFFECTIVE AMENDMENT NO. 46
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
AMENDMENT NO. 47
THE ARCH FUND, INC.
(Exact Name of Registrant as Specified in Charter)
3435 Stelzer Road
Columbus, Ohio 43219
(Address of Principal Executive Offices)
Registrant's Telephone Number: (800) 551-3731
W. BRUCE MCCONNEL, III, Esq.
Drinker Biddle & Reath LLP
1100 Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, Pennsylvania 19107-3496
(Name and Address of Agent for Service)
Copy to:
Jon W. Bilstrom, Esq.
Mercantile Bank of St. Louis N.A.
One Mercantile Center
8th and Washington Streets
St. Louis, MO 63101
It is proposed that this filing will become effective (check appropriate box)
|_|1 immediately upon filing pursuant to paragraph (b) on March 31, 1998
pursuant to paragraph (b
|_|2 60 days after filing pursuant to paragraph (a)(1)
|X|3 on March 30, 1999 pursuant to paragraph (a)(1)
|_|4 75 days after filing pursuant to paragraph (a)(2)
|_|5 on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
|_|6 this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
The Title of Securities Being Registered. . . . Shares of common stock
This Post-Effective Amendment relates to Registrant's Trust Shares, Trust II
Shares, Institutional Shares, Investor A Shares and/or Investor B Shares of the
Treasury Money Market, Money Market, Tax-Exempt Money Market, U.S. Government
Securities, Intermediate Corporate Bond, Bond Index, Government & Corporate
Bond, Short-Intermediate Municipal, Missouri Tax-Exempt Bond, National Municipal
Bond, Balanced, Equity Income, Equity Index, Growth & Income Equity, Growth
Equity, Small Cap Equity, Small Cap Equity Index and International Equity
Portfolios. Accordingly, the Prospectus and Statement of Additional Information
relating to the Registrant's Conning Money Market Portfolio are not included in
this fling.
<PAGE> 2
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 as an investment or
determined if this prospectus is truthful or complete. Anyone who tells you
otherwise is committing a criminal offense.
<PAGE> 3
CONTENTS
Overview......................................................................
Treasury Money Market Portfolio...............................................
Money Market Portfolio........................................................
Tax-Exempt Money Market Portfolio.............................................
U.S. Government Securities Portfolio..........................................
Intermediate Corporate Bond Portfolio.........................................
Bond Index Portfolio..........................................................
Government & Corporate Bond Portfolio.........................................
Short-Intermediate Municipal Portfolio........................................
National Municipal Bond Portfolio.............................................
Balanced Portfolio............................................................
Equity Income Portfolio.......................................................
Equity Index Portfolio........................................................
Growth & Income Equity Portfolio..............................................
Growth Equity Portfolio.......................................................
Small Cap Equity Portfolio....................................................
Small Cap Equity Index Portfolio..............................................
International Equity Portfolio................................................
Additional Information on Risk................................................
Your Account..................................................................
Explanation of Sales Price...............................................
How to Buy Shares........................................................
How to Sell Shares.......................................................
How to Exchange Shares...................................................
Administrative Services Fees.............................................
General Transaction Policies.............................................
Distributions and Taxes.......................................................
Management of the Fund........................................................
Financial Highlights..........................................................
<PAGE> 4
OVERVIEW
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 PORTFOLIOS?
The Treasury Money Market Portfolio may be appropriate for 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 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.
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 one of the Portfolios, 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
-3-
<PAGE> 5
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.
(SIDEBAR)
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.
-4-
<PAGE> 6
TREASURY MONEY MARKET PORTFOLIO
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 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.
(sidebar)
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 risk.
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.
There's no guarantee the Portfolio will be able to preserve the value of your
investment at $1.00 per share.
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. 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. The returns for Trust II Shares would have differed from the
returns shown in the bar chart, because the two classes bear different expenses.
-5-
<PAGE> 7
TRUST SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
- ---------------------------------------------- ----------------- ----------------- --------------
1 Year 5 Years Since
TREASURY MONEY MARKET PORTFOLIO Inception*
- ---------------------------------------------- ----------------- ----------------- --------------
<S> <C> <C> <C>
Trust Shares -----% -----% -----%
- ---------------------------------------------- ----------------- ----------------- --------------
</TABLE>
* December 2, 1991 for Trust Shares; Trust II Shares do not have a long-term
performance record because they have been offered for less than one calendar
year.
To obtain the Portfolio's current 7-day yield, please call 1-800-452-2724.
FEES AND EXPENSES
The following table shows the fees and expenses that you pay if you buy and hold
shares of the Treasury Money Market Portfolio.
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS)
<TABLE>
<CAPTION>
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Total Annual
Portfolio
Management Distribution Operating
Fees (12b-1) Fees Other Expenses Expenses
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Trust Shares _____% None _____% _____%
- ---------------------------------------------------------------------------------------------------------------------
Trust II Shares ____% None ____% ____%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Management Fees, Other Expenses and Total Annual Portfolio Operating
Expenses for the Portfolio's Trust Shares for the last fiscal year were less
than the amounts shown above because certain of the Portfolio's service
providers voluntarily waived a portion of their fees and/or reimbursed the
Portfolio for certain other expenses. Similarly, 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 fee and/or reimbursing the Portfolio for certain
other expenses. These fee waivers or reimbursements were made, in the case of
Trust Shares, and are being made, in the case of Trust II Shares, in order to
keep the annual fees and expenses for the Portfolio's Trust Shares and Trust II
Shares at certain levels.
-6-
<PAGE> 8
Management Fees, Other Expenses and Total Annual Portfolio Operating Expenses,
after taking these fee waivers and expense reimbursements into account, were
___%, ___% and ___%, respectively, for Trust Shares and are expected to be
____%, ___% and ___%, respectively, for Trust II Shares. The Fund's service
providers intend to continue these fee waivers and expense reimbursements but
are not obligated to do so.
EXAMPLE
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:
<TABLE>
<CAPTION>
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
1 year 3 years 5 years 10 years
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Trust Shares $ $ $ $
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Trust II Shares $ $ $ $
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
-7-
<PAGE> 9
MONEY MARKET PORTFOLIO
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to seek current income with liquidity
and stability of principal.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio invests 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.
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 or only one such rating if only one organization has rated the
instrument. If the money market instrument 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 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.
There's no guarantee the Portfolio will be able to preserve the value of your
investment at $1.00 per share.
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. 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. The returns for Trust II Shares would have differed from the
returns shown in the bar chart, because the two classes bear different expenses.
TRUST SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
-8-
<PAGE> 10
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
- ---------------------------------------------- ----------------- ----------------- --------------
Since
MONEY MARKET PORTFOLIO 1 Year 5 Years Inception*
<S> <C> <C> <C>
- ---------------------------------------------- ----------------- ----------------- --------------
Trust Shares _____% _____% _____%
- ---------------------------------------------- ----------------- ----------------- --------------
</TABLE>
* December 1, 1990 for Trust Shares; Trust II Shares do not have a
long-term performance record because they have been offered for less than
one calendar year.
To obtain the Portfolio's current 7-day yield, please call 1-800-452-2724.
FEES AND EXPENSES
The following table shows the fees and expenses that you pay if you buy and hold
shares of the Money Market Portfolio.
<TABLE>
<CAPTION>
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE PORTFOLIO'S ASSETS)
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Total Annual
Portfolio
Management Distribution Operating
Fees (12b-1)Fees Other Expenses Expenses
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Trust Shares _____% None _____% _____%
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Trust II Shares _____% None _____% _____%
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
Note: Management Fees, Other Expenses and Total Annual Portfolio Operating
Expenses for the Portfolio's Trust Shares for the last fiscal year were less
than the amounts shown above because certain of the Portfolio's service
providers voluntarily waived a portion of their fees and/or reimbursed the
Portfolio for certain other expenses. Similarly, 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 or reimbursements were made, in the case of
Trust Shares, and are being made, in the case of Trust II Shares, 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, were ___%, ___% and ___%, respectively, for Trust
Shares and are expected to be ___%, ___% and ___%, respectively, for Trust II
Shares. The Fund's service providers intend to continue these fee waivers and
expense reimbursements but are not obligated to do so.
-9-
<PAGE> 11
EXAMPLE
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:
<TABLE>
<CAPTION>
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
1 year 3 years 5 years 10 years
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Trust Shares $ $ $ $
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Trust II Shares $ $ $ $
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
-10-
<PAGE> 12
TAX-EXEMPT MONEY MARKET PORTFOLIO
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 assets in short-term
municipal securities, which are securities issued by state and local governments
and other political or public bodies or agencies and 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.
(sidebar)
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.
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, 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.
-11-
<PAGE> 13
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.
There's no guarantee the Portfolio will be able to preserve the value of your
investment at $1.00 per share.
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. 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. The returns for Trust II Shares would have differed from the
returns shown in the bar chart, because the two classes bear different expenses.
Note: 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.
TRUST SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
- ---------------------------------------------- ----------------- ----------------- --------------
1 Year 5 Years Since
TAX-EXEMPT MONEY MARKET PORTFOLIO Inception*
- ---------------------------------------------- ----------------- ----------------- --------------
<S> <C> <C> <C>
Trust Shares _____% _____% _____%
- ---------------------------------------------- ----------------- ----------------- --------------
</TABLE>
* September 28, 1990 for Trust Shares. Trust II Shares do not have a
long-term performance record because they have been offered for less than
one calendar year.
To obtain the Portfolio's current 7-day yield, please call 1-800-452-2724.
-12-
<PAGE> 14
FEES AND EXPENSES
The following table shows the fees and expenses that you pay if you buy and hold
shares of the Tax-Exempt Money Market Portfolio.
<TABLE>
<CAPTION>
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE PORTFOLIO'S ASSETS)
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Total Annual
Portfolio
Management Distribution Operating
Fees (12b-1) Fees Other Expenses Expenses
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Trust Shares ____% None ____% ____%
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Trust II Shares ____% None ____% ____%
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
Note: Management Fees, Other Expense and Total Annual Portfolio Operating
Expenses for the Portfolio's Trust Shares for the last fiscal year were less
than the amounts shown above because certain of the Portfolio's service
providers voluntarily waived a portion of their fees and/or reimbursed the
Portfolio for certain other expenses. Similarly, 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 or reimbursements were made, in the case of
Trust Shares, or are being made, in the case of Trust II Shares, 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, were ___%, ___% and ___%, respectively, for Trust
Shares and are expected to be ___%, ___% and ___%, respectively, for Trust II
shares. The Fund's service providers intend to continue these fee waivers and
expense reimbursements but are not obligated to do so.
EXAMPLE
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:
<TABLE>
<CAPTION>
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
1 year 3 years 5 years 10 years
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Trust Shares $ $ $ $
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Trust II Shares $ $ $ $
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
-13-
<PAGE> 15
U.S. GOVERNMENT SECURITIES PORTFOLIO
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 invests 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 one to 30 years.
(sidebar)
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.
(sidebar)
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").
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, which could adversely affect the
Portfolio's value.
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.
Repurchase agreements carry the risk that the other party may not fulfill its
obligations under the agreement.
-15-
<PAGE> 16
(sidebar)
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.
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. 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 selected 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.
TRUST SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
- ---------------------------------------------- ----------------- ----------------- --------------
Since
U.S. GOVERNMENT SECURITIES PORTFOLIO 1 Year 5 Years Inception*
- ---------------------------------------------- ----------------- ----------------- --------------
<S> <C> <C> <C>
Trust Shares _____% _____% _____%
- ---------------------------------------------- ----------------- ----------------- --------------
Lehman Brothers Intermediate Government Bond
Index _____% _____% _____%
- ---------------------------------------------- ----------------- ----------------- --------------
</TABLE>
* February 1, 1991.
(sidebar)
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.
-16-
<PAGE> 17
FEES AND EXPENSES
The following table shows the fees and expenses that you pay if you buy and hold
shares of the U.S. Government Securities Portfolio.
<TABLE>
<CAPTION>
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE PORTFOLIO'S ASSETS)
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Total Annual
Portfolio
Management Distribution Operating
Fees (12b-1) Fees Other Expenses Expenses
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Trust Shares _____% None _____% _____%
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
Note: Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Trust Shares for the last fiscal year were less than the amounts
shown above because certain of the Portfolio's service providers voluntarily
waived a portion of their fees and/or reimbursed the Portfolio for certain other
expenses. These fee waivers or reimbursements were made in order to keep the
annual fees and expenses for the Portfolio's Trust Shares at certain levels.
Other Expenses and Total Annual Portfolio Operating Expenses, after taking these
fee waivers and expense reimbursements into account, were ___% and ___%,
respectively, for Trust Shares. The Fund's service providers intend to continue
these fee waivers and expense reimbursements but are not obligated to do so.
EXAMPLE
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:
<TABLE>
<CAPTION>
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
1 year 3 years 5 years 10 years
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Trust Shares $ $ $ $
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
-17-
<PAGE> 18
INTERMEDIATE CORPORATE BOND PORTFOLIO
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 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
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.
In making investment decisions, the Adviser will consider a number of factors
including current yield, maturity, yield to maturity, anticipated changes to
interest rates, and the overall quality of the investment. The Portfolio's
average weighted maturity will generally be between three and ten years.
(sidebar)
INVESTMENT GRADE DEBT SECURITIES are those of medium credit quality or better as
determined by a national rating agency, such as Standard & Poor's (debt
securities rated in the four highest rating categories, i.e. BBB or better) and
Moody's Investors Service (debt securities rated in the four highest rating
categories, i.e. Baa or better). The higher the credit rating, the less likely
it is that the issuer of the securities will default on its principal and
interest payments.
(sidebar)
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.
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
-18-
<PAGE> 19
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, which could adversely affect the Portfolio's
value.
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, different accounting standards and political
instability.
(sidebar)
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.
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. 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 selected
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.
TRUST SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 1998
- ---------------------------------------------- ----------------- --------------
Since
INTERMEDIATE CORPORATE BOND PORTFOLIO 1 Year Inception*
- ---------------------------------------------- ----------------- --------------
<S> <C> <C>
Trust Shares _____% _____%
- ---------------------------------------------- ----------------- --------------
Lehman Brothers Intermediate Corporate Bond
Index _____% ____%
- ---------------------------------------------- ----------------- --------------
</TABLE>
* February 10, 1997.
(sidebar)
-19-
<PAGE> 20
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.
FEES AND EXPENSES
The following table shows the fees and expenses that you pay if you buy and hold
shares of the Intermediate Corporate Bond Portfolio.
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS)
<TABLE>
<CAPTION>
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Total Annual
Portfolio
Management Distribution Operating
Fees (12b-1) Fees Other Expenses Expenses
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Trust Shares _____% None _____% _____%
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
Note: Management Fees, Other Expenses and Total Annual Portfolio Operating
Expenses for the Portfolio's Trust Shares for the last fiscal year were less
than the amounts shown above because certain of the Portfolio's service
providers voluntarily waived a portion of their fees and/or reimbursed the
Portfolio for certain other expenses. These fee waivers or reimbursements were
made in order to keep the annual fees and expenses for the Portfolio's Trust
Shares at certain levels. Management Fees, Other Expenses and Total Annual
Portfolio Operating Expenses, after taking these fee waivers and expense
reimbursements into account, were ___%, ___% and ___%, respectively, for Trust
Shares. The Fund's service providers intend to continue these fee waivers and
expense reimbursements but are not obligated to do so.
EXAMPLE
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:
xxxxx
<TABLE>
<CAPTION>
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
1 year 3 years 5 years 10 years
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Trust Shares $ $ $ $
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
-20-
<PAGE> 21
BOND INDEX PORTFOLIO
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").
Unlike most of the Portfolios, which require shareholder approval to change
their investment objectives, the Bond Index 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 sophisticated
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.
(sidebar)
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.
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,
which could adversely affect the Portfolio's value.
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.
-21-
<PAGE> 22
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. 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 selected
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.
TRUST SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
- ---------------------------------------------- ----------------- --------------
Since
BOND INDEX PORTFOLIO 1 Year Inception*
- ---------------------------------------------- ----------------- --------------
<S> <C> <C>
Trust Shares _____% _____%
- ---------------------------------------------- ----------------- --------------
Lehman Brothers Aggregate Bond Index _____% _____%
- ---------------------------------------------- ----------------- --------------
</TABLE>
* February 10, 1997.
(sidebar)
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.
FEES AND EXPENSES
The following table shows the fees and expenses that you pay if you buy and hold
shares of the Bond Index Portfolio.
-22-
<PAGE> 23
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS)
<TABLE>
<CAPTION>
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Total Annual
Portfolio
Management Distribution Operating
Fees (12b-1) Fees Other Expenses Expenses
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Trust Shares ____% None ____% ____%
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
Note: Management Fees, Other Expenses and Total Annual Portfolio Operating
Expenses for the Portfolio's Trust Shares for the last fiscal year were less
than the amounts shown above because certain of the Portfolio's service
providers voluntarily waived a portion of their fees and/or reimbursed the
Portfolio for certain other expenses. These fee waivers or reimbursements were
made in order to keep the annual fees and expenses for the Portfolio's Trust
Shares at certain levels. Management Fees, Other Expenses and Total Annual
Portfolio Operating Expenses, after taking these fee waivers and expense
reimbursements into account, were ___%, ___% and ___%, respectively, for Trust
Shares. The Fund's service providers intend to continue these fee waivers and
expense reimbursements but are not obligated to do so.
EXAMPLE
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:
<TABLE>
<CAPTION>
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
1 year 3 years 5 years 10 years
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Trust Shares $ $ $ $
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
-23-
<PAGE> 24
GOVERNMENT & CORPORATE BOND PORTFOLIO
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, debentures and securities
convertible into common stock. 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. Under normal market conditions, however, the Portfolio intends
to invest at least 65% of its 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.
In making investment decisions, the Adviser considers 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 vary from time to time depending on current
market and economic conditions and the Adviser's assessment of probable changes
in interest rates.
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,
which could adversely affect the Portfolio's value.
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.
-24-
<PAGE> 25
Foreign investments may be riskier than U.S. investments because of government
restrictions, different accounting standards and political instability.
(sidebar)
PORTFOLIO MANAGER
George J. Schupp is the person primarily responsible for the day-to-day
management of the Portfolio. Mr. Schupp joined MVA in 1983 and has 22 years of
prior investment experience. He has managed the Portfolio since February 1998.
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. 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
selected 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.
TRUST SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
- ---------------------------------------------- ----------------- ----------------- --------------
GOVERNMENT & CORPORATE BOND PORTFOLIO Since
1 Year 5 Years Inception*
- ---------------------------------------------- ----------------- ----------------- --------------
<S> <C> <C> <C>
Trust Shares _____% _____% _____%
- ---------------------------------------------- ----------------- ----------------- --------------
- ---------------------------------------------- ----------------- ----------------- --------------
Lehman Brothers Aggregate Bond Index _____% _____% _____%
- ---------------------------------------------- ----------------- ----------------- --------------
</TABLE>
* February 1, 1991.
FEES AND EXPENSES
The following table shows the fees and expenses that you pay if you buy and hold
shares of the Government & Corporate Bond Portfolio.
-25-
<PAGE> 26
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS)
<TABLE>
<CAPTION>
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Total Annual
Portfolio
Management Distribution Operating
Fees (12b-1) Fees Other Expenses Expenses
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Trust Shares _____% None _____% _____%
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
Note: Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Trust Shares for the last fiscal year were less than the amounts
shown above because certain of the Portfolio's service providers voluntarily
waived a portion of their fees and/or reimbursed the Portfolio for certain other
expenses. These fee waivers or reimbursements were made in order to keep the
annual fees and expenses for the Portfolio's Trust Shares at certain levels.
Other Expenses and Total Annual Portfolio Operating Expenses, after taking these
fee waivers and expense reimbursements into account, were ___% and ___%,
respectively, for Trust Shares. The Fund's service providers intend to continue
these fee waivers and expense reimbursements but are not obligated to do so.
EXAMPLE
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:
<TABLE>
<CAPTION>
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
1 year 3 years 5 years 10 years
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Trust Shares $ $ $ $
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
-26-
<PAGE> 27
SHORT-INTERMEDIATE MUNICIPAL PORTFOLIO
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 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.
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 or Moody's Investors Service, 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.
The Portfolio's average weighted maturity will generally be between two and five
years.
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, which could adversely affect the
Portfolio's value.
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.
-27-
<PAGE> 28
(sidebar)
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. Prior to joining MVA, Mr. Merzian was employed as a
portfolio manager at another financial institution.
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. 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 selected
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.
TRUST SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
- ---------------------------------------------- ----------------- --------------
1 Year Since
SHORT-INTERMEDIATE MUNICIPAL PORTFOLIO Inception*
- ---------------------------------------------- ----------------- --------------
<S> <C> <C>
-----% -----%
Trust Shares
- ---------------------------------------------- ----------------- --------------
Lehman Brothers Municipal Bond Index--3 Year _____% _____%
- ---------------------------------------------- ----------------- --------------
</TABLE>
* July 10, 1995.
(sidebar)
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.
-28-
<PAGE> 29
FEES AND EXPENSES
The following table shows the fees and expenses that you pay if you buy and hold
shares of the Short-Intermediate Municipal Portfolio.
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS)
<TABLE>
<CAPTION>
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Total Annual
Portfolio
Management Distribution Operating
Fees (12b-1) Fees Other Expenses Expenses
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Trust Shares _____% None _____% _____%
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
Note: Management Fees, Other Expenses and Total Annual Portfolio Operating
Expenses for the Portfolio's Trust Shares for the last fiscal year were less
than the amounts shown above because certain of the Portfolio's service
providers voluntarily waived a portion of their fees and/or reimbursed the
Portfolio for certain other expenses. These fee waivers or reimbursements were
made in order to keep the annual fees and expenses for the Portfolio's Trust
Shares at certain levels. Management Fees, Other Expenses and Total Annual
Portfolio Operating Expenses, after taking these fee waivers and expense
reimbursements into account, were ___%, ___% and ___%, respectively, for Trust
Shares. The Fund's service providers intend to continue these fee waivers and
expense reimbursements but are not obligated to do so.
EXAMPLE
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:
<TABLE>
<CAPTION>
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
1 year 3 years 5 years 10 years
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Trust Shares $ $ $ $
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
-29-
<PAGE> 30
MISSOURI TAX-EXEMPT BOND PORTFOLIO
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 assets in municipal
securities that pay interest that is exempt from federal income tax, and at
least 65% of its 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.
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 or Moody's Investors Service, 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.
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.
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, which could adversely affect
the Portfolio's value.
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
-30-
<PAGE> 31
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.
(sidebar)
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 then. Prior to joining MVA, Mr. Merzian was
employed as a portfolio manager at another financial institution.
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. 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 selected 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.
Note: 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.
TRUST SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
-31-
<PAGE> 32
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
- ---------------------------------------------- ----------------- ----------------- --------------
1 Year 5 Years Since
MISSOURI TAX-EXEMPT BOND PORTFOLIO Inception*
- ---------------------------------------------- ----------------- ----------------- --------------
<S> <C> <C> <C>
Trust Shares _____% _____% _____%
- ---------------------------------------------- ----------------- ----------------- --------------
Lehman Brothers Municipal Bond Index _____% _____% _____%
- ---------------------------------------------- ----------------- ----------------- --------------
</TABLE>
* September 28, 1990.
(sidebar)
KNOW YOUR INDEX
THE LEHMAN BROTHERS MUNICIPAL BOND INDEX is an unmanaged index that tracks the
performance of municipal bonds.
FEES AND EXPENSES
The following table shows the fees and expenses that you pay if you buy and hold
shares of the Missouri Tax-Exempt Bond Portfolio.
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS)
<TABLE>
<CAPTION>
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Total Annual
Portfolio
Management Distribution Operating
Fees (12b-1) Fees Other Expenses Expenses
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Trust Shares _____% None _____% _____%
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
Note: Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Trust Shares for the last fiscal year were less than the amounts
shown above because certain of the Portfolio's service providers voluntarily
waived a portion of their fees and/or reimbursed the Portfolio for certain other
expenses. These fee waivers or reimbursements were made in order to keep the
annual fees and expenses for the Portfolio's Trust Shares at certain levels.
Other Expenses and Total Annual Portfolio Operating Expenses, after taking these
fee waivers and expense reimbursements into account, were ___% and ___%,
respectively, for Trust Shares. The Fund's service providers intend to continue
these fee waivers and expense reimbursements but are not obligated to do so.
-32-
<PAGE> 33
EXAMPLE
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:
<TABLE>
<CAPTION>
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
1 year 3 years 5 years 10 years
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Trust Shares $ $ $ $
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
-33-
<PAGE> 34
NATIONAL MUNICIPAL BOND PORTFOLIO
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 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.
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 or Moody's Investors Service, 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.
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.
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, which could adversely affect
the Portfolio's value.
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.
-34-
<PAGE> 35
(sidebar)
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.
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. 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 selected
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.
TRUST SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
- ---------------------------------------------- ----------------- --------------
1 Year Since
NATIONAL MUNICIPAL BOND PORTFOLIO Inception*
- ---------------------------------------------- ----------------- --------------
<S> <C> <C>
Trust Shares _____% _____%
- ---------------------------------------------- ----------------- --------------
Lehman Brothers Municipal Bond Index--10 Year
-----% -----%
- ---------------------------------------------- ----------------- --------------
</TABLE>
* November 18, 1996.
(sidebar)
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.
-35-
<PAGE> 36
FEES AND EXPENSES
The following table shows the fees and expenses that you pay if you buy and hold
shares of the National Municipal Bond Portfolio.
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS)
<TABLE>
<CAPTION>
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Total Annual
Portfolio
Management Distribution Operating
Fees (12b-1) Fees Other Expenses Expenses
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Trust Shares _____% None _____% _____%
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
Note: Management Fees, Other Expenses and Total Annual Portfolio Operating
Expenses for the Portfolio's Trust Shares for the last fiscal year were less
than the amounts shown above because certain of the Portfolio's service
providers voluntarily waived a portion of their fees and/or reimbursed the
Portfolio for certain other expenses. These fee waivers or reimbursements were
made in order to keep the annual fees and expenses for the Portfolio's Trust
Shares at certain levels. Management Fees, Other Expenses and Total Annual
Portfolio Operating Expenses, after taking these fee waivers and expense
reimbursements into account, were ___%, ___% and ___%, respectively, for Trust
Shares. The Fund's service providers intend to continue these fee waivers and
expense reimbursements but are not obligated to do so.
EXAMPLE
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:
<TABLE>
<CAPTION>
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
1 year 3 years 5 years 10 years
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Trust Shares $ $ $ $
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
-36-
<PAGE> 37
BALANCED PORTFOLIO
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.
(sidebar)
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.
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. 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.
Under normal market conditions, the Portfolio invests at least 25% of its assets
in fixed-income securities and no more than 75% of its 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.
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,
which could adversely affect the value of the Portfolio. Fixed-income securities
are subject to other risks, including the risk that the issuer will be unable to
repay the debt.
-37-
<PAGE> 38
(sidebar)
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
Balanced Portfolio since May 1996. He also manages the Fund's three municipal
bond portfolios. Prior to joining MVA, Mr. Merzian was employed as a portfolio
manager at another financial organization.
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. 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
selected 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.
TRUST SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
- ---------------------------------------------- ----------------- ----------------- --------------
1 Year 5 Years Since
BALANCED PORTFOLIO Inception*
- ---------------------------------------------- ----------------- ----------------- --------------
<S> <C> <C> <C>
-----% -----% -----%
Trust Shares
- ---------------------------------------------- ----------------- ----------------- --------------
-----% -----% -----%
S&P 500 Index
- ---------------------------------------------- ----------------- ----------------- --------------
-----% -----% -----%
Lehman Brothers Aggregate Bond Index
- ---------------------------------------------- ----------------- ----------------- --------------
</TABLE>
* April 1, 1993.
(sidebar)
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.
-38-
<PAGE> 39
FEES AND EXPENSES
The following table shows the fees and expenses that you pay if you buy and hold
shares of the Balanced Portfolio.
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS)
<TABLE>
<CAPTION>
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Total Annual
Portfolio
Management Distribution Operating
Fees (12b-1) Fees Other Expenses Expenses
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Trust Shares _____% None _____% _____%
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
Note: Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Trust Shares for the last fiscal year were less than the amounts
shown above because certain of the Portfolio's service providers voluntarily
waived a portion of their fees and/or reimbursed the Portfolio for certain other
expenses. These fee waivers or reimbursements were made in order to keep the
annual fees and expenses for the Portfolio's Trust Shares at certain levels.
Other Expenses and Total Annual Portfolio Operating Expenses, after taking these
fee waivers and expense reimbursements into account, were ___% and ___%,
respectively, for Trust Shares. The Fund's service providers intend to continue
these fee waivers and expense reimbursements but are not obligated to do so.
EXAMPLE
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:
<TABLE>
<CAPTION>
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
1 year 3 years 5 years 10 years
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Trust Shares $ $ $ $
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
-39-
<PAGE> 40
EQUITY INCOME PORTFOLIO
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. 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 assets
in income-producing (dividend-paying) equity securities. 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.
(sidebar)
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.
(sidebar)
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.
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.
(sidebar)
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.
-40-
<PAGE> 41
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. 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 selected
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.
TRUST SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 1998
- ---------------------------------- --------------- ----------------------
Since
EQUITY INCOME PORTFOLIO 1Year Inception*
- ---------------------------------- --------------- ----------------------
<S> <C> <C>
-----% -----%
Trust Shares
- ---------------------------------- --------------- ----------------------
-----% -----%
Russell 1000 Value Index
- ---------------------------------- --------------- ----------------------
</TABLE>
* February 27, 1997.
(sidebar)
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 companies in the
Russell 3000 Index as ranked by total market capitalization.
-41-
<PAGE> 42
FEES AND EXPENSES
The following table shows the fees and expenses that you pay if you buy and hold
shares of the Equity Income Portfolio.
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS)
<TABLE>
<CAPTION>
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Total Annual
Portfolio
Management Distribution Operating
Fees (12b-1) Fees Other Expenses Expenses
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Trust Shares _____% None _____% _____%
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
Note: Management Fees, Other Expenses and Total Annual Portfolio Operating
Expenses for the Portfolio's Trust Shares for the last fiscal year were less
than the amounts shown above because certain of the Portfolio's service
providers voluntarily waived a portion of their fees and/or reimbursed the
Portfolio for certain other expenses. These fee waivers or reimbursements were
made in order to keep the annual fees and expenses for the Portfolio's Trust
Shares at certain levels. Management Fees, Other Expenses and Total Annual
Portfolio Operating Expenses, after taking these fee waivers and expense
reimbursements into account, were ___%, ___% and ___%, respectively, for Trust
Shares. The Fund's service providers intend to continue these fee waivers and
expense reimbursements but are not obligated to do so.
EXAMPLE
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:
<TABLE>
<CAPTION>
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
1 year 3 years 5 years 10 years
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Trust Shares $ $ $ $
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
-42-
<PAGE> 43
EQUITY INDEX PORTFOLIO
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.
Unlike most of the Portfolios, which require shareholder approval to change
their investment objectives, the Equity Index 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 to approximate the investment
performance of the S&P 500 Index through the use of sophisticated computer
models. The Portfolio invests substantially all of its 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 cash flow and
in the composition of the S&P 500 Index.
(sidebar)
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.
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.
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. The bar chart shows how the performance of the Portfolio's Trust
Shares has varied from year to year, and 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
-43-
<PAGE> 44
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)
(insert bar chart)
Best quarter:
Worst quarter:
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
- ------------------------------ ------------------ -------------
Since
EQUITY INDEX PORTFOLIO 1 Year Inception*
- ------------------------------ ------------------ -------------
<S> <C> <C>
-----% -----%
Trust Shares
- ------------------------------ ------------------ -------------
-----% -----%
S&P 500 Index
- ------------------------------ ------------------ -------------
</TABLE>
* May 1, 1997.
FEES AND EXPENSES
The following table shows the fees and expenses that you pay if you buy and hold
shares of the Equity Index Portfolio.
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS)
<TABLE>
<CAPTION>
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Total Annual
Portfolio
Management Distribution Operating
Fees (12b-1) Fees Other Expenses Expenses
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Trust Shares _____% None _____% _____%
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
Note: Management Fees, Other Expenses and Total Annual Portfolio Operating
Expenses for the Portfolio's Trust Shares for the last fiscal year were less
than the amounts shown above because certain of the Portfolio's service
providers voluntarily waived a portion of their fees and/or reimbursed the
Portfolio for certain other expenses. These fee waivers or reimbursements were
made in order to keep the annual fees and expenses for the Portfolio's Trust
Shares at certain levels. Management Fees, Other Expenses and Total Annual
Portfolio Operating Expenses, after taking these fee waivers and expense
reimbursements into account, were ___%, ___% and ___%, respectively, for Trust
Shares. The Fund's service providers intend to continue these fee waivers and
expense reimbursements but are not obligated to do so.
-44-
<PAGE> 45
EXAMPLE
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:
<TABLE>
<CAPTION>
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
1 year 3 years 5 years 10 years
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Trust Shares $ $ $ $
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
-45-
<PAGE> 46
GROWTH & INCOME EQUITY PORTFOLIO
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.
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 a major 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.
(sidebar)
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.
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. The bar chart shows how the performance of the Portfolio's Trust
Shares has varied from year to year, and the table shows how the Portfolio's
average annual returns for one year, five years and since inception compare to
those of a selected 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.
-46-
<PAGE> 47
TRUST SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
- ------------------------------------------ -------------- -------------- ------------
GROWTH & INCOME EQUITY PORTFOLIO Since
1 Year 5 Years inception*
- ------------------------------------------ -------------- -------------- ------------
<S> <C> <C> <C>
-----% -----% -----%
Trust Shares
- ------------------------------------------ -------------- -------------- ------------
-----% -----% -----%
S&P 500 Index
- ------------------------------------------ -------------- -------------- ------------
</TABLE>
* April 1, 1991.
FEES AND EXPENSES
The following table shows the fees and expenses that you pay if you buy and hold
shares of the Growth & Income Equity Portfolio.
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS)
<TABLE>
<CAPTION>
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Total Annual
Portfolio
Management Distribution Operating
Fees (12b-1) Fees Other Expenses Expenses
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Trust Shares _____% None _____% _____%
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
Note: Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Trust Shares for the last fiscal year were less than the amounts
shown above because certain of the Portfolio's service providers voluntarily
waived a portion of their fees and/or reimbursed the Portfolio for certain other
expenses. These fee waivers or reimbursements were made in order to keep the
annual fees and expenses for the Portfolio's Trust Shares at certain levels.
Other Expenses and Total Annual Portfolio Operating Expenses, after taking these
fee waivers and expense reimbursements into account, were ___% and ___%,
respectively, for Trust Shares. The Fund's service providers intend to continue
these fee waivers and expense reimbursements but are not obligated to do so.
-47-
<PAGE> 48
EXAMPLE
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:
<TABLE>
<CAPTION>
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
1 year 3 years 5 years 10 years
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Trust Shares $ $ $ $
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
-48-
<PAGE> 49
GROWTH EQUITY PORTFOLIO
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 Portfolio securities, 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 market share, but company
earnings are the primary consideration.
Under normal market conditions, the Portfolio invests at least 65% of its assets
in stocks or other equity securities. 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.
(sidebar)
GROWTH STOCKS offer strong revenue and earnings potential and accompanying
capital growth, with less dividend income than value stocks.
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.
(sidebar)
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.
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. The bar chart shows how the performance of the Portfolio's Trust
Shares has varied from year to year, and the table shows how the Portfolio's
average annual returns for one year and since inception compare to those of a
selected 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.
-49-
<PAGE> 50
Note: 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.
TRUST SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
- ------------------------------ --------------- -------------
Since
GROWTH EQUITY PORTFOLIO 1 Year Inception*
- ------------------------------ --------------- -------------
<S> <C> <C>
-----% -----%
Trust Shares
- ------------------------------ --------------- -------------
-----% -----%
S&P 500 Index
- ------------------------------ --------------- -------------
</TABLE>
* November 24, 1997.
FEES AND EXPENSES
The following table shows the fees and expenses that you pay if you buy and hold
shares of the Growth Equity Portfolio.
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS)
<TABLE>
<CAPTION>
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Total Annual
Portfolio
Management Distribution Operating
Fees (12b-1) Fees Other Expenses Expenses
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Trust Shares ____% None ____% ____%
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
Note: Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Trust Shares for the last fiscal year were less than the amounts
shown above because certain of the Portfolio's service providers voluntarily
waived a portion of their fees and/or reimbursed the Portfolio for certain other
expenses. These fee waivers or reimbursements were made in order to keep the
annual fees and expenses for the Portfolio's Trust Shares at certain levels.
Other Expenses and Total Annual Portfolio Operating Expenses, after taking these
fee waivers and
-50-
<PAGE> 51
expense reimbursements into account, were ___% and ___%, respectively, for Trust
Shares. The Fund's service providers intend to continue these fee waivers and
expense reimbursements but are not obligated to do so.
EXAMPLE
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:
<TABLE>
<CAPTION>
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
1 year 3 years 5 years 10 years
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Trust Shares $ $ $ $
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
-51-
<PAGE> 52
SMALL CAP EQUITY PORTFOLIO
INVESTMENT OBJECTIVE
The Portfolio's investment objective is capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
Under normal conditions, the Portfolio invests at least 65% of its assets in
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. Purchased stocks 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. In addition, the Portfolio is subject to the
additional risk that the growth 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 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.
-52-
<PAGE> 53
(sidebar)
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.
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. The bar chart shows how the performance of the Portfolio's Trust
Shares has varied from year to year, and the table shows how the Portfolio's
average annual returns for one year, five years and since inception compare to
those of a selected 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.
TRUST SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
- --------------------------------- ---------------- ------------- ------------
Since
SMALL CAP EQUITY PORTFOLIO 1 Year 5 Years inception*
- --------------------------------- ---------------- ------------- ------------
<S> <C> <C> <C>
----% ----% ----%
Trust Shares
- --------------------------------- ---------------- ------------- ------------
----% ----% ----%
Russell 2000 Index
- --------------------------------- ---------------- ------------- ------------
</TABLE>
* May 1, 1992.
(sidebar)
KNOW YOUR INDEX
THE RUSSELL 2000 INDEX is an unmanaged index comprised of the 2,000 smallest
companies in the Russell 3000 Index.
FEES AND EXPENSES
The following table shows the fees and expenses that you pay if you buy and hold
shares of the Small Cap Equity Portfolio.
-53-
<PAGE> 54
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS)
<TABLE>
<CAPTION>
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Total Annual
Portfolio
Management Distribution Operating
Fees (12b-1) Fees Other Expenses Expenses
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Trust Shares ____% None ____% ____%
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
Note: Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Trust Shares for the last fiscal year were less than the amounts
shown above because certain of the Portfolio's service providers voluntarily
waived a portion of their fees and/or reimbursed the Portfolio for certain other
expenses. These fee waivers or reimbursements were made in order to keep the
annual fees and expenses for the Portfolio's Trust Shares at certain levels.
Other Expenses and Total Annual Portfolio Operating Expenses, after taking these
fee waivers and expense reimbursements into account, were ___% and ___%,
respectively, for Trust Shares. The Fund's service providers intend to continue
these fee waivers and expense reimbursements but are not obligated to do so.
EXAMPLE
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:
<TABLE>
<CAPTION>
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
1 year 3 years 5 years 10 years
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Trust Shares $ $ $ $
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
-54-
<PAGE> 55
SMALL CAP EQUITY INDEX PORTFOLIO
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.
Unlike most of the Portfolios, which require shareholder approval to change
their investment objectives, the Small Cap Equity Index 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 sophisticated
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 cash flow 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 Stock Portfolios. By
typically investing in all 600 stocks in the Index, the Portfolio remains
broadly diversified, which may reduce some of this risk.
-55-
<PAGE> 56
RETURN HISTORY
The Portfolio does not have a long-term performance record because it has been
in operation for less than one calendar year.
FEES AND EXPENSES
The following table shows the fees and expenses that you pay if you buy and hold
shares of the Small Cap Equity Index Portfolio.
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS)
<TABLE>
<CAPTION>
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Total Annual
Portfolio
Management Distribution Operating
Fees (12b-1) Fees Other Expenses Expenses
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Trust Shares ____% None ____% ____%
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
Note: 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
or reimbursements are being made in order to keep the annual fees and expenses
for the Portfolio's Trust 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___%, ___%
and ___%, respectively, for Trust Shares. The Fund's service providers intend to
continue these fee waivers and expense reimbursements but are not obligated to
do so.
EXAMPLE
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:
<TABLE>
<CAPTION>
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
1 year 3 years 5 years 10 years
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Trust Shares $ $ $ $
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
-56-
<PAGE> 57
INTERNATIONAL EQUITY PORTFOLIO
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 of its 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 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.
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, 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. 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.
(sidebar)
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.
-57-
<PAGE> 58
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. The bar chart shows how the performance of the Portfolio's Trust
Shares has varied from year to year, and the table shows how the Portfolio's
average annual returns for one year and since inception compare to those of a
selected 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.
TRUST SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDING DECEMBER 31, 1998
<TABLE>
<CAPTION>
- ------------------------------------------------------- ---------------- --------------
Since
INTERNATIONAL EQUITY PORTFOLIO 1 Year inception*
- ------------------------------------------------------- ---------------- --------------
<S> <C> <C>
----% ----%
Trust Shares
- ------------------------------------------------------- ---------------- --------------
----% ----%
Morgan Stanley Capital International Europe,
Australia & Far East (EAFE) Index
- ------------------------------------------------------- ---------------- --------------
</TABLE>
* April 4, 1994.
(sidebar)
KNOW YOUR INDEX
The Morgan Stanley Capital International Europe, Australia and Far East Index,
or EAFE Index, is an unmanaged index consisting of companies in Australia, New
Zealand, Europe and the Far East.
FEES AND EXPENSES
The following table shows the fees and expenses that you pay if you buy and hold
shares of the International Equity Portfolio.
-58-
<PAGE> 59
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS)
<TABLE>
<CAPTION>
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Total Annual
Portfolio
Management Distribution Operating
Fees (12b-1) Fees Other Expenses Expenses
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Trust Shares ____% None ____% ____%
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
Note: Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Trust Shares for the last fiscal year were less than the amounts
shown above because certain of the Portfolio's service providers voluntarily
waived a portion of their fees and/or reimbursed the Portfolio for certain other
expenses. These fee waivers or reimbursements were made in order to keep the
annual fees and expenses for the Portfolio's Trust Shares at certain levels.
Other Expenses and Total Annual Portfolio Operating Expenses, after taking these
fee waivers and expense reimbursements into account, were __% and __%
respectively, for Trust Shares. The Fund's service providers intend to continue
these fee waivers and expense reimbursements but are not obligated to do so.
EXAMPLE
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:
<TABLE>
<CAPTION>
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
1 year 3 years 5 years 10 years
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Trust Shares $ $ $ $
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
-59-
<PAGE> 60
ADDITIONAL INFORMATION ON RISK
The principal risks of investing in each Portfolio are described above. 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). 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 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.
SELECTION OF INVESTMENTS
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolios and how they may advance the Portfolios' investment
objectives. It is possible, however, that these evaluations will prove to be
inaccurate.
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, which is referred to on
the back cover of this prospectus.
FREQUENT TRADING
Each Portfolio may trade its investments frequently in trying to achieve its
investment goal. This strategy increases the chances that a Taxable Bond,
Tax-Exempt Bond or Stock Portfolio will pay investors short-term capital gains.
These gains are taxable at higher rates than long-term capital gains. Frequent
trading could also mean higher brokerage commissions and other transaction
costs, which could reduce the Portfolio's returns.
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
-60-
<PAGE> 61
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.
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.
-61-
<PAGE> 62
YOUR ACCOUNT
EXPLANATION OF SALES PRICE
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 that class and then
dividing the result by the total number of shares in the class that are
outstanding.
(sidebar)
BUSINESS DAYS DEFINED
A business day is any day that both the New York Stock Exchange (NYSE) and the
Federal Reserve Bank of St. Louis are open for business. Currently, the Fund
observes the following holidays: New Year's Day, Martin Luther King Jr. Day,
Presidents' Day, Good Friday, Memorial Day (observed), Independence Day
(observed), Labor Day, Columbus Day, Veterans' Day, Thanksgiving and Christmas.
- - 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 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 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
-62-
<PAGE> 63
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 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.
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 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 1-800-452-4015.
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.
HOW TO SELL SHARES
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 41-6, St. Louis, Missouri 63178. The order must be
accompanied by the share certificates, properly
-63-
<PAGE> 64
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. 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.
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.
-64-
<PAGE> 65
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.
-65-
<PAGE> 66
DISTRIBUTIONS AND TAXES
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.
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.
-66-
<PAGE> 67
- - 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
-67-
<PAGE> 68
gross income in determining whether any Social Security or railroad
retirement payments received by you are subject to federal income
taxes.
- - 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
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
Statement of Additional Information 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.
(sidebar)
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.
-68-
<PAGE> 69
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 as a
Portfolio % of net assets
- ------------------------------------------- --------------------------------
<S> <C>
Treasury Money Market Portfolio
Money Market Portfolio
- ------------------------------------------- --------------------------------
Tax-Exempt Money Market Portfolio
- ------------------------------------------- --------------------------------
U.S. Government Securities Portfolio
- ------------------------------------------- --------------------------------
Intermediate Corporate Bond Portfolio
- ------------------------------------------- --------------------------------
Bond Index Portfolio
- ------------------------------------------- --------------------------------
Government & Corporate Bond Portfolio
- ------------------------------------------- --------------------------------
Short-Intermediate Municipal Portfolio
- ------------------------------------------- --------------------------------
Missouri Tax-Exempt Bond Portfolio
- ------------------------------------------- --------------------------------
National Municipal Bond Portfolio
- ------------------------------------------- --------------------------------
Balanced Portfolio
- ------------------------------------------- --------------------------------
Growth & Income Equity Portfolio
- ------------------------------------------- --------------------------------
Equity Income Portfolio
- ------------------------------------------- --------------------------------
Equity Index Portfolio
- ------------------------------------------- --------------------------------
Growth Equity Portfolio
- ------------------------------------------- --------------------------------
Small Cap Equity Portfolio
- ------------------------------------------- --------------------------------
Small Cap Equity Index Portfolio*
- ------------------------------------------- --------------------------------
International Equity Portfolio
- ------------------------------------------- --------------------------------
</TABLE>
* The Portfolio commenced operations on December 30, 1998 and the fee shown is
that which currently is in effect.
-69-
<PAGE> 70
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.
-70-
<PAGE> 71
FINANCIAL HIGHLIGHTS
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 [____________________], independent accountants,
whose report, along with the Portfolios' financial statements, is included in
the Fund's Annual Report to Shareholders, and [____________________________] the
SAI. The Small Cap Equity Index Portfolio did not conduct investment operations
during the periods covered by the tables.
-71-
<PAGE> 72
<TABLE>
<CAPTION>
Treasury Money Market Portfolio
(For a Share(b) outstanding throughout each period)
YEAR ENDED NOVEMBER 30,
-----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
TRUST SHARES TRUST SHARES TRUST SHARES TRUST SHARES TRUST SHARES
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.............. $1.00 $1.00 $1.00 $1.00
Investment Activities
Net investment income............ 0.046 0.045 0.050 0.033
----- ----- ----- -----
Total from Investment
Activities....................... 0.046 0.045 0.050 0.033
----- ----- ----- -----
Distributions
Net investment income............ (0.046) (0.045) (0.050) (0.033)
------- ------- ------- -------
Total Distributions................... (0.046) (0.045) (0.050) (0.033)
------- ------- ------- -------
Net Asset Value, End of
Period........................... $1.00 $1.00 $1.00 $1.00
===== ===== ===== =====
Total Return.......................... 4.70% 4.64% 5.12% 3.38%
Ratios/Supplemental Data:
Net Assets at end of period
(000)............................ $283,653 $131,322 $252,780 $242,099
Ratio of expenses to average
net assets (including
waivers)......................... 0.61% 0.61% 0.60% 0.49%
Ratio of net investment
income to average net
assets (including
waivers)......................... 4.60% 4.55% 5.01% 3.26%
Ratio of expenses to average
net assets (before
waivers)*........................ 0.92% 0.76% 0.75% 0.94%
Ratio of net investment
income to average net
assets (before waivers)*......... 4.28% 4.40% 4.86% 2.82%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
-72-
<PAGE> 73
<TABLE>
<CAPTION>
TREASURY MONEY MARKET PORTFOLIO
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
November 2, 1998
to
November 30,
1998(a)
--------
Trust II
Shares
--------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD
Investment Activities
Net investment income.....................
Net realized and unrealized gains
from investments..........................
Total from Investment Activities.......
Distributions
Net investment income.......................
In excess of net investment income..........
Total Distributions.........................
NET ASSET VALUE, END OF PERIOD
Total Return (excludes sales charges).......
RATIOS/SUPPLEMENTARY DATA:
Net assets at the end of period (000).......
Ratio of expenses to average net
assets (including waivers)................
Ratio of net investment income to
average net assets (including waivers)....
Ratio of expenses to average net
assets (before waivers)*..................
Ratio of net investment income to
average net assets (before waivers)*......
</TABLE>
- ---------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been
as indicated.
(a) Period from initial public investment.
-73-
<PAGE> 74
Money Market Portfolio
(For a Share(a) outstanding throughout each period)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
--------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
TRUST SHARES TRUST SHARES TRUST SHARES TRUST SHARES TRUST SHARES
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.............. $1.00 $1.00 $1.00 $1.00
----- ----- ----- -----
Investment Activities
Net investment income............ 0.050 0.049 0.054 0.035
----- ----- ----- -----
Total from Investment
Activities....................... 0.050 0.049 0.054 0.035
----- ----- ----- -----
Distributions
Net investment income............ (0.050) (0.049) (0.054) (0.035)
------- ------- ------- -------
Total Distributions................... (0.050) (0.049) (0.054) (0.035)
------- ------- ------- -------
Net Asset Value, End of
Period.......................... $1.00 $1.00 $1.00 $1.00
===== ===== ===== =====
Total Return.......................... 5.06% 4.99% 5.52% 3.55%
Ratios/Supplemental Data:
Net Assets at end of period
(000).......................... $1,042,151 $717,265 $698,131 $544,952
Ratio of expenses to average
net assets (including
waivers)......................... 0.64% 0.61% 0.59% 0.61%
Ratio of net investment
income to average net
assets (including
waivers)......................... 4.96% 4.88% 5.38% 3.45%
Ratio of expenses to average
net assets (before
waivers)*....................... 0.92% 0.76% 0.74% 0.93%
Ratio of net investment
income to average net
assets (before waivers)*........ 4.68% 4.73% 5.23% 3.13%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
-74-
<PAGE> 75
MONEY MARKET PORTFOLIO
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
November 2, 1998
To
November 30,
1998(a)
----
Trust II
NET ASSET VALUE, BEGINNING OF PERIOD SHARES
------
Investment Activities
Net investment income.....................
Net realized and unrealized gains
from investments..........................
Total from Investment Activities.......
Distributions
Net investment income.......................
In excess of net investment income..........
Total Distributions.........................
NET ASSET VALUE, END OF PERIOD
Total Return (excludes sales charges).......
RATIOS/SUPPLEMENTARY DATA:
Net assets at the end of period (000).......
Ratio of expenses to average net
assets (including waivers)................
Ratio of net investment income to
average net assets (including waivers)....
Ratio of expenses to average net
assets (before waivers)*..................
Ratio of net investment income to
average net assets (before waivers)*......
- ---------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been
as indicated.
(a) Period from initial public investment.
-75-
<PAGE> 76
Tax-Exempt Money Market Portfolio(a)
(For a Share(b) outstanding throughout each period)
<TABLE>
<CAPTION>
Six Months
Year Ended Year Ended Year Ended Ended
November 30, November 30, November 30, November 30, Year Ended May 31,
------------ ------------ ------------ ------------ ------------------
1998 1997 1996 1995(e) 1995 1994
---- ---- ---- ---- ---- ----
Trust Shares Trust Shares Trust Shares Trust Shares Trust Shares Trust Shares
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <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 ........ 0.030 0.030 0.016 0.029 0.020
-------- ------- ------- ------- --------
Total from Investment
Activities .................. 0.030 0.030 0.016 0.029 0.020
-------- ------- ------- ------- --------
Distributions
Net investment income ........ (0.030) (0.030) (0.016) (0.029) (0.020)
-------- ------- ------- ------- --------
Total Distributions ............. (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
======== ======= ======= ======= ========
Total Return .................... 3.08% 3.06% 1.57%(c) 2.93% 1.97%
Ratios/Supplemental Data:
Net Assets at end of period
(000) ...................... $143,517 $95,726 $78,031 $85,324 $112,594
Ratio of expenses to average
net assets (including
waivers) ..................... 0.58% 0.53% 0.70%(d) 0.61% 0.52%
Ratio of net investment
income to average net
assets (including
waivers) .................... 3.04% 3.01% 3.01%(d) 2.87% 1.95%
Ratio of expenses to average
net assets (before
waivers)* ................... 0.83% 0.58% 0.75%(d) 0.70% 0.86%
Ratio of net investment
income to average net
assets (before waivers)* .... 2.79% 2.96% 3.05%(d) 2.78% 1.61%
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been
as indicated.
(a) The Portfolio commenced operations on July 10, 1986 as a portfolio of
The ARCH Tax-Exempt Trust. On October 2, 1995, it was reorganized as a
new portfolio of the Fund.
(b) "Trust" Shares were originally issued as "Money" Shares. As of
September 28, 1990, the Portfolio issued a second series of Shares
which were designated as "Trust" Shares. The financial highlights
presented for periods prior to September 28, 1990 are the financial
highlights applicable to Money Shares.
(c) Not annualized.
(d) Annualized.
(e) Upon its reorganization as a portfolio of the Fund, the Portfolio
changed its fiscal year-end from May 31 to November 30.
-76-
<PAGE> 77
TAX-EXEMPT MONEY MARKET PORTFOLIO
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
November 2, 1998
to
November 30,
1998(a)
-------
Trust II
Shares
------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD
Investment Activities
Net investment income.....................
Net realized and unrealized gains
from investments..........................
Total from Investment Activities.......
Distributions
Net investment income.......................
In excess of net investment income..........
Total Distributions.........................
NET ASSET VALUE, END OF PERIOD
Total Return (excludes sales charges).......
RATIOS/SUPPLEMENTARY DATA:
Net assets at the end of period (000).......
Ratio of expenses to average net
assets (including waivers)................
Ratio of net investment income to
average net assets (including waivers)....
Ratio of expenses to average net
assets (before waivers)*..................
Ratio of net investment income to
average net assets (before waivers)*......
</TABLE>
- ---------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been
as indicated.
(a) Period from initial public investment.
-77-
<PAGE> 78
U.S. Government Securities Portfolio
(For a Share outstanding throughout each period)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
TRUST SHARES TRUST SHARES TRUST SHARES TRUST SHARES TRUST SHARES
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ............... $ 10.67 $ 10.85 $ 10.05 $ 11.20
---------- ---------- ---------- ----------
Investment Activities
Net investment income ............. 0.61 0.66 0.67 0.66
---------- ---------- ---------- ----------
Net realized and unrealized
gains (losses) from
investments ...................... (0.05) (0.15) 0.80 (0.97)
---------- ---------- ---------- ----------
Total from Investment Activities ....... 0.56 0.51 1.47 (0.31)
---------- ---------- ---------- ----------
Distributions
Net investment income ............. (0.61) (0.66)) (0.67) (0.66)
Net realized gains ................ -- -- -- --
---------- ---------- ---------- ----------
In excess of net realized
gains ........................... -- (0.03) -- (0.18)
---------- ---------- ---------- ----------
Total Distributions ............... (0.61) (0.69) (0.67) (0.84)
---------- ---------- ---------- ----------
Net Asset Value,
End of Period ..................... $ 10.62 $ 10.67 $ 10.85 $ 10.05
========== ========== ========== ==========
Total Return ........................... 5.51% 4.88% 15.00% (2.85%)
Ratios/Supplemental Data:
Net Assets at end of period
(000) ........................... $ 72,753 $ 60,079 $ 45,513 $ 33,166
Ratio of expenses to average
net assets (including
waivers) .......................... 0.67% 0.67% 0.67% 0.66%
Ratio of net investment
income to average net
assets (including
waivers) .......................... 5.84% 6.10% 6.36% 6.25%
Ratio of expenses to average
net assets (before
waivers)* ........................ 1.07% 0.77% 0.77% 1.06%
Ratio of net investment
income to average net
assets (before waivers)* ......... 5.44% 6.00% 6.26% 5.85%
Portfolio turnover** ................... 100.33% 53.76% 93.76% 50%
</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.
-78-
<PAGE> 79
INTERMEDIATE CORPORATE BOND PORTFOLIO
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
February 10, 1997
Year Ended to
November 30, 1998 November 30, 1997(a)
----------------- --------------------
Trust Trust
Shares Shares
------ ------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.......................... $10.00
Investment Activities
Net investment income.................................... 0.53
Net realized and unrealized gains (losses)
from investments......................................... 0.11
------
Total from Investment Activities......................... 0.64
------
Distributions
Net investment income.................................... (0.53)
------
Total Distributions...................................... (0.53)
------
NET ASSET VALUE, END OF PERIOD................................ $10.11
======
Total Return ............................................ 6.65%(b)
RATIOS/SUPPLEMENTARY DATA:
Net assets at the end of period (000).................... $44,443
Ratio of expenses to average net assets.................. 0.29%(c)
Ratio of net investment income to
average net assets................................... 6.90%(c)
Ratio of expenses to average net assets*................. 1.32%(c)
Ratio of net investment income to average
net assets*.......................................... 5.87%(c)
Portfolio turnover**..................................... 61.98%
</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) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
-79-
<PAGE> 80
BOND INDEX PORTFOLIO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
February 10, 1997
Year Ended to
November 30, 1998 November 30, 1997(a)
----------------- --------------------
Trust Trust
Shares Shares
------ ------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.......................... $ 10.00
--------
Investment Activities
Net investment income.................................... 0.53
Net realized and unrealized gains (losses)
from investments......................................... 0.16
--------
Total from Investment Activities......................... 0.69
--------
Distributions
Net investment income.................................... (0.53)
--------
Total Distributions...................................... (0.53)
--------
NET ASSET VALUE, END OF PERIOD................................ $10.16
========
Total Return ............................................ 7.15%(b)
RATIOS/SUPPLEMENTARY DATA:
Net assets at the end of period (000).................... $138,319
Ratio of expenses to average net assets.................. 0.23%(c)
Ratio of net investment income to
average net assets................................... 6.92%(c)
Ratio of expenses to average net assets*................. 0.94%(c)
Ratio of net investment income to average
net assets*.......................................... 6.21%(c)
Portfolio turnover**..................................... 46.16%
</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) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
-80-
<PAGE> 81
Government & Corporate Bond Portfolio
(For a Share outstanding throughout each period)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
TRUST SHARES TRUST SHARES TRUST SHARES TRUST SHARES TRUST SHARES
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ................ $ 10.34 $ 10.53 $ 9.64 $ 10.65
----------- ----------- ----------- -----------
Investment Activities
Net investment income .............. 0.59 0.67 0.64 0.63
Net realized and unrealized
gains (losses) from
investments ........................ 0.03 (0.19) 0.89 (0.94)
----------- ----------- ----------- -----------
Total from Investment Activities ........ 0.62 0.48 1.53 (0.31)
----------- ----------- ----------- -----------
Distributions
Net investment income .............. (0.59) (0.67) (0.64) (0.63)
----------- ----------- ----------- -----------
Net realized gains ...................... -- -- -- (0.07)
----------- ----------- ----------- -----------
In excess of net realized
gains .............................. (0.59) (0.67) (0.64) (0.70)
----------- ----------- ----------- -----------
Total Distributions
Net Asset Value, End of
Period ............................. $ 10.37 $ 10.34 $ 10.53 $ 9.64
=========== =========== =========== ===========
Total Return ............................ 6.32% 4.82% 16.31% (3.03%)
Ratios/Supplemental Data:
Net Assets at end of period
(000) .............................. $ 172,637 $ 141,440 $ 127,741 $ 132,577
Ratio of expenses to average
net assets (including
waivers) ........................... 0.65% 0.65% 0.65% 0.65%
Ratio of net investment
income to average net
assets (including
waivers) ........................... 5.85% 6.36% 6.32% 6.25%
Ratio of expenses to average
net assets (before
waivers)* .......................... 1.05% 0.75% 0.75% 1.05%
Ratio of net investment
income to average net
assets (before waivers)* ........... 5.45% 6.26% 6.22% 5.85%
Portfolio turnover** .................... 140.72% 149.20% 59.32% 50%
</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.
-81-
<PAGE> 82
Short - Intermediate Municipal Portfolio
(For a Share outstanding throughout each period)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended July 10, 1995 to
November 30, 1998 November 30, 1997 November 30, 1996 November 30, 1995(a)
----------------- ----------------- --------------------------------------
Trust Shares Trust Shares Trust Shares Trust Shares
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period .................... $ 10.07 $ 10.07 $ 10.00
---------- ---------- ----------
Investment Activities
Net investment income (loss) ............ 0.40 0.41 0.14
Net realized and unrealized
gains (losses) from Investments ......... 0.03 -- 0.07
---------- ---------- ----------
Total from Investment
Activities .............................. 0.43 0.41 0.21
---------- ---------- ----------
Distributions
Net investment income ................... (0.40) (0.41) (0.14)
---------- ---------- ----------
Total Distributions ........................ (0.40) (0.41) (0.14)
---------- ---------- ----------
Net Asset Value, End of
Period .................................... $ 10.10 $ 10.07 $ 10.07
========== ========== ==========
Total Return ................................. 4.39% 4.15% 2.15%(b)
Ratios/Supplemental Data:
Net Assets at end of period
(000) ..................................... $ 30,454 $ 29,472 $ 23,754
Ratio of expenses to average
net assets (including
waivers) .................................. 0.38% 0.31% 0.47%(c)
Ratio of net investment
income to average net
assets (including
waivers) .................................. 4.00% 4.07% 3.81%(c)
Ratio of expenses to average
net assets (before
waivers)* ................................. 1.33% 0.96% 1.12%(c)
Ratio of net investment
income to average net
assets (before waivers)* .................. 3.05% 3.42% 3.16%(c)
Portfolio turnover** ......................... 0.00% 0.00% 0.00%
</TABLE>
- -------------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been
as indicated.
** 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.
-82-
<PAGE> 83
Missouri Tax-Exempt Bond Portfolio(a)
(For a Share outstanding throughout each period)
<TABLE>
<CAPTION>
Six Months
Year Ended Year Ended Year Ended Ended Year Ended May 31,
November 30, November 30, November 30, November 30, 1995 1994
1998 1997 1996 1995(b) -------- --------
---- ---- ------------ ------------ Trust Trust
Trust Shares Trust Shares Trust Shares Trust Shares Shares Shares
------------ ------------ ------------ ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ................ $ 11.69 $ 11.74 $ 11.52 $ 11.13 $ 11.54
---------- ---------- ---------- ---------- ----------
Investment Activities
Net investment income .............. 0.56 0.57 0.28 0.57 0.58
Net realized and unrealized
gains (losses) on investments ...... 0.18 (0.05) 0.22 0.40 (0.37)
---------- ---------- ---------- ---------- ----------
Total from Investment
Activities ......................... 0.74 0.52 0.50 0.97 0.21
---------- ---------- ---------- ---------- ----------
Distributions
Net investment income .............. (0.56) (0.57) (0.28) (0.57) (0.58)
---------- ---------- ---------- ---------- ----------
Net realized gains ................. -- -- -- (0.01) (0.04)
---------- ---------- ---------- ---------- ----------
Total Distributions ................ (0.56) (0.57) (0.28) (0.58) (0.62)
---------- ---------- ---------- ---------- ----------
Net Asset Value, End of
Period ............................. $ 11.69 $ 11.87 $ 11.74 $ 11.52 $ 11.13
========== ========== ========== ========== ==========
Total Return ............................ 6.48% 4.62% 4.41%(d) 9.12% 1.73%
Ratios/Supplemental Data:
Net Assets at end of period......... $ 75,431 $ 55,905 $ 47,773 $ 44,336 $ 47,743
Ratio of expenses to average
net assets (including
waivers)............................ 0.66% 0.65% 0.78%(e) 0.64% 0.45%
Ratio of net investment
income to average net
assets (including
waivers) ........................... 4.76% 4.95% 4.83%(e) 5.22% 4.96%
Ratio of expenses to average
net assets (before
waivers)* .......................... 1.06% 0.75% 0.88%(e) 1.16% 1.13%
Ratio of net investment
income to average net
assets (before waivers)* .......... 4.36% 4.85% 4.73%(e) 4.70% 4.28%
Portfolio Turnover Rate** ............... 3.50% 3.66% 1.55% -- 20%
</TABLE>
-83-
<PAGE> 84
* 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) The Portfolio (formerly, the Long-Term Tax-Exempt Portfolio) commenced
operations on July 15, 1988 as a portfolio of The ARCH Tax-Exempt
Trust. On October 2, 1995, it was reorganized as a new portfolio of the
Fund.
(b) Upon its reorganization as a portfolio of the Fund, the Portfolio
changed its fiscal-year end from May 31 to November 30.
-84-
<PAGE> 85
NATIONAL MUNICIPAL BOND PORTFOLIO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
November 18, 1996
Year Ended Year Ended To
November 30, 1998 November 30, 1997 November 30, 1996(a)
----------------- ----------------- --------------------
Trust Shares Trust Shares Trust Shares
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $10.05 $10.00
------ ------
Investment Activities
Net investment income (loss)................ 0.54 0.02
Net realized and unrealized gains
(losses) from investments................... 0.23 0.05
------ ------
Total from Investment Activities............ 0.77 0.07
------ ------
Distributions
Net investment income....................... (0.54) (0.02)
------ ------
Total Distributions......................... (0.54) (0.02)
------ ------
Net Asset Value, End of Period................... $10.28 $10.05
====== ======
Total Return .................................... 7.97% 0.74%(b)
Ratios/Supplementary Data:
Net assets at the end of period (000)....... $366,889 $310,413
Ratio of expenses to average net assets
(including waivers)..................... 0.14% 0.12%(c)
Ratio of net investment income to
average net assets (including waivers) 5.35% 5.77%(c)
Ratio of expenses to average net assets
(before waivers)*....................... 1.17% 0.82%(c)
Ratio of net investment income to average
net assets (before waivers)*............ 4.35% 5.07%(c)
Portfolio turnover**........................ 83.94% 0.0
</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) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
-85-
<PAGE> 86
Balanced Portfolio
(For a Share outstanding throughout each period)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
Nov. 30, 1998 Nov. 30, 1997 Nov. 30, 1996 Nov. 30, 1995 Nov. 30, 1994
------------- ------------- ------------- ------------- -------------
Trust Shares Trust Shares Trust Shares Trust Shares Trust Shares
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ................... $ 12.58 $ 11.64 $ 9.62 $ 10.22
---------- ---------- ---------- ----------
Investment Activities
Net investment income (loss) .......... 0.38 0.37 0.34 0.29
Net realized and unrealized gains
(losses) from investments ............. 1.45 1.34 2.02 (0.47)
---------- ---------- ---------- ----------
Total from Investment Activities ......... 1.83 1.71 2.36 (0.18)
---------- ---------- ---------- ----------
Distributions
Net investment income ................. (0.43) (0.35) (0.34) (0.29)
Net realized gains .................... (0.71) (0.42) -- --
In excess of realized gains ........... -- -- -- (0.13)
---------- ---------- ---------- ----------
Total distributions ................... (1.14) (0.77) (0.34) (0.42)
---------- ---------- ---------- ----------
Net Asset Value,
End of Period ......................... $ 13.27 $ 12.58 $ 11.64 $ 9.62
========== ========== ========== ==========
Total Return ............................. 15.81% 15.56% 24.97% (1.81%)
Ratios/Supplemental Data:
Net Assets at end of period (000) ........ $ 54,299 $ 61,821 $ 72,669 $ 65,288
Ratio of expenses to average net
assets (including waivers) ............ 0.97% 0.97% 0.98% 0.97%
Ratio of net investment income to
average net assets (including
waivers) .............................. 2.87% 3.08% 3.29% 3.04%
Ratio of expenses to average net
assets (before waivers)* .............. 1.37% 1.07% 1.08% 1.39%
Ratio of net investment income to
average net assets (before waivers)* .. 2.47% 2.98% 3.19% 2.63%
Portfolio turnover** ..................... 43.60% 85.16% 58.16% 49%
</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.
-86-
<PAGE> 87
EQUITY INCOME PORTFOLIO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
February 27, 1997
Year Ended To
November 30, 1998 November 30, 1997(a)
----------------- --------------------
Trust Trust
Shares Shares
------ ------
<S> <S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.......................... $10.00
------
Investment Activities
Net investment income.................................... 0.20
Net realized and unrealized gains (losses)
from investments......................................... 1.55
------
Total from Investment Activities......................... 1.75
------
Distributions
Net investment income.................................... (0.19)
------
Total Distributions...................................... (0.19)
------
NET ASSET VALUE, END OF PERIOD................................ $11.56
======
Total Return ............................................ 17.64%(b)
RATIOS/SUPPLEMENTARY DATA:
Net assets at the end of period (000).................... $131,919
Ratio of expenses to average net assets.................. 0.15%(c)
Ratio of net investment income to
average net assets................................... 2.51%(c)
Ratio of expenses to average net assets*................. 1.38%(c)
Ratio of net investment income to average
net assets*.......................................... 1.28%(c)
Portfolio turnover**..................................... 48.33%
</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) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
-87-
<PAGE> 88
EQUITY INDEX PORTFOLIO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
May 1, 1997
Year Ended To
November 30, 1998 November 30, 1997(a)
----------------- --------------------
Trust Trust
Shares Shares
------------- ------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.......................... $10.00
------
Investment Activities
Net investment income.................................... 0.10
Net realized and unrealized gains (losses)
from investments......................................... 1.94
------
Total from Investment Activities......................... 2.04
------
Distributions
Net investment income.................................... (0.10)
------
Total Distributions...................................... (0.10)
------
NET ASSET VALUE, END OF PERIOD................................ $11.94
======
Total Return ............................................ 20.40%(b)
RATIOS/SUPPLEMENTARY DATA:
Net assets at the end of period (000).................... $31,787
Ratio of expenses to average net assets.................. 0.39%(c)
Ratio of net investment income to
average net assets................................... 1.48%(c)
Ratio of expenses to average net assets*................. 1.12%(c)
Ratio of net investment income to average
net assets*.......................................... 0.75%(c)
Portfolio turnover**..................................... 1.66%
</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) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
-88-
<PAGE> 89
Growth & Income Equity Portfolio
(For a Share outstanding throughout each period)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
TRUST SHARES TRUST SHARES TRUST SHARES TRUST SHARES TRUST SHARES
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ................... $ 18.71 $ 16.32 $ 12.72 $ 14.74
----------- ----------- ----------- -----------
Investment Activities
Net investment income ................. 0.23 0.24 0.27 0.22
----------- ----------- ----------- -----------
Net realized and unrealized
gains (losses) from
investments .......................... 3.96 3.34 3.74 (0.17)
----------- ----------- ----------- -----------
Total from Investment Activities ........... 4.19 3.58 4.01 0.05
----------- ----------- ----------- -----------
Distributions
Net investment income ................. (0.25) (0.24) (0.27) (0.21)
----------- ----------- ----------- -----------
In excess of net investment income ......... -- (0.01) -- --
Net realized gains .................... (1.46) (0.94) (0.14) (0.18)
In excess of net realized gains ....... -- -- -- (1.68)
----------- ----------- ----------- -----------
Total Distributions ................... (1.71) (1.19) (0.41) (2.07)
----------- ----------- ----------- -----------
Net Asset Value,
End of Period ......................... $ 21.19 $ 18.71 $ 16.32 $ 12.72
=========== =========== =========== ===========
Total Return ............................... 24.55% 23.45% 32.27% 0.36%
Ratios/Supplemental Data:
Net Assets at end of period (000) .......... $ 322,304 $ 348,183 $ 286,546 $ 235,955
Ratio of expenses to average net
Assets .................................... 0.74% 0.75% 0.75% 0.75%
Ratio of net investment income to
average net assets .................... 0.91% 1.50% 1.89% 1.72%
Ratio of expenses to average net
assets (before waivers)* .............. 1.14% 0.85% 0.85% 1.15%
Ratio of net investment income to
average net assets (before
waivers)* ............................. 0.51% 1.40% 1.79% 1.32%
Portfolio turnover** ....................... 57.11% 63.90% 58.50% 65%
</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.
-89-
<PAGE> 90
GROWTH EQUITY PORTFOLIO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
November 24, 1997
Year Ended to
November 30, 1998 November 30, 1997(a)
----------------- --------------------
Trust Trust
Shares Shares
--------- ---------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.......................... $16.44
------
Investment Activities
Net investment income.................................... (0.10)
Net realized and unrealized gains (losses)
from investments......................................... (0.17)
------
Total from Investment Activities......................... (0.18)
------
Distributions
Net investment income.................................... --
------
Total Distributions...................................... --
------
NET ASSET VALUE, END OF PERIOD................................ $ 16.26
=======
Total Return ............................................ (1.09%)(b)
RATIOS/SUPPLEMENTARY DATA:
Net assets at the end of period (000).................... $63,786
Ratio of expenses to average net assets.................. 1.24% (c)
Ratio of net investment income to
average net assets................................... (0.15%)(c)
Ratio of expenses to average net assets*................. 1.34% (c)
Ratio of net investment income to average
net assets*.......................................... (0.25%)(c)
Portfolio turnover**..................................... 0.009%
</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) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
-90-
<PAGE> 91
Small Cap Equity Portfolio(a)
(For a Share outstanding throughout each period)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
November 30, November 30, November 30, November 30, November 30,
------------ ------------ ------------ -------------- ------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Trust Shares Trust Shares Trust Shares Trust Shares Trust Shares
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period .................... $ 13.49 $ 13.49 $ 12.01 $ 13.14
----------- ----------- ----------- -----------
Investment Activities ..................... 0.01 0.02 0.03 (0.01)
Net investment income (loss)
Net realized and unrealized gains
(losses) from Investments .............. 2.50 1.05 2.36 0.89
----------- ----------- ----------- -----------
Total from Investment
Activities............................. 2.51 1.07 2.39 0.88
----------- ----------- ----------- -----------
Distributions (0.01) (0.02) -- --
Net investment income...................
Net realized gains ..................... (0.82) (1.05) (0.91) (1.78)
In excess of realized gains ............ -- -- -- (0.23)
----------- ----------- ----------- -----------
Total Distributions ....................... (0.83) (1.07) (0.91) (2.01)
----------- ----------- ----------- -----------
Net Asset Value, End of Period ............ $ 15.17 $ 13.49 $ 13.49 $ 12.01
=========== =========== =========== ===========
Total Return .............................. 19.77% 8.72% 21.70% 7.56%
Ratios/Supplemental Data:
Net Assets at end of period
(000)................................. $ 211,643 $ 171,295 $ 139,681 $ 77,690
Ratio of expenses to average .............. 0.95% 0.96% 0.96% 0.95%
net assets (including
waivers)
Ratio of net investment ................... 0.01% 0.17% 0.18% (0.16)%
income (loss) to average net
assets (including waivers)
Ratio of expenses to average .............. 1.35% 1.06% 1.06% 1.36%
net assets (before
waivers)*
Ratio of net investment ................... (0.39)% 0.07% 0.08% (0.56)%
income (loss) to average net
assets (before waivers)*
Portfolio turnover** ...................... 80.23% 65.85% 83.13% 85%
<FN>
- -------------------
* 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) The Emerging Growth Portfolio changed its name to Small Cap Equity
Portfolio on December 1, 1996.
</TABLE>
-91-
<PAGE> 92
International Equity Portfolio
For a Share outstanding throughout each period
International Equity Portfolio
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended April 4, 1994
Nov. 30, Nov. 30, Nov. 30, Nov. 30, To Nov. 30,
1998 1997 1996 1995 1994(a)
---- ---- ---- ---- -------
Trust Shares Trust Shares Trust Shares Trust Shares Trust Shares
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ............ $ 12.12 $ 10.79 $ 9.92 $ 10.00
------------ ------------ ------------ ------------
Investment Activities
Net investment income (loss) ................. 0.01 0.06 0.03 0.01
Net realized and unrealized gains
(losses) from investments and
foreign currency ............................. 0.33 1.27 0.86 (0.09)
------------ ------------ ------------ ------------
Total from Investment Activities ................ 0.34 1.33 (0.89) (0.08)
------------ ------------ ------------ ------------
Distributions
Net investment income ........................ (0.04) -- -- --
In excess of net investment income ........... (0.02) -- -- --
Net realized gains ........................... (0.31) -- (0.01) --
In excess of realized gains .................. ( -- ) -- (0.01) --
------------ ------------ ------------ ------------
Total distributions .......................... (0.37) -- (0.02) --
------------ ------------ ------------ ------------
Net Asset Value, End of Period .................. $ 12.09 $ 12.12 $ 10.79 $ 9.92
============ ============ ============ ============
Total Return .................................... 2.91% 12.33% 8.97% (0.80%)(b)
Ratios/Supplemental Data:
Net Assets at end of period (000) ............... $ 55,038 $ 52,181 $ 36,096 $ 23,746
Ratio of expenses to average net assets
(including waivers) .......................... 1.29% 1.14% 1.16% 1.23%(c)
Ratio of net investment income to
average net assets (including waivers) ....... 0.09% 0.51% 0.39% 0.23%(c)
Ratio of expenses to average net assets
(before waivers)* ............................ 1.75% 1.45% 1.46% 1.95%(c)
Ratio of net investment income to average
net assets (before waivers)* .................. (0.37)% 0.20% 0.09% (0.49%)(c)
Portfolio turnover** ............................. 75.18% 77.63% 62.78% 21%
Average commission rate paid(d) .................. $ 0.0229 $ 0.0251 -- --
<FN>
- -------------------
* 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) Period from commencement of operations.
(b) Not annualized
(c) Annualized
</TABLE>
-93-
<PAGE> 93
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> 94
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 as an investment or
determined if this prospectus is truthful or complete. Anyone who tells you
otherwise is committing a criminal offense.
<PAGE> 95
CONTENTS
Overview...............................................................
Treasury Money Market Portfolio........................................
Money Market Portfolio.................................................
Tax-Exempt Money Market Portfolio......................................
Additional Information on Risk.........................................
Your Account...........................................................
Explanation of Sales Price........................................
How to Buy Shares.................................................
How to Sell Shares................................................
How to Exchange Shares............................................
Administrative Services Fees......................................
General Transaction Policies......................................
Distributions and Taxes................................................
Management of the Fund.................................................
Financial Highlights...................................................
<PAGE> 96
OVERVIEW
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 you pay as an investor in the Portfolio.
WHO MAY WANT TO INVEST IN THE MERCANTILE MONEY MARKET PORTFOLIOS?
The Treasury Money Market Portfolio may be appropriate for 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.
Before investing in one of the Mercantile Money Market Portfolios, 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.
<PAGE> 97
(SIDEBAR)
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 Money Market Portfolios.
-2-
<PAGE> 98
TREASURY MONEY MARKET PORTFOLIO
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 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.
(sidebar)
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 risk.
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.
There's no guarantee the Portfolio will be able to preserve the value of your
investment at $1.00 per share.
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. 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.
-3-
<PAGE> 99
TRUST SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1 Year 5 Years Since
TREASURY MONEY MARKET PORTFOLIO Inception*
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Trust Shares ______% _____% _____%
- --------------------------------------------------------------------------------
</TABLE>
* December 2, 1991.
To obtain the Portfolio's current 7-day yield, please call 1-800-452-2724.
FEES AND EXPENSES
The following table shows the fees and expenses that you pay if you buy and hold
shares of the Treasury Money Market Portfolio.
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Total Annual
Portfolio
Management Distribution Operating
Fees (12b-1) Fees Other Expenses Expenses
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust Shares _____% None _____% _____%
- --------------------------------------------------------------------------------
</TABLE>
Note: Management Fees, Other Expenses and Total Annual Portfolio Operating
Expenses for the Portfolio's Trust Shares for the last fiscal year were less
than the amounts shown above because certain of the Portfolio's service
providers voluntarily waived a portion of their fees and/or reimbursed the
Portfolio for certain other expenses. These fee waivers or reimbursements were
made in order to keep the annual fees and expenses for the Portfolio's Trust
Shares at certain levels. Management Fees, Other Expenses and Total Annual
Portfolio Operating Expenses, after taking these fee waivers and expense
reimbursements into account, were ___%, ___% and ___%, respectively, for Trust
Shares. The Fund's service providers intend to continue these fee waivers and
expense reimbursements but are not obligated to do so.
-4-
<PAGE> 100
EXAMPLE
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:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1 year 3 years 5 years 10 years
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust Shares $ $ $ $
- --------------------------------------------------------------------------------
</TABLE>
-5-
<PAGE> 101
MONEY MARKET PORTFOLIO
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to seek current income with liquidity
and stability of principal.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio invests 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.
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 or only one such rating if only one organization has rated the
instrument. If the money market instrument 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 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.
There's no guarantee the Portfolio will be able to preserve the value of your
investment at $1.00 per share.
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. 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)
(insert bar chart)
Best quarter:
Worst quarter:
-6-
<PAGE> 102
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Since
MONEY MARKET PORTFOLIO 1 Year 5 Years Inception*
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Trust Shares _____% _____% _____%
- --------------------------------------------------------------------------------
</TABLE>
* December 1, 1990.
To obtain the Portfolio's current 7-day yield, please call 1-800-452-2724.
FEES AND EXPENSES
The following table shows the fees and expenses that you pay if you buy and hold
shares of the Money Market Portfolio.
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Total Annual
Portfolio
Management Fees Distribution Operating
(12b-1) Fees Other Expenses Expenses
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust Shares _____% None _____% _____%
- --------------------------------------------------------------------------------
</TABLE>
Note: Management Fees, Other Expenses and Total Annual Portfolio Operating
Expenses for the Portfolio's Trust Shares for the last fiscal year were less
than the amounts shown above because certain of the Portfolio's service
providers voluntarily waived a portion of their fees and/or reimbursed the
Portfolio for certain other expenses. These fee waivers or reimbursements were
made in order to keep the annual fees and expenses for the Portfolio's Trust
Shares at certain levels. Management Fees, Other Expenses and Total Annual
Portfolio Operating Expenses, after taking these fee waivers and expense
reimbursements into account, were ___%, ___% and ___%, respectively, for Trust
Shares. The Fund's service providers intend to continue these fee waivers and
expense reimbursements but are not obligated to do so.
EXAMPLE
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-
<PAGE> 103
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1 year 3 years 5 years 10 years
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust Shares $ $ $ $
- --------------------------------------------------------------------------------
</TABLE>
-8-
<PAGE> 104
TAX-EXEMPT MONEY MARKET PORTFOLIO
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 assets in short-term
municipal securities, which are securities issued by state and local governments
and other political or public bodies or agencies and 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.
(sidebar)
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.
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, 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.
-9-
<PAGE> 105
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.
There's no guarantee the Portfolio will be able to preserve the value of your
investment at $1.00 per share.
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. 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.
Note: 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.
TRUST SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1 Year 5 Years Since
TAX-EXEMPT MONEY MARKET PORTFOLIO Inception*
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Trust Shares -----% -----% -----%
- --------------------------------------------------------------------------------
</TABLE>
* September 28, 1990.
To obtain the Portfolio's current 7-day yield, please call 1-800-452-2724.
-10-
<PAGE> 106
FEES AND EXPENSES
The following table shows the fees and expenses that you pay if you buy and hold
shares of the Tax-Exempt Money Market Portfolio.
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Total Annual
Portfolio
Management Distribution Operating
Fees (12b-1) Fees Other Expenses Expenses
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust Shares ____% None ____% ____%
- --------------------------------------------------------------------------------
</TABLE>
Note: Management Fees, Other Expense and Total Annual Portfolio Operating
Expenses for the Portfolio's Trust Shares for the last fiscal year were less
than the amounts shown above because certain of the Portfolio's service
providers voluntarily waived a portion of their fees and/or reimbursed the
Portfolio for certain other expenses. These fee waivers or reimbursements were
made in order to keep the annual fees and expenses for the Portfolio's Trust
Shares at certain levels. Management Fees, Other Expenses and Total Annual
Portfolio Operating Expenses, after taking these fee waivers and expense
reimbursements into account, were ___%, ___% and ___%, respectively, for Trust
Shares. The Fund's service providers intend to continue these fee waivers and
expense reimbursements but are not obligated to do so.
EXAMPLE
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:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1 year 3 years 5 years 10 years
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust Shares $ $ $ $
- --------------------------------------------------------------------------------
</TABLE>
-11-
<PAGE> 107
ADDITIONAL INFORMATION ON RISK
The principal risks of investing in each Portfolio are described above. The
following supplements that discussion.
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.
SELECTION OF INVESTMENTS
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolios and how they may advance the Portfolios' investment
objectives. It is possible, however, that these evaluations will prove to be
inaccurate.
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.
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.
-12-
<PAGE> 108
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.
-13-
<PAGE> 109
YOUR ACCOUNT
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 4:00 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.
(sidebar)
BUSINESS DAYS DEFINED
A business day is any day that both the New York Stock Exchange (NYSE) and the
Federal Reserve Bank of St. Louis are open for business. Currently, the Fund
observes the following holidays: New Year's Day, Martin Luther King Jr. Day,
Presidents' Day, Good Friday, Memorial Day (observed), Independence Day
(observed), Labor Day, Columbus Day, Veterans' Day, Thanksgiving and Christmas.
- - Each Portfolio's investments are valued at amortized cost, which is
approximately equal to market value.
- - A properly placed purchase order 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.
-14-
<PAGE> 110
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 1-800-452-4015.
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.
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 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. 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. 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> 111
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 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
about 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 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 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.
-16-
<PAGE> 112
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.
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
distribution 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.
-17-
<PAGE> 113
- - 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
Statement of Additional Information 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 you
specific situation.
(sidebar)
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.
-18-
<PAGE> 114
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>
- --------------------------------------------------------------------------
<S> <C>
Investment advisory fees as a
Portfolio % of net assets
- --------------------------------------------------------------------------
Treasury Money Market Portfolio
- --------------------------------------------------------------------------
Money Market Portfolio
- --------------------------------------------------------------------------
Tax-Exempt Money Market Portfolio
- --------------------------------------------------------------------------
</TABLE>
-19-
<PAGE> 115
FINANCIAL HIGHLIGHTS
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 [____________________], independent accountants,
whose report, along with the Portfolios' financial statements, is included in
the Fund's Annual Report to Shareholders, and [____________________________] the
SAI.
-20-
<PAGE> 116
Treasury Money Market Portfolio
(For a Share(b) outstanding throughout each period)
<TABLE>
<CAPTION>
Year Ended November 30,
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Trust Shares Trust Shares Trust Shares Trust Shares Trust 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............ 0.046 0.045 0.050 0.026
------ ------ ------
Total from Investment
Activities....................... 0.046 0.045 0.050 0.026
------ ------ ------ ------
Distributions
Net investment income............ (0.046) (0.045) (0.050) (0.026)
------ ------ ------ ------
Total Distributions................... (0.046) (0.045) (0.050) (0.026)
------ ------ ------ ------
Net Asset Value, End of
Period........................... $1.00 $1.00 $1.00 $1.00
====== ====== ====== ======
Total Return.......................... 4.70% 4.64% 5.12% 2.67%
Ratios/Supplemental Data:
Net Assets at end of period
(000)............................ $283,653 $131,322 $252,780 $242,099
Ratio of expenses to average
net assets (including
waivers)......................... 0.61% 0.61% 0.60% 0.49%
Ratio of net investment
income to average net
assets (including
waivers)......................... 4.60% 4.55% 5.01% 3.26%
Ratio of expenses to average
net assets (before
waivers)*........................ 0.92% 0.76% 0.75% 0.94%
Ratio of net investment
income to average net
assets (before waivers)*......... 4.28% 4.40% 4.86% 2.82%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
-21-
<PAGE> 117
Money Market Portfolio
(For a Share(a) outstanding throughout each period)
<TABLE>
<CAPTION>
Year Ended November 30,
---------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Trust Shares Trust Shares Trust Shares Trust Shares Trust 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............ 0.050 0.049 0.054 0.035
----- ----- -----
Total from Investment
Activities.......................
0.050 0.049 0.054 0.035
Distributions ----- ----- ----- -----
Net investment income............
(0.050) (0.049) (0.054) (0.035)
Total Distributions................... ------- ------- ------- -------
Net Asset Value, End of (0.050) (0.049) (0.054) (0.035)
Period.......................... ------- ------- ------- -------
$1.00 $1.00 $1.00 $1.00
Total Return.......................... ===== ===== ===== =====
Ratios/Supplemental Data: 5.06% 4.99% 5.52% 3.55%
Net Assets at end of period $1,042,151 $717,265 $698,131 $544,952
(000)..........................
Ratio of expenses to average
net assets (including
waivers)......................... 0.64% 0.61% 0.59% 0.61%
Ratio of net investment
income to average net
assets (including 4.96% 4.88% 5.38% 3.45%
waivers).........................
Ratio of expenses to average
net assets (before
waivers)*....................... 0.92% 0.76% 0.74% 0.93%
Ratio of net investment
income to average net
assets (before waivers)*........ 4.68% 4.73% 5.23% 3.13%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been
as indicated.
-22-
<PAGE> 118
Tax-Exempt Money Market Portfolio(a)
(For a Share outstanding throughout each period)
<TABLE>
<CAPTION>
Six Months
Year Ended Year Ended Year Ended Ended
November 30, November 30, November 30, November 30, Year Ended May 31,
------------ ------------ ------------ ------------ ------------------
1998 1997 1996 1995(a) 1995 1994
---- ---- ---- ---- ----
Trust Shares Trust Shares Trust Shares Trust Shares Trust Shares Trust Shares
------------ ------------ ------------ ------------ ------------ ------------
<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.............. 0.030 0.030 0.016 0.029 0.020
-------- ------- ------- ------- --------
Total from Investment
Activities........................ 0.030 0.030 0.016 0.029 0.020
-------- ------- ------- ------- --------
Distributions
Net investment income.............. (0.030) (0.030) (0.016) (0.029) (0.020)
-------- ------- ------- ------- --------
Total Distributions................... (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
====== ====== ====== ====== ======
Total Return.......................... 3.08% 3.06% 1.57%(b) 2.93% 1.97%
Ratios/Supplemental Data:
Net Assets at end of period
(000)............................ $143,517 $95,726 $78,031 $85,324 $112,594
Ratio of expenses to average
net assets (including
waivers)........................... 0.58% 0.53% 0.70%(c) 0.61% 0.52%
Ratio of net investment
income to average net
assets (including
waivers)........................... 3.04% 3.01% 3.01%(c) 2.87% 1.95%
Ratio of expenses to average
net assets (before
waivers)*......................... 0.83% 0.58% 0.58%(c) 0.70% 0.86%
Ratio of net investment
income to average net
assets (before waivers)*.......... 2.79% 2.96% 2.96%(c) 2.78% 1.61%
</TABLE>
- -------------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) The Portfolio commenced operations on July 10, 1986 as a portfolio of The
ARCH Tax-Exempt Trust. On October 2, 1995, it was reorganized as a new
portfolio of the Fund. Upon its reorganization as a portfolio of the Fund,
the Portfolio changed its fiscal year-end from May 31 to November 30.
(b) Not Annualized.
(c) Annualized.
-23-
<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 as an investment or
determined if this prospectus is truthful or complete. Anyone who tells you
otherwise is committing a criminal offense.
<PAGE> 121
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Overview..................................................................................
Treasury Money Market Portfolio...........................................................
Money Market Portfolio....................................................................
U.S. Government Securities Portfolio......................................................
Intermediate Corporate Bond Portfolio.....................................................
Bond Index Portfolio......................................................................
Government & Corporate Bond Portfolio.....................................................
Balanced Portfolio........................................................................
Equity Income Portfolio...................................................................
Equity Index Portfolio....................................................................
Growth & Income Equity Portfolio..........................................................
Growth Equity Portfolio...................................................................
Small Cap Equity Portfolio................................................................
Small Cap Equity Index Portfolio..........................................................
International Equity Portfolio............................................................
Additional Information on Risk............................................................
Your Account..............................................................................
Explanation of Sales Price...........................................................
How to Buy Shares....................................................................
How to Sell Shares...................................................................
How to Exchange Shares...............................................................
Administrative Services Fees.........................................................
General Transaction Policies.........................................................
Distributions and Taxes...................................................................
Management of the Fund....................................................................
Financial Highlights......................................................................
</TABLE>
-2-
<PAGE> 122
OVERVIEW
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 PORTFOLIOS?
The Treasury Money Market Portfolio may be appropriate for 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 one of the Portfolios, 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
-3-
<PAGE> 123
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.
(SIDEBAR)
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.
-4-
<PAGE> 124
TREASURY MONEY MARKET PORTFOLIO
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 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.
(sidebar)
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 risk.
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.
There's no guarantee the Portfolio will be able to preserve the value of your
investment at $1.00 per share.
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. 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 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.
-5-
<PAGE> 125
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
1 Year Since
TREASURY MONEY MARKET PORTFOLIO Inception*
- --------------------------------------------------------------------------------
Institutional Shares -----% -----%
- --------------------------------------------------------------------------------
</TABLE>
* January 26, 1995.
To obtain the Portfolio's current 7-day yield, please call 1-800-452-2724.
FEES AND EXPENSES
The following table shows the fees and expenses that you pay if you buy and hold
shares of the Treasury Money Market Portfolio.
<TABLE>
<CAPTION>
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE PORTFOLIO'S ASSETS)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Annual
Portfolio
Management Distribution (12b-1) Other Operating
Fees Fees Expenses Expenses
- ---------------------------------------------------------------------------------------------------------------------
Institutional Shares _____% None _____% _____%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Management Fees, Other Expenses and Total Annual Portfolio Operating
Expenses for the Portfolio's Institutional Shares for the last fiscal year were
less than the amounts shown above because certain of the Portfolio's service
providers voluntarily waived a portion of their fees and/or reimbursed the
Portfolio for certain other expenses. These fee waivers or reimbursements were
made, in the case of Institutional Shares, and are being made in order to keep
the annual fees and expenses for the Portfolio's Institutional Shares at certain
levels. Management Fees, Other Expenses and Total Annual Portfolio Operating
Expenses, after taking these fee waivers and expense reimbursements into
account, were ___%, ___% and ___%, respectively, for Institutional Shares. The
Fund's service providers intend to continue these fee waivers and expense
reimbursements but are not obligated to do so.
-6-
<PAGE> 126
<TABLE>
<CAPTION>
EXAMPLE
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:
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 year 3 years 5 years 10 years
- ---------------------------------------------------------------------------------------------------------------------
Institutional Shares $ $ $ $
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-7-
<PAGE> 127
MONEY MARKET PORTFOLIO
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to seek current income with liquidity
and stability of principal.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio invests 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.
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 or only one such rating if only one organization has rated the
instrument. If the money market instrument 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 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.
There's no guarantee the Portfolio will be able to preserve the value of your
investment at $1.00 per share.
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. 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 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.
INSTITUTIONAL SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
-8-
<PAGE> 128
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Since
MONEY MARKET PORTFOLIO 1 Year Inception*
- -------------------------------------------------------------------------------
Institutional Shares _____% _____%
- -------------------------------------------------------------------------------
</TABLE>
* January 3, 1994.
To obtain the Portfolio's current 7-day yield, please call 1-800-452-2724.
FEES AND EXPENSES
The following table shows the fees and expenses that you pay if you buy and hold
shares of the Money Market Portfolio.
<TABLE>
<CAPTION>
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE PORTFOLIO'S ASSETS)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Annual
Portfolio Operating
Management Fees Distribution (12b-1) Expenses
Fees Other Expenses
- ---------------------------------------------------------------------------------------------------------------------
Institutional Shares _____% None _____% _____%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Management Fees, Other Expenses and Total Annual Portfolio Operating
Expenses for the Portfolio's Institutional Shares for the last fiscal year were
less than the amounts shown above because certain of the Portfolio's service
providers voluntarily waived a portion of their fees and/or reimbursed the
Portfolio for certain other expenses. These fee waivers or reimbursements were
made in order to keep the annual fees and expenses for the Portfolio's
Institutional Shares at certain levels. Management Fees, Other Expenses and
Total Annual Portfolio Operating Expenses, after taking these fee waivers and
expense reimbursements into account, were ___%, ___% and ___%, respectively, for
Institutional Shares. The Fund's service providers intend to continue these fee
waivers and expense reimbursements but are not obligated to do so.
EXAMPLE
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:
-9-
<PAGE> 129
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 year 3 years 5 years 10 years
- ---------------------------------------------------------------------------------------------------------------------
Institutional Shares $ $ $ $
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-10-
<PAGE> 130
U.S. GOVERNMENT SECURITIES PORTFOLIO
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 invests 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 one to 30 years.
(sidebar)
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.
(sidebar)
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").
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, which could adversely affect the
Portfolio's value.
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.
Repurchase agreements carry the risk that the other party may not fulfill its
obligations under the agreement.
-11-
<PAGE> 131
(sidebar)
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.
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. 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 selected 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>
<CAPTION>
INSTITUTIONAL SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Since
U.S. GOVERNMENT SECURITIES PORTFOLIO 1 Year Inception*
- -------------------------------------------------------------------------------
Institutional Shares _____% _____%
- -------------------------------------------------------------------------------
Lehman Brothers Intermediate Government Bond
Index _____% _____%
- -------------------------------------------------------------------------------
</TABLE>
* June 7, 1994.
(sidebar)
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.
-12-
<PAGE> 132
FEES AND EXPENSES
The following table shows the fees and expenses that you pay if you buy and hold
shares of the U.S. Government Securities Portfolio.
<TABLE>
<CAPTION>
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE PORTFOLIO'S ASSETS)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Annual
Portfolio Operating
Management Fees Distribution (12b-1) Expenses
Fees Other Expenses
- ---------------------------------------------------------------------------------------------------------------------
Institutional Shares _____% None _____% _____%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Institutional Shares for the last fiscal year were less than the
amounts shown above because certain of the Portfolio's service providers
voluntarily waived a portion of their fees and/or reimbursed the Portfolio for
certain other expenses. These fee waivers or reimbursements were made in order
to keep the annual fees and expenses for the Portfolio's Institutional Shares at
certain levels. Other Expenses and Total Annual Portfolio Operating Expenses,
after taking these fee waivers and expense reimbursements into account, were
___% and ___%, respectively, for Institutional Shares. The Fund's service
providers intend to continue these fee waivers and expense reimbursements but
are not obligated to do so.
EXAMPLE
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:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 year 3 years 5 years 10 years
- -----------------------------------------------------------------------------------------------------------------
Institutional Shares $ $ $ $
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
-13-
<PAGE> 133
INTERMEDIATE CORPORATE BOND PORTFOLIO
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 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
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.
In making investment decisions, the Adviser will consider a number of factors
including current yield, maturity, yield to maturity, anticipated changes to
interest rates, and the overall quality of the investment. The Portfolio's
average weighted maturity will generally be between three and ten years.
(sidebar)
INVESTMENT GRADE DEBT SECURITIES are those of medium credit quality or better as
determined by a national rating agency, such as Standard & Poor's (debt
securities rated in the four highest rating categories, i.e. BBB or better) and
Moody's Investors Service (debt securities rated in the four highest rating
categories, i.e. Baa or better). The higher the credit rating, the less likely
it is that the issuer of the securities will default on its principal and
interest payments.
(sidebar)
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.
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,
which could adversely affect the Portfolio's value.
-14-
<PAGE> 134
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, different accounting standards and political
instability.
(sidebar)
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.
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. 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 selected 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>
<CAPTION>
INSTITUTIONAL SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 1998
- -----------------------------------------------------------------------------
<S> <C> <C>
Since
INTERMEDIATE CORPORATE BOND PORTFOLIO 1 Year Inception*
- -----------------------------------------------------------------------------
Institutional Shares _____% _____%
- -----------------------------------------------------------------------------
Lehman Brothers Intermediate Corporate Bond
Index _____% _____%
- -----------------------------------------------------------------------------
</TABLE>
* February 10, 1997.
-15-
<PAGE> 135
(sidebar)
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.
FEES AND EXPENSES
The following table shows the fees and expenses that you pay if you buy and hold
shares of the Intermediate Corporate Bond Portfolio.
<TABLE>
<CAPTION>
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE PORTFOLIO'S ASSETS)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Annual
Portfolio Operating
Management Fees Distribution (12b-1) Expenses
Fees Other Expenses
- ---------------------------------------------------------------------------------------------------------------------
Institutional Shares _____% None _____% _____%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Management Fees, Other Expenses and Total Annual Portfolio Operating
Expenses for the Portfolio's Institutional Shares for the last fiscal year were
less than the amounts shown above because certain of the Portfolio's service
providers voluntarily waived a portion of their fees and/or reimbursed the
Portfolio for certain other expenses. These fee waivers or reimbursements were
made in order to keep the annual fees and expenses for the Portfolio's
Institutional Shares at certain levels. Management Fees, Other Expenses and
Total Annual Portfolio Operating Expenses, after taking these fee waivers and
expense reimbursements into account, were ___%, ___% and ___%, respectively, for
Institutional Shares. The Fund's service providers intend to continue these fee
waivers and expense reimbursements but are not obligated to do so.
EXAMPLE
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:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 year 3 years 5 years 10 years
- ---------------------------------------------------------------------------------------------------------------------
Institutional Shares $ $ $ $
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-16-
<PAGE> 136
BOND INDEX PORTFOLIO
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").
Unlike most of the Portfolios, which require shareholder approval to change
their investment objectives, the Bond Index 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 sophisticated
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.
(sidebar)
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.
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,
which could adversely affect the Portfolio's value.
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.
-17-
<PAGE> 137
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. 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 selected 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>
<CAPTION>
INSTITUTIONAL SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Since
BOND INDEX PORTFOLIO 1 Year Inception*
- -------------------------------------------------------------------------------
Institutional Shares _____% _____%
- -------------------------------------------------------------------------------
</TABLE>
Lehman Brothers Aggregate Bond Index _____% _____%
- -------------------------------------------------------------------------------
* February 10, 1997.
(sidebar)
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.
FEES AND EXPENSES
The following table shows the fees and expenses that you pay if you buy and hold
shares of the Bond Index Portfolio.
-18-
<PAGE> 138
<TABLE>
<CAPTION>
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE PORTFOLIO'S ASSETS)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Annual
Portfolio
Management Distribution (12b-1) Other Operating
Fees Fees Expenses Expenses
- ---------------------------------------------------------------------------------------------------------------------
Institutional Shares ____% None ____% ____%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Management Fees, Other Expenses and Total Annual Portfolio Operating
Expenses for the Portfolio's Institutional Shares for the last fiscal year were
less than the amounts shown above because certain of the Portfolio's service
providers voluntarily waived a portion of their fees and/or reimbursed the
Portfolio for certain other expenses. These fee waivers or reimbursements were
made in order to keep the annual fees and expenses for the Portfolio's
Institutional Shares at certain levels. Management Fees, Other Expenses and
Total Annual Portfolio Operating Expenses, after taking these fee waivers and
expense reimbursements into account, were ___%, ___% and ___%, respectively, for
Institutional Shares. The Fund's service providers intend to continue these fee
waivers and expense reimbursements but are not obligated to do so.
EXAMPLE
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:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 year 3 years 5 years 10 years
- ---------------------------------------------------------------------------------------------------------------------
Institutional Shares $ $ $ $
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-19-
<PAGE> 139
GOVERNMENT & CORPORATE BOND PORTFOLIO
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, debentures and securities
convertible into common stock. 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. Under normal market conditions, however, the Portfolio intends
to invest at least 65% of its 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.
In making investment decisions, the Adviser considers 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 vary from time to time depending on current
market and economic conditions and the Adviser's assessment of probable changes
in interest rates.
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,
which could adversely affect the Portfolio's value.
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 government
restrictions, different accounting standards and political instability.
-20-
<PAGE> 140
(sidebar)
PORTFOLIO MANAGER
George J. Schupp is the person primarily responsible for the day-to-day
management of the Portfolio. Mr. Schupp joined MVA in 1983 and has 22 years of
prior investment experience. He has managed the Portfolio since February 1998.
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. 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 selected 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>
<CAPTION>
INSTITUTIONAL SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
GOVERNMENT & CORPORATE BOND PORTFOLIO Since
1 Year Inception*
- -------------------------------------------------------------------------------
Institutional Shares _____% _____%
- -------------------------------------------------------------------------------
Lehman Brothers Aggregate Bond Index _____% _____%
- -------------------------------------------------------------------------------
</TABLE>
* January 3, 1994.
FEES AND EXPENSES
The following table shows the fees and expenses that you pay if you buy and hold
shares of the Government & Corporate Bond Portfolio.
-21-
<PAGE> 141
<TABLE>
<CAPTION>
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE PORTFOLIO'S ASSETS)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Annual
Portfolio Operating
Management Fees Distribution (12b-1) Expenses
Fees Other Expenses
- -----------------------------------------------------------------------------------------------------------------
Institutional Shares _____% None _____% _____%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Institutional Shares for the last fiscal year were less than the
amounts shown above because certain of the Portfolio's service providers
voluntarily waived a portion of their fees and/or reimbursed the Portfolio for
certain other expenses. These fee waivers or reimbursements were made in order
to keep the annual fees and expenses for the Portfolio's Institutional Shares at
certain levels. Other Expenses and Total Annual Portfolio Operating Expenses,
after taking these fee waivers and expense reimbursements into account, were
___% and ___%, respectively, for Institutional Shares. The Fund's service
providers intend to continue these fee waivers and expense reimbursements but
are not obligated to do so.
EXAMPLE
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:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 year 3 years 5 years 10 years
- ---------------------------------------------------------------------------------------------------------------------
Institutional Shares $ $ $ $
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-22-
<PAGE> 142
BALANCED PORTFOLIO
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.
(sidebar)
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.
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. 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.
Under normal market conditions, the Portfolio invests at least 25% of its assets
in fixed-income securities and no more than 75% of its 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.
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,
which could adversely affect the value of the Portfolio. Fixed-income securities
are subject to other risks, including the risk that the issuer will be unable to
repay the debt.
-23-
<PAGE> 143
(sidebar)
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
Balanced Portfolio since May 1996. He also manages the Fund's three municipal
bond portfolios. Prior to joining MVA, Mr. Merzian was employed as a portfolio
manager at another financial organization.
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. 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 selected 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>
<CAPTION>
INSTITUTIONAL SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
1 Year Since
BALANCED PORTFOLIO Inception*
- -------------------------------------------------------------------------------
Institutional Shares -----% -----%
- -------------------------------------------------------------------------------
S&P 500 Index -----% -----%
- -------------------------------------------------------------------------------
Lehman Brothers Aggregate Bond Index -----% -----%
- -------------------------------------------------------------------------------
</TABLE>
* January 3, 1994.
(sidebar)
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.
-24-
<PAGE> 144
FEES AND EXPENSES
The following table shows the fees and expenses that you pay if you buy and hold
shares of the Balanced Portfolio.
<TABLE>
<CAPTION>
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE PORTFOLIO'S ASSETS)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Annual
Portfolio Operating
Management Fees Distribution (12b-1) Expenses
Fees Other Expenses
- -----------------------------------------------------------------------------------------------------------------
Institutional Shares _____% None _____% _____%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Institutional Shares for the last fiscal year were less than the
amounts shown above because certain of the Portfolio's service providers
voluntarily waived a portion of their fees and/or reimbursed the Portfolio for
certain other expenses. These fee waivers or reimbursements were made in order
to keep the annual fees and expenses for the Portfolio's Institutional Shares at
certain levels. Other Expenses and Total Annual Portfolio Operating Expenses,
after taking these fee waivers and expense reimbursements into account, were
___% and ___%, respectively, for Institutional Shares. The Fund's service
providers intend to continue these fee waivers and expense reimbursements but
are not obligated to do so.
EXAMPLE
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:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 year 3 years 5 years 10 years
- ---------------------------------------------------------------------------------------------------------------------
Institutional Shares $ $ $ $
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-25-
<PAGE> 145
EQUITY INCOME PORTFOLIO
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. 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 assets
in income-producing (dividend-paying) equity securities. 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.
(sidebar)
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.
(sidebar)
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.
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.
(sidebar)
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.
-26-
<PAGE> 146
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. 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 selected 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>
<CAPTION>
INSTITUTIONAL SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 1998
- -------------------------------------------------------------------------
<S> <C> <C>
Since
EQUITY INCOME PORTFOLIO 1 Year Inception*
- -------------------------------------------------------------------------
Institutional Shares -----% -----%
- -------------------------------------------------------------------------
Russell 1000 Value Index -----% -----%
- -------------------------------------------------------------------------
</TABLE>
* February 27, 1997.
(sidebar)
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 companies in the
Russell 3000 Index as ranked by total market capitalization.
-27-
<PAGE> 147
FEES AND EXPENSES
The following table shows the fees and expenses that you pay if you buy and hold
shares of the Equity Income Portfolio.
<TABLE>
<CAPTION>
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE PORTFOLIO'S ASSETS)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Annual
Portfolio
Management Distribution (12b-1) Other Operating
Fees Fees Expenses Expenses
- ---------------------------------------------------------------------------------------------------------------------
Institutional Shares _____% None _____% _____%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Management Fees, Other Expenses and Total Annual Portfolio Operating
Expenses for the Portfolio's Institutional Shares for the last fiscal year were
less than the amounts shown above because certain of the Portfolio's service
providers voluntarily waived a portion of their fees and/or reimbursed the
Portfolio for certain other expenses. These fee waivers or reimbursements were
made in order to keep the annual fees and expenses for the Portfolio's
Institutional Shares at certain levels. Management Fees, Other Expenses and
Total Annual Portfolio Operating Expenses, after taking these fee waivers and
expense reimbursements into account, were ___%, ___% and ___%, respectively, for
Institutional Shares. The Fund's service providers intend to continue these fee
waivers and expense reimbursements but are not obligated to do so.
EXAMPLE
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:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 year 3 years 5 years 10 years
- ---------------------------------------------------------------------------------------------------------------------
Institutional Shares $ $ $ $
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-28-
<PAGE> 148
EQUITY INDEX PORTFOLIO
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.
Unlike most of the Portfolios, which require shareholder approval to change
their investment objectives, the Equity Index 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 to approximate the investment
performance of the S&P 500 Index through the use of sophisticated computer
models. The Portfolio invests substantially all of its 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 cash flow and
in the composition of the S&P 500 Index.
(sidebar)
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.
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.
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. The bar chart shows how the performance of the Portfolio's
Institutional Shares has varied from year to year, and 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.
-29-
<PAGE> 149
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 1998
- ---------------------------------------------------------------
<S> <C> <C>
Since
EQUITY INDEX PORTFOLIO 1 Year Inception*
- ---------------------------------------------------------------
Institutional Shares -----% -----%
- ---------------------------------------------------------------
S&P 500 Index -----% -----%
- ---------------------------------------------------------------
</TABLE>
* May 1, 1997.
FEES AND EXPENSES
The following table shows the fees and expenses that you pay if you buy and hold
shares of the Equity Index Portfolio.
<TABLE>
<CAPTION>
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE PORTFOLIO'S ASSETS)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Annual
Portfolio
Management Distribution (12b-1) Other Operating
Fees Fees Expenses Expenses
- -----------------------------------------------------------------------------------------------------------------
Institutional Shares _____% None _____% _____%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Management Fees, Other Expenses and Total Annual Portfolio Operating
Expenses for the Portfolio's Institutional Shares for the last fiscal year were
less than the amounts shown above because certain of the Portfolio's service
providers voluntarily waived a portion of their fees and/or reimbursed the
Portfolio for certain other expenses. These fee waivers or reimbursements were
made in order to keep the annual fees and expenses for the Portfolio's
Institutional Shares at certain levels. Management Fees, Other Expenses and
Total Annual Portfolio Operating Expenses, after taking these fee waivers and
expense reimbursements into account, were ___%, ___% and ___%, respectively, for
Institutional Shares. The Fund's service providers intend to continue these fee
waivers and expense reimbursements but are not obligated to do so.
-30-
<PAGE> 150
EXAMPLE
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:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 year 3 years 5 years 10 years
- -----------------------------------------------------------------------------------------------------------------
Institutional Shares $ $ $ $
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
-31-
<PAGE> 151
GROWTH & INCOME EQUITY PORTFOLIO
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.
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 a major 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.
(sidebar)
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.
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. The bar chart shows how the performance of the Portfolio's
Institutional Shares has varied from year to year, and the table shows how the
Portfolio's average annual returns for one year and since inception compare to
those of a selected 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.
-32-
<PAGE> 152
INSTITUTIONAL SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 1998
- -----------------------------------------------------------------------
<S> <C> <C>
Growth & Income Equity Portfolio Since
1 Year inception*
- -----------------------------------------------------------------------
Institutional Shares -----% -----%
- -----------------------------------------------------------------------
S&P 500 Index -----% -----%
- -----------------------------------------------------------------------
</TABLE>
* January 3, 1994.
FEES AND EXPENSES
The following table shows the fees and expenses that you pay if you buy and hold
shares of the Growth & Income Equity Portfolio.
<TABLE>
<CAPTION>
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE PORTFOLIO'S ASSETS)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Annual
Portfolio
Management Distribution (12b-1) Other Operating
Fees Fees Expenses Expenses
- -----------------------------------------------------------------------------------------------------------------
Institutional Shares _____% None _____% _____%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Institutional Shares for the last fiscal year were less than the
amounts shown above because certain of the Portfolio's service providers
voluntarily waived a portion of their fees and/or reimbursed the Portfolio for
certain other expenses. These fee waivers or reimbursements were made in order
to keep the annual fees and expenses for the Portfolio's Institutional Shares at
certain levels. Other Expenses and Total Annual Portfolio Operating Expenses,
after taking these fee waivers and expense reimbursements into account, were
___% and ___%, respectively, for Institutional Shares. The Fund's service
providers intend to continue these fee waivers and expense reimbursements but
are not obligated to do so.
-33-
<PAGE> 153
EXAMPLE
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:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 year 3 years 5 years 10 years
- -----------------------------------------------------------------------------------------------------------------
Institutional Shares $ $ $ $
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
-34-
<PAGE> 154
GROWTH EQUITY PORTFOLIO
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 Portfolio securities, 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 market share, but company
earnings are the primary consideration.
Under normal market conditions, the Portfolio invests at least 65% of its assets
in stocks or other equity securities. 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.
(sidebar)
Growth stocks offer strong revenue and earnings potential and accompanying
capital growth, with less dividend income than value stocks.
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.
(sidebar)
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.
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. The bar chart shows how the performance of the Portfolio's
Institutional Shares has varied from year to year, and the table shows how the
Portfolio's average annual returns for one year and since inception compare to
those of a selected 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.
-35-
<PAGE> 155
Note: 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 YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 1998
- ----------------------------------------------------------
<S> <C> <C>
Since
Growth Equity Portfolio 1 Year Inception*
- ----------------------------------------------------------
Institutional Shares -----% -----%
- ----------------------------------------------------------
S&P 500 Index -----% -----%
- ----------------------------------------------------------
</TABLE>
* December 2, 1997.
FEES AND EXPENSES
The following table shows the fees and expenses that you pay if you buy and hold
shares of the Growth Equity Portfolio.
<TABLE>
<CAPTION>
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE PORTFOLIO'S ASSETS)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Annual
Portfolio
Management Distribution (12b-1) Other Operating
Fees Fees Expenses Expenses
- -----------------------------------------------------------------------------------------------------------------
Institutional Shares ____% None ____% ____%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Institutional Shares for the last fiscal year were less than the
amounts shown above because certain of the Portfolio's service providers
voluntarily waived a portion of their fees and/or reimbursed the Portfolio for
certain other expenses. These fee waivers or reimbursements were made in order
to keep the annual fees and expenses for the Portfolio's Institutional Shares at
certain levels. Other Expenses and Total Annual Portfolio Operating Expenses,
after taking these fee waivers and expense reimbursements into account, were
___% and ___%, respectively, for Institutional Shares. The Fund's service
providers intend to continue these fee waivers and expense reimbursements but
are not obligated to do so.
-36-
<PAGE> 156
EXAMPLE
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:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 year 3 years 5 years 10 years
- -----------------------------------------------------------------------------------------------------------------
Institutional Shares $ $ $ $
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
-37-
<PAGE> 157
SMALL CAP EQUITY PORTFOLIO
INVESTMENT OBJECTIVE
The Portfolio's investment objective is capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
Under normal conditions, the Portfolio invests at least 65% of its assets in
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. Purchased stocks 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. In addition, the Portfolio is subject to the
additional risk that the growth 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 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.
-38-
<PAGE> 158
(sidebar)
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.
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. The bar chart shows how the performance of the Portfolio's
Institutional Shares has varied from year to year, and the table shows how the
Portfolio's average annual returns for one year and since inception compare to
those of a selected 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.
INSTITUTIONAL SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 1998
- -------------------------------------------------------------
<S> <C> <C>
Since
Small Cap Equity Portfolio 1 Year inception*
- -------------------------------------------------------------
Institutional Shares ----% ----%
- -------------------------------------------------------------
Russell 2000 Index ----% ----%
- -------------------------------------------------------------
</TABLE>
* January 3, 1994.
(sidebar)
KNOW YOUR INDEX
The Russell 2000 Index is an unmanaged index comprised of the 2,000 smallest
companies in the Russell 3000 Index.
FEES AND EXPENSES
The following table shows the fees and expenses that you pay if you buy and hold
shares of the Small Cap Equity Portfolio.
-39-
<PAGE> 159
<TABLE>
<CAPTION>
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE PORTFOLIO'S ASSETS)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Annual
Portfolio
Management Distribution (12b-1) Other Operating
Fees Fees Expenses Expenses
- -----------------------------------------------------------------------------------------------------------------
Institutional Shares ____% None ____% ____%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Institutional Shares for the last fiscal year were less than the
amounts shown above because certain of the Portfolio's service providers
voluntarily waived a portion of their fees and/or reimbursed the Portfolio for
certain other expenses. These fee waivers or reimbursements were made in order
to keep the annual fees and expenses for the Portfolio's Institutional Shares at
certain levels. Other Expenses and Total Annual Portfolio Operating Expenses,
after taking these fee waivers and expense reimbursements into account, were
___% and ___%, respectively, for Institutional Shares. The Fund's service
providers intend to continue these fee waivers and expense reimbursements but
are not obligated to do so.
EXAMPLE
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:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 year 3 years 5 years 10 years
- -----------------------------------------------------------------------------------------------------------------
Institutional Shares $ $ $ $
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
-40-
<PAGE> 160
SMALL CAP EQUITY INDEX PORTFOLIO
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.
Unlike most of the Portfolios, which require shareholder approval to change
their investment objectives, the Small Cap Equity Index 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 sophisticated
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 cash flow 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 Stock Portfolios. By
typically investing in all 600 stocks in the Index, the Portfolio remains
broadly diversified, which may reduce some of this risk.
-41-
<PAGE> 161
RETURN HISTORY
The Portfolio does not have a long-term performance record because it has been
in operation for less than one calendar year.
FEES AND EXPENSES
The following table shows the fees and expenses that you pay if you buy and hold
shares of the Small Cap Equity Index Portfolio.
<TABLE>
<CAPTION>
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE PORTFOLIO'S ASSETS)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Annual
Portfolio
Management Distribution (12b-1) Other Operating
Fees Fees Expenses Expenses
- ---------------------------------------------------------------------------------------------------------------------
Institutional Shares ____% None ____% ____%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: 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
or reimbursements are being made in order to keep the annual fees and expenses
for the Portfolio's Institutional 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___%,
___% and ___%, respectively, for Institutional Shares. The Fund's service
providers intend to continue these fee waivers and expense reimbursements but
are not obligated to do so.
EXAMPLE
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:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 year 3 years 5 years 10 years
- -----------------------------------------------------------------------------------------------------------------
Institutional Shares $ $ $ $
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
-42-
<PAGE> 162
INTERNATIONAL EQUITY PORTFOLIO
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 of its 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 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.
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, 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. 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.
(sidebar)
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.
-43-
<PAGE> 163
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. The bar chart shows how the performance of the Portfolio's
Institutional Shares has varied from year to year, and the table shows how the
Portfolio's average annual returns for one year and since inception compare to
those of a selected 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.
INSTITUTIONAL SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDING DECEMBER 31, 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Since
International Equity Portfolio 1 Year inception*
- ---------------------------------------------------------------------------------------
Institutional Shares ----% ----%
- ---------------------------------------------------------------------------------------
Morgan Stanley Capital International Europe, ----% ----%
Australia & Far East (EAFE) Index
- ---------------------------------------------------------------------------------------
</TABLE>
* April 4, 1994.
(sidebar)
KNOW YOUR INDEX
The Morgan Stanley Capital International Europe, Australia and Far East Index,
or EAFE Index, is an unmanaged index consisting of companies in Australia, New
Zealand, Europe and the Far East.
FEES AND EXPENSES
The following table shows the fees and expenses that you pay if you buy and hold
shares of the International Equity Portfolio.
-44-
<PAGE> 164
<TABLE>
<CAPTION>
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE PORTFOLIO'S ASSETS)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Annual
Portfolio
Management Distribution (12b-1) Other Operating
Fees Fees Expenses Expenses
- ---------------------------------------------------------------------------------------------------------------------
Institutional Shares ____% None ____% ____%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Institutional Shares for the last fiscal year were less than the
amounts shown above because certain of the Portfolio's service providers
voluntarily waived a portion of their fees and/or reimbursed the Portfolio for
certain other expenses. These fee waivers or reimbursements were made in order
to keep the annual fees and expenses for the Portfolio's Institutional Shares at
certain levels. Other Expenses and Total Annual Portfolio Operating Expenses,
after taking these fee waivers and expense reimbursements into account, were __%
and __% respectively, for Institutional Shares. The Fund's service providers
intend to continue these fee waivers and expense reimbursements but are not
obligated to do so.
EXAMPLE
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:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 year 3 years 5 years 10 years
- ---------------------------------------------------------------------------------------------------------------------
Institutional Shares $ $ $ $
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-45-
<PAGE> 165
ADDITIONAL INFORMATION ON RISK
The principal risks of investing in each Portfolio are described above. 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). In
addition, each of the Taxable Bond and Stock Portfolios may hold money market
instruments, including 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.
SELECTION OF INVESTMENTS
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolios and how they may advance the Portfolios' investment
objectives. It is possible, however, that these evaluations will prove to be
inaccurate.
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, which is referred to on
the back cover of this prospectus.
FREQUENT TRADING
Each Portfolio may trade its investments frequently in trying to achieve its
investment goal. This strategy increases the chances that a Taxable Bond or
Stock Portfolio will pay investors short-term capital gains. These gains are
taxable at higher rates than long-term capital gains. Frequent trading could
also mean higher brokerage commissions and other transaction costs, which could
reduce the Portfolio's returns.
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.
-46-
<PAGE> 166
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.
-47-
<PAGE> 167
YOUR ACCOUNT
EXPLANATION OF SALES PRICE
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.
(sidebar)
BUSINESS DAYS DEFINED
A business day is any day that both the New York Stock Exchange (NYSE) and the
Federal Reserve Bank of St. Louis are open for business. Currently, the Fund
observes the following holidays: New Year's Day, Martin Luther King Jr. Day,
Presidents' Day, Good Friday, Memorial Day (observed), Independence Day
(observed), Labor Day, Columbus Day, Veterans' Day, Thanksgiving and Christmas.
- - 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 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 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
-48-
<PAGE> 168
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.
HOW TO BUY SHARES
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 1-800-452-4015.
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.
HOW TO SELL SHARES
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. 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.
-49-
<PAGE> 169
(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.
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
-50-
<PAGE> 170
getting through to the Fund by telephone because of unusual market conditions
should consider selling or exchanging their shares by mail.
DISTRIBUTIONS AND TAXES
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 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.
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.
-51-
<PAGE> 171
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.
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
Statement of Additional Information 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.
(sidebar)
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.
-52-
<PAGE> 172
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>
- ----------------------------------------------------------------------------
<S> <C>
Investment advisory fees as a
Portfolio % of net assets
- ----------------------------------------------------------------------------
Treasury Money Market Portfolio
- ----------------------------------------------------------------------------
Money Market Portfolio
- ----------------------------------------------------------------------------
U.S. Government Securities Portfolio
- ----------------------------------------------------------------------------
Intermediate Corporate Bond Portfolio
- ----------------------------------------------------------------------------
Bond Index Portfolio
- ----------------------------------------------------------------------------
Government & Corporate Bond Portfolio
- ----------------------------------------------------------------------------
Balanced Portfolio
- ----------------------------------------------------------------------------
Growth & Income Equity Portfolio
- ----------------------------------------------------------------------------
Equity Income Portfolio
- ----------------------------------------------------------------------------
Equity Index Portfolio
- ----------------------------------------------------------------------------
Growth Equity Portfolio
- ----------------------------------------------------------------------------
Small Cap Equity Portfolio
- ----------------------------------------------------------------------------
Small Cap Equity Index Portfolio*
- ----------------------------------------------------------------------------
International Equity Portfolio
- ----------------------------------------------------------------------------
</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.
-53-
<PAGE> 173
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.
-54-
<PAGE> 174
FINANCIAL HIGHLIGHTS
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
[____________________], independent accountants, whose report, along with the
Portfolios' financial statements, is included in the Fund's Annual Report to
Shareholders, and [____________________________] the SAI. The Small Cap Equity
Index Portfolio did not conduct investment operations during the periods covered
by the tables.
-55-
<PAGE> 175
<TABLE>
<CAPTION>
Treasury Money Market Portfolio
(For a Share outstanding throughout each period)
Year Ended Year Ended Year Ended January 26, 1995
November 30, November 30, November 30, to November 30,
1998 1997 1996 1995(a)
---- ---- ---- -------
Institutional Institutional Institutional Institutional
Shares Shares Shares Shares
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $1.00 $1.00 $1.00
----- ----- -----
Investment Activities
Net Investment Income 0.044 0.044 0.042
----- ----- -----
Total from Investment
Activities 0.044 0.044 0.042
----- ----- -----
Distributions
Net investment income (0.044) (0.044) (0.042)
----- ----- -----
Total Distributions (0.044) (0.044) (0.042)
----- ----- -----
Net Asset Value,
End of Period $1.00 $1.00 $1.00
===== ===== =====
Total Return 4.53% 4.46% 4.94%(c)
Ratio/Supplemental Data:
Net Assets at end of
period (000) $233 $299 $28
Ratio of expenses to
average net assets
(including waivers) 0.77% 0.79% 0.92%(b)
Ratio of net investment
income to average net
assets (including
waivers)* 4.44% 4.39% 5.76%(b)
Ratio of expenses to average net
assets (before waivers)* 0.92% 0.94% 1.07%(b)
Ratio of net investment
income to average net
assets (before
waivers)* 4.29% 4.24% 5.61%(b)
<FN>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been
as indicated.
(a) Period from commencement of operations.
(b) Annualized.
(c) Represents 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.
</TABLE>
-56-
<PAGE> 176
<TABLE>
<CAPTION>
Money Market Portfolio
(For a Share(a) outstanding throughout each period)
Year Ended November, 30
---------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994(a)
---- ---- ---- ---- ------
Institutional Institutional Institutional Institutional Institutional
Shares Shares Shares Shares Shares
------ ------ ------ ------ ------
<S> <C> <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 0.047 0.052 0.033
----- ----- ----- -----
Total from investment
Activities 0.048 0.047 0.052 0.033
----- ----- ----- -----
Distributions
Net investment income (0.048) (0.047) (0.052) (0.033)
------ ------ ------ ------
Total Distributions (0.048) (0.047) (0.052) (0.033)
------ ------ ------ ------
Net Asset Value,
End of Period $1.00 $1.00 $1.00 $1.00
===== ===== ===== =====
Total Return 4.93% 4.81% 5.33% 3.34%
Ratio/Supplemental Data:
Net Assets at end of
period (000) $22,022 $15,921 $13,340 $10,295
Ratio of expenses to
average net assets
(including waivers) 0.77% 0.78% 0.77% 0.78%
Ratio of net investment
income to average net
assets (including
waivers)* 0.92% 0.93% 0.92% 0.95%
Ratio of net investment
income to average net
assets (before
waivers)* 4.68% 4.55% 5.05% 3.31%
<FN>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios 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.
</TABLE>
-57-
<PAGE> 177
<TABLE>
<CAPTION>
U.S. Government Securities Portfolio
(For a Share(a) outstanding throughout each period)
Year Ended November, 30
---------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994(a)
------ ------ ------ ------ ------
Institutional Institutional Institutional Institutional Institutional
Shares Shares Shares Shares Shares
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $10.64 $10.82 $10.02 $11.02
------ ------ ------ ------
Investment Activities
Net Investment Income 0.56 0.62 0.63 0.61
Net realized and unrealized
gains (losses) from investments (0.04) (0.15) 0.80 (1.00)
----- ----- ----- -----
Total from Investment Activities 0.52 0.47 1.43 (0.39)
----- ----- ----- -----
Distributions
Net investment income (0.58) (0.62) (0.63) (0.61)
Net realized gains --- --- --- ---
In excess of net investment income --- --- --- ---
In excess of net realized gains --- --- --- ---
----- ----- ----- -----
Total Distributions (0.58) (0.65) (0.63) (0.79)
----- ----- ----- -----
Net Asset Value,
End of Period $10.58 $10.64 $10.82 $10.02
====== ====== ====== ======
Total Return 5.10% 4.55% 14.69% (3.46%)
Ratio/Supplemental Data:
Net Assets at end of
period (000) $7.049 $2,232 $667 $51
Ratio of expenses to
average net assets
(including waivers) 0.97% 0.96% 0.97% 0.95%
Ratio of net investment
income to average net
assets (including
waivers)* 5.52% 5.75% 5.91% 6.54%
Ratio of expenses to
average net assets
(before waivers) 1.07% 1.06% 1.07% 1.16%
Ratio of net investment
income to average net
assets (before
waivers)* 5.42% 5.65% 5.81% 6.33%
Portfolio turnover** 100.33% 53.76% 93.76% 50%
</TABLE>
- --------------------------
-58-
<PAGE> 178
* 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.
-59-
<PAGE> 179
INTERMEDIATE CORPORATE BOND PORTFOLIO
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
February 10, 1997
Year Ended to
November 30, 1998 November 30, 1997(a)
----------------- --------------------
Institutional Institutional
Shares Shares
------------- -------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD............................................ $10.00
------
Investment Activities
Net investment income........................................................ 0.53
Net realized and unrealized losses from investments.......................... 0.11
------
Total from Investment Activities....................................... 0.64
------
Distributions
Net investment income........................................................ (0.53)
-----
Total Distributions.................................................... (0.53)
-----
NET ASSET VALUE, END OF PERIOD.................................................. $10.11
======
Total Return.................................................................... 6.60%(b)
RATIOS/SUPPLEMENTARY DATA:
Net assets at the end of period (000)........................................ $27
Ratio of expenses to average net assets...................................... 0.29%(c)
Ratio of net investment income to average net assets......................... 7.06%(c)
Ratio of expenses to average net assets*..................................... 1.31%(c)
Ratio of net investment income to average net assets*........................ 6.04%(c)
Portfolio turnover**......................................................... 61.98%
</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) Period from commencement of operations.
(b) Not Annualized.
(c) Annualized.
<PAGE> 180
BOND INDEX PORTFOLIO
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
February 10, 1997
Year Ended to
November 30, 1998 November 30, 1997(a)
----------------- --------------------
Institutional Institutional
Shares Shares
------------- -------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD............................................ $10.00
------
Investment Activities
Net investment income........................................................ 0.53
Net realized and unrealized losses from investments.......................... 0.17
------
Total from Investment Activities....................................... 0.70
------
Distributions
Net investment income........................................................ (0.53)
-----
Total Distributions.................................................... (0.53)
-----
NET ASSET VALUE, END OF PERIOD.................................................. $10.17
======
Total Return.................................................................... 7.20%(b)
RATIOS/SUPPLEMENTARY DATA:
Net assets at the end of period (000)........................................ $27
Ratio of expenses to average net assets...................................... 0.24%(c)
Ratio of net investment income to average net assets......................... 7.09%(c)
Ratio of expenses to average net assets*..................................... 0.95%(c)
Ratio of net investment income to average net assets*........................ 6.38%(c)
Portfolio turnover**......................................................... 46.16%
</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) Period from commencement of operations.
(b) Not Annualized.
(c) Annualized.
-2-
<PAGE> 181
GOVERNMENT & CORPORATE BOND PORTFOLIO
(FOR A SHARE(a) OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
Year ended November 30,
-----------------------
1998 1997 1996 1995 1994(a)
------ ------ ------ ------ -------
Institutional Institutional Institutional Institutional Institutional
Shares Shares Shares Shares Shares
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.................. $10.34 $10.53 $ 9.64 $10.65
====== ====== ====== ======
Investment Activities
Net investment income.............................. 0.56 0.64 0.61 0.60
Net realized and unrealized gains (losses)
from investments................................. 0.03 (0.19) 0.89 (0.94)
------ ------ ------ ------
Total from Investment Activities................... 0.59 0.45 1.50 (0.34)
------ ------ ------ ------
Distributions
Net investment income.............................. (0.56) (0.64) (0.61) (0.60)
In excess of net realized gains.................... -- -- -- (0.07)
------ ------ ------ ------
Total Distributions................................ (0.56) (0.64) (0.61) (0.67)
------ ------ ------ ------
Net Asset Value, End of Period........................ $10.37 $10.34 $10.53 $ 9.64
====== ====== ====== ======
Total Return.......................................... 6.00% 4.51% 15.98% (3.32)%
Ratios/Supplemental Data:
Net Assets at end of period (000)..................... $16,954 $14,875 $9,413 $5,965
Ratio of expenses to average net assets
(including waivers)................................ 0.95% 0.95% 0.95% 0.96%
Ratio of net investment income to average net
assets (including waivers)......................... 5.55% 6.06% 6.01% 6.03%
Ratio of expenses to average net assets
(before waivers)*.................................. 1.05% 1.05% 1.05% 1.07%
Ratio of net investment income to average net
assets (before waivers)*........................... 5.45% 5.96% 5.91% 5.92%
Portfolio turnover**.................................. 140.72% 149.20% 59.32% 50%
</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) 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.
-3-
<PAGE> 182
BALANCED PORTFOLIO
(FOR A SHARE(a) OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended
November 30, 1998 November 30, 1997 November 30, 1996 November 30, 1995
----------------- ----------------- ----------------- -----------------
Institutional Institutional Institutional Institutional
Shares Shares Shares Shares
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................. $12.54 $11.62 $ 9.60
------ ------ ------
Investment Activities
Net investment income (loss)...................... 0.31 0.32 0.31
Net realized and unrealized gains from
investments.................................... 1.49 1.34 2.02
------ ------ ------
Total from Investment Activities.................. 1.80 1.66 2.33
------ ------ ------
Distributions
Net investment income............................. (0.37) (0.32) (0.31)
In excess of net investment income................ (0.03) -- --
Net realized gains................................ (0.71) (0.42 --
In excess of net realized gains................... -- -- --
------ ------ ------
Total Distributions............................... (1.11) (0.74) (0.31)
------ ------ ------
Net Asset Value, End of Period....................... $13.23 $12.54 $11.62
====== ====== ======
Total Return......................................... 15.52% 15.08% 24.67%
Ratios/Supplemental Data:
Net Assets at end of period (000).................... $61,655 $54,731 $36,827
Ratio of expenses to average net assets
(including waivers)............................... 1.27% 1.27% 1.27%
Ratio of net investment income to average net
assets (including waivers)........................ 2.56% 2.78% 2.97%
Ratio of expenses to average net assets
(before waivers)*................................. 1.37% 1.37% 1.37%
Ratio of net investment income to average net
assets (before waivers)*.......................... 2.46% 2.68% 2.87%
Portfolio turnover**................................. 43.60% 85.16% 58.16%
</TABLE>
<TABLE>
<CAPTION>
Year Ended
November 30, 1994(a)
--------------------
Institutional
Shares
------
<S> <C>
Net Asset Value, Beginning of Period................. $10.22
------
Investment Activities
Net investment income (loss)...................... 0.28
Net realized and unrealized gains from
investments.................................... (0.48)
------
Total from Investment Activities.................. (0.20)
------
Distributions
Net investment income............................. (0.29)
In excess of net investment income................ --
Net realized gains................................ --
In excess of net realized gains................... (0.13)
------
Total Distributions............................... (0.42)
------
Net Asset Value, End of Period....................... $ 9.60
======
Total Return......................................... (2.00%)
Ratios/Supplemental Data:
Net Assets at end of period (000).................... $22,723
Ratio of expenses to average net assets
(including waivers)............................... 1.27%
Ratio of net investment income to average net
assets (including waivers)........................ 2.77%
Ratio of expenses to average net assets
(before waivers)*................................. 1.40%
Ratio of net investment income to average net
assets (before waivers)*.......................... 2.64%
Portfolio turnover**................................. 49%
</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.
-4-
<PAGE> 183
EQUITY INCOME PORTFOLIO
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
March 7, 1997
Year Ended to
November 30, 1998 November 30, 1997(a)
----------------- --------------------
Institutional Institutional
Shares Shares
------------- -------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD....................................... $10.00
------
Investment Activities
Net investment income................................................... 0.19
Net realized and unrealized gains from investments...................... 1.56
------
Total from Investment Activities.................................. 1.75
------
Distributions
Net investment income................................................... (0.19)
------
Total Distributions............................................... (0.19)
------
NET ASSET VALUE, END OF PERIOD............................................. $11.56
======
Total Return............................................................... 17.64%(b)
RATIOS/SUPPLEMENTARY DATA:
Net assets at the end of period (000)................................... $ 1
Ratio of expenses to average net assets................................. 0.37%(c)
Ratio of net investment income to average net assets.................... 2.34%(c)
Ratio of expenses to average net assets*................................ 1.60%(c)
Ratio of net investment income to average net assets*................... 1.11%(c)
Portfolio turnover**.................................................... 48.33%
</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) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
-5-
<PAGE> 184
EQUITY INDEX PORTFOLIO
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
May 1, 1997
Year Ended to
November 30, 1998 November 30, 1997(a)
----------------- --------------------
Institutional Institutional
Shares Shares
------------- -------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD............................................ $10.00
------
Investment Activities
Net investment income........................................................ 0.10
Net realized and unrealized gains from investments........................... 1.94
------
Total from Investment Activities....................................... 2.04
------
Distributions
Net investment income........................................................ (0.10)
-----
Total Distributions.................................................... (0.10)
-----
NET ASSET VALUE, END OF PERIOD.................................................. $11.94
======
Total Return.................................................................... 20.40%(b)
RATIOS/SUPPLEMENTARY DATA:
Net assets at the end of period (000)........................................ $ 8
Ratio of expenses to average net assets...................................... 0.46%(c)
Ratio of net investment income to average net assets......................... 1.30%(c)
Ratio of expenses to average net assets*..................................... 1.19%(c)
Ratio of net investment income to average net assets*........................ 0.57%(c)
Portfolio turnover**......................................................... 1.66%
</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) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
-6-
<PAGE> 185
GROWTH & INCOME EQUITY PORTFOLIO
(FOR A SHARE(a) OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
Year ended November 30,
-----------------------
1998 1997 1996 1995 1994(a)
------ ------ ------ ------ -------
Institutional Institutional Institutional Institutional Institutional
Shares Shares Shares Shares Shares
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.................. $18.67 $16.29 $12.70 $14.74
====== ====== ====== ======
Investment Activities
Net investment income.............................. 0.12 0.20 0.23 0.20
Net realized and unrealized gains (losses) from
investments...................................... 3.95 3.33 3.74 (0.17)
------ ------ ------ -------
Total from Investment Activities................... 4.07 3.53 3.97 0.03
------ ------ ------ ------
Distributions
Net investment income.............................. (0.13) (0.20) (0.24) (0.21)
In excess of net investment income................. (0.03) (0.01 -- --
Net realized gains................................. (1.46) (0.94) (0.14) (0.18)
------
In excess of net realized gains.................... -- -- -- (1.68)
------ ------ ------ ------
Total Distributions................................ (1.62) (1.15) (0.38) (2.07)
------ ------ ------ ------
Net Asset Value, End of Period........................ $21.12 $18.67 $16.29 $12.70
====== ====== ====== ======
Total Return.......................................... 23.90% 23.08% 31.88% 0.19%
Ratios/Supplemental Data:
Net Assets at end of period (000)..................... $92,515 $72,950 $40,228 $21,897
Ratio of expenses to average net assets
(including waivers)................................ 1.04% 1.05% 1.05% 1.05%
Ratio of net investment income to average net
assets (including waivers)......................... 0.60% 1.19% 1.58% 1.41%
Ratio of expenses to average net assets
(before waivers)*.................................. 1.14% 1.15% 1.15% 1.16%
Ratio of net investment income to average net
assets (before waivers)*........................... 0.50% 1.09% 1.48% 1.30%
Portfolio turnover**.................................. 57.11% 63.90% 58.50% 65%
</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.
-7-
<PAGE> 186
SMALL CAP EQUITY PORTFOLIO(a)
(FOR A SHARE(b) OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
Year ended November 30,
-----------------------
1998 1997 1996 1995 1994(a)
------ ------ ------ ------ -------
Institutional Institutional Institutional Institutional Institutional
Shares Shares Shares Shares Shares
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.................. $13.36 $13.40 $11.96 $13.14
------ ------ ------ ------
Investment Activities
Net investment income (loss) (0.04) (0.01) (0.01) (0.03)
Net realized and unrealized gains from
investments...................................... 2.48 1.03 2.36 0.86
------ ------ ------ ------
Total from Investment Activities................... 2.44 1.02 2.35 0.83
------ ------ ------ ------
Distributions
Net investment income.............................. -- -- -- --
In excess of net investment income................. -- (0.01) -- --
Net realized gains................................. (0.82) (1.05) (0.91) (1.78)
------
In excess of net realized gains.................... -- -- -- (0.23)
------ ------ ------ ------
Total Distributions................................ (0.82) (1.06) (0.91) (2.01)
------ ------ ------ ------
Net Asset Value, End of Period........................ $14.98 $13.36 $13.40 $11.96
====== ====== ====== ======
Total Return.......................................... 19.41% 8.39% 21.43% 7.11%
Ratios/Supplemental Data:
Net Assets at end of period (000)..................... $34,395 $30,081 $17,620 $5,633
Ratio of expenses to average net assets
(including waivers)................................ 1.25% 1.26% 1.26% 1.25%
Ratio of net investment income to average net
assets (including waivers)......................... (0.29%) (0.13%) (0.11%) (1.41%)
Ratio of expenses to average net assets
(before waivers)*.................................. 1.35% 1.36% 1.36% 1.37%
Ratio of net investment income to average net
assets (before waivers)*........................... (0.39%) (0.23%) (0.21%) (0.53%)
Portfolio turnover**.................................. 80.23% 65.85% 83.13% 85%
</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) The Emerging Growth Portfolio changed its name to Small Cap Equity
Portfolio on December 1, 1996.
(b) 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.
-8-
<PAGE> 187
INTERNATIONAL EQUITY PORTFOLIO
(FOR A SHARE(a) OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
Year ended November 30,
-----------------------
April 4, 1994 to
1998 1997 1996 1995 November 30, 1994(a)
------ ------ ------ ------ --------------------
Institutional Institutional Institutional Institutional Institutional
Shares Shares Shares Shares Shares
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period............. $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....... 0.33 1.27 0.86 (0.09)
------ ------ ------ ------
Total from Investment Activities.............. 0.30 1.28 0.87 (0.10)
------ ------ ------ ------
Distributions
In excess of net investment income............ (0.05) -- -- --
Net realized gains............................ (0.31) -- (0.01) --
Tax return of capital......................... -- -- (0.01) --
------ ------ ------ ------
Total Distributions........................... (0.36) -- (0.02) --
------ ------ ------ ------
Net Asset Value, End of Period................... $11.97 $12.03 $10.75 $ 9.90
====== ====== ====== ======
Total Return..................................... 2.59% 11.91% 8.78% (1.00%)(b)
Ratios/Supplemental Data:
Net Assets at end of period (000)................ $6,798 $6,059 $2,159 $197
Ratio of expenses to average net assets
(including waivers)........................... 1.59% 1.44% 1.44% 1.70%(c)
Ratio of net investment income (loss) to average
net assets (including waivers)................ (0.21%) 0.16% 0.13% (0.48%)(c)
Ratio of expenses to average net assets
(before waivers)*............................. 1.75% 1.76% 1.75% 2.17%(c)
Ratio of net investment income (loss) to average
net assets (before waivers)*.................. (0.37%) (0.16%) (0.18%) (0.94%)(c)
Portfolio turnover**............................. 75.18% 77.63% 62.78% 21%
</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 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.
-9-
<PAGE> 188
[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> 189
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 as an investment or
determined if this prospectus is truthful or complete. Anyone who tells you
otherwise is committing a criminal offense.
<PAGE> 190
CONTENTS
Overview
Treasury Money Market Portfolio...............................................
Money Market Portfolio........................................................
Tax-Exempt Money Market Portfolio.............................................
Additional Information on Risk................................................
Your Account..................................................................
Distribution Arrangements/Sales Charges..................................
Explanation of Sales Price...............................................
How to Buy Shares........................................................
How to Sell Shares.......................................................
Investor Programs........................................................
General Transaction Policies.............................................
Distributions and Taxes.......................................................
Management of the Fund........................................................
Financial Highlights..........................................................
<PAGE> 191
OVERVIEW
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:
o A description of the Portfolio's investment objective (sometimes referred
to as its goal);
o The Portfolio's principal investment strategies (the steps it takes to try
to meet its goal);
o The principal risks associated with the Portfolio (factors that may prevent
it from meeting its goal);
o The Portfolio's past performance (how successful it's been in meeting its
goal); and
o The fees and expenses (including sales charges) you pay as an investor in
the Portfolio.
WHO MAY WANT TO INVEST IN THE MERCANTILE MONEY MARKET PORTFOLIOS?
The Treasury Money Market Portfolio may be appropriate for 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.
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.
(sidebar)
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.
<PAGE> 192
TREASURY MONEY MARKET PORTFOLIO
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 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.
(sidebar)
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 risk.
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.
There's no guarantee the Portfolio will be able to preserve the value of your
investment at $1.00 per share.
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. 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.
-2-
<PAGE> 193
INVESTOR A SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Since
TREASURY MONEY MARKET PORTFOLIO 1 Year 5 Years Inception*
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investor A Shares _____% _____% _____
- ---------------------------------------------------------------------------------------------
</TABLE>
* April 20, 1992.
To obtain the Portfolio's current 7-day yield, please call 1-800-452-2724.
FEES AND EXPENSES
There are no sales charges when you buy or sell Investor A Shares of the
Portfolio. The following table shows the fees and expenses that you pay if you
buy and hold shares of the Treasury Money Market Portfolio.
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Total Annual
Distribution Portfolio
Management (12b-1) and Operating
Fees Service Fees Other Expenses Expenses
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investor A
Shares
_____% _____% _____% _____%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Management Fees, Other Expenses and Total Annual Portfolio Operating
Expenses for the Portfolio's Investor A Shares for the last fiscal year were
less than the amounts shown above because certain of the Portfolio's service
providers voluntarily waived a portion of their fees and/or reimbursed the
Portfolio for certain other expenses. These fee waivers or reimbursements were
made in order to keep the annual fees and expenses for the Portfolio's Investor
A Shares at certain levels. Management Fees, Other Expenses and Total Annual
Portfolio Operating Expenses, after taking these fee waivers and expense
reimbursements into account, were ___%, ___% and ___%, respectively, for
Investor A Shares. The Fund's service providers intend to continue these fee
waivers and expense reimbursements but are not obligated to do so.
-3-
<PAGE> 194
EXAMPLE
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:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 year 3 years 5 years 10 years
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investor A
Shares $ $ $ $
- --------------------------------------------------------------------------------------------------------
</TABLE>
-4-
<PAGE> 195
MONEY MARKET PORTFOLIO
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to seek current income with liquidity
and stability of principal.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio invests 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.
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 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.
There's no guarantee the Portfolio will be able to preserve the value of your
investment at $1.00 per share.
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. 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
table reflects any sales charges payable on redemptions of the Portfolio's
Investor B Shares. The Portfolio's past performance does not necessarily
indicate how it will perform in the future. The returns for Investor B Shares
differed from the returns shown in the bar chart, because the two classes bear
different expenses.
-5-
<PAGE> 196
INVESTOR A SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Since
MONEY MARKET PORTFOLIO 1 Year 5 Years 10 Years Inception*
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investor A Shares _____% _____% ______% _____%
- ------------------------------------------------------------------------------------------------------------
Investor B Shares _____% N/A N/A _____%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
* March 24, 1983 for Investor A Shares; January 26, 1996 for Investor B Shares
To obtain the Portfolio's current 7-day yield, please call 1-800-452-2724.
FEES AND EXPENSES
The following tables show the fees and expenses that you pay if you buy and hold
shares of the Money Market Portfolio.
SHAREHOLDER FEES (FEES YOU PAY DIRECTLY)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Maximum deferred sales
Maximum sales charge (load) charge (load) shown as a % of
to buy shares, shown as a % of the offering price or sale price,
the offering price whichever is less
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investor A Shares None None
- -----------------------------------------------------------------------------------------------------------------
Investor B Shares None 5.00%(1)
- -----------------------------------------------------------------------------------------------------------------
</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.
-6-
<PAGE> 197
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Total Annual
Distribution Portfolio
Management (12b-1) and Operating
Fees Service Fees Other Expenses Expenses
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investor A
Shares _____% _____% _____% _____%
- ------------------------------------------------------------------------------------------------------------
Investor B
Shares _____% _____% _____% _____%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Management Fees, Other Expenses and Total Annual Portfolio Operating
Expenses for the Portfolio's Investor A Shares and Investor B Shares for the
last fiscal year were less than the amounts shown above because certain of the
Portfolio's service providers voluntarily waived a portion of their fees and/or
reimbursed the Portfolio for certain other expenses. These fee waivers or
reimbursements were 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, were
___%, ___% and ___%, respectively, for Investor A Shares and ___%, ___% and
___%, respectively, for Investor B Shares. The Fund's service providers intend
to continue these fee waivers and expense reimbursements but are not obligated
to do so.
EXAMPLE
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:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 year 3 years 5 years 10 years
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investor A
Shares $ $ $ $
- --------------------------------------------------------------------------------------------------------
Investor B
Shares $ $ $ $
- --------------------------------------------------------------------------------------------------------
If you hold Investor B Shares, you would pay the following expenses if you did not sell your shares:
- --------------------------------------------------------------------------------------------------------
$ $ $ $
- --------------------------------------------------------------------------------------------------------
</TABLE>
-7-
<PAGE> 198
TAX-EXEMPT MONEY MARKET PORTFOLIO
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 assets in short-term
municipal securities, which are securities issued by state and local governments
and other political or public bodies or agencies and 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.
(sidebar)
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.
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, 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.
There's no guarantee the Portfolio will be able to preserve the value of your
investment at $1.00 per share.
-8-
<PAGE> 199
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. 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.
Note: 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. Annual returns
for periods prior to October 2, 1995 reflect the performance of the Predecessor
Portfolio.
INVESTOR A SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Since
TAX-EXEMPT MONEY MARKET PORTFOLIO 1 Year 5 Years 10 Years Inception*
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investor A Shares _____% _____% _____% _____%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
* July 10, 1986.
To obtain the Portfolio's current 7-day yield, please call 1-800-452-2724.
FEES AND EXPENSES
There are no sales charges when you buy Investor A Shares of the Portfolio. The
following table shows the fees and expenses that you pay if you buy and hold
shares of the Tax-Exempt Money Market Portfolio.
-9-
<PAGE> 200
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Total Annual
Distribution Portfolio
Management (12b-1) and Operating
Fees Service Fees Other Expenses Expenses
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investor A
Shares _____% _____% _____% _____%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Management Fees, Other Expense and Total Annual Portfolio Operating
Expenses for the Portfolio's Investor A Shares for the last fiscal year were
less than the amounts shown above because certain of the Portfolio's service
providers voluntarily waived a portion of their fees and/or reimbursed the
Portfolio for certain other expenses. These fee waivers or reimbursements were
made in order to keep the annual fees and expenses for the Portfolio's Investor
A Shares at certain levels. Management Fees, Other Expenses and Total Annual
Portfolio Operating Expenses, after taking these fee waivers and expense
reimbursements into account, were ___%, ___% and ___%, respectively, for
Investor A Shares. The Fund's service providers intend to continue these fee
waivers and expense reimbursements but are not obligated to do so.
EXAMPLE
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:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 year 3 years 5 years 10 years
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investor A
Shares $ $ $ $
- --------------------------------------------------------------------------------------------------------
</TABLE>
-10-
<PAGE> 201
ADDITIONAL INFORMATION ON RISK
The principal risks of investing in each Portfolio are described above. The
following supplements that discussion.
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.
SELECTION OF INVESTMENTS
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolios and how they may advance the Portfolios' investment
objectives. It is possible, however, that these evaluations will prove to be
inaccurate.
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.
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.
-11-
<PAGE> 202
YOUR ACCOUNT
DISTRIBUTION ARRANGEMENTS/SALES CHARGES
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>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
TYPES OF CHARGES INVESTOR A SHARES INVESTOR B SHARES
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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 Subject to annual distribution Subject to annual distribution
Service Fees and shareholder servicing fees and shareholder servicing fees
of up to 0.25% 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>
-12-
<PAGE> 203
CALCULATION OF SALES CHARGES
INVESTOR B SHARES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Number of years since purchase CDSC as a % of dollar amount subject to the charge
- -------------------------------------------------------------------------------------------------
<S> <C>
1 or less 5.0%
- -------------------------------------------------------------------------------------------------
1-2 4.0%
- -------------------------------------------------------------------------------------------------
2-3 3.0%
- -------------------------------------------------------------------------------------------------
3-4 3.0%
- -------------------------------------------------------------------------------------------------
4-5 2.0%
- -------------------------------------------------------------------------------------------------
5-6 1.0%
- -------------------------------------------------------------------------------------------------
More than 6 None
- -------------------------------------------------------------------------------------------------
</TABLE>
For purposes of calculating the CDSC, all purchases made during a calendar month
are considered to be made on the first day of that month. The CDSC is based on
the value of the Investor B Shares on the date that they are sold or the
original cost of the shares, whichever is lower. To keep your CDSC as low as
possible each time you sell shares, the Fund will first sell any shares in your
account that are not subject to a CDSC. If there are not enough of these, the
Fund will sell the shares that have the lowest CDSC.
No CDSC is assessed on redemptions of Investor B Shares if:
o The shares were purchased with reinvested dividends or capital gains
distributions.
o The shares were purchased through an exchange of Investor B Shares of
another Portfolio.
o 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.
o The redemption is in connection with the death or disability of the
shareholder.
o You participate in the Automatic Withdrawal Plan and your annual
withdrawals do not exceed 12% of your account's value.
o Your account falls below the Portfolio's minimum account size, and the Fund
liquidates your account (see page __).
o 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.
-13-
<PAGE> 204
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.
EXPLANATION OF SALES PRICE
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.
(sidebar)
BUSINESS DAYS DEFINED
A business day is any day that both the New York Stock Exchange (NYSE) and the
Federal Reserve Bank of St. Louis are open for business. Currently, the Fund
observes the following holidays: New Year's Day, Martin Luther King Jr. Day,
Presidents' Day, Good Friday, Memorial Day (observed), Independence Day
(observed), Labor Day, Columbus Day, Veterans' Day, Thanksgiving and Christmas.
o Each Portfolio's investments are valued at amortized cost, which is
approximately equal to market value.
o If you properly place a purchase order 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.
HOW TO BUY SHARES
Investing in the Mercantile Money Market Portfolios is quick and convenient. You
can purchase Investor A Shares in any of the following ways:
o 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.
-14-
<PAGE> 205
o 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.
o 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
the Fund at P.O. Box 78069, St. Louis, Missouri 63178. If you are buying
shares of the Money Market Portfolio, 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.
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 an 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.
MINIMUM INVESTMENTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
To Open Your Account To Add to Your Account
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Regular accounts $1,000 $100
- ------------------------------------------------------------------------------------------------
Sweep program through your None None
financial institution
- ------------------------------------------------------------------------------------------------
Wrap fee program through your
financial institution None None
- ------------------------------------------------------------------------------------------------
Payroll Deduction Program* None $ 25
- ------------------------------------------------------------------------------------------------
Automatic Exchange $1,000 minimum account
Program* $5,000 balance
- ------------------------------------------------------------------------------------------------
Automatic Investment
Program* $ 50 $ 50
- ------------------------------------------------------------------------------------------------
</TABLE>
* See Investor Programs below.
HOW TO SELL SHARES
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:
-15-
<PAGE> 206
o 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.
o BY MAIL. Send your written redemption request to: Mercantile Mutual Funds,
Inc., P.O. Box 78069 - Tram 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.
o 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. The proceeds of the sale
of Investor B Shares of the Money Market Portfolio will be reduced by the
applicable contingent deferred sales charge (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, 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.
-16-
<PAGE> 207
(sidebar)
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 or more, 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.
-17-
<PAGE> 208
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 20th day
(or the next business day after the 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 contingent deferred sales charge 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.
-18-
<PAGE> 209
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 25th 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.
-19-
<PAGE> 210
GENERAL TRANSACTION POLICIES
The Fund reserves the right to:
o Refuse any order to buy shares.
o Reject any exchange request.
o Change or cancel the procedures for selling or exchanging shares by
telephone at any time.
o 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.
o Send redemption proceeds within seven days after receiving a request, if an
earlier payment could adversely affect a Portfolio.
o Modify or terminate the Automatic Exchange, Automatic Investment and
Automatic Withdrawal programs at any time.
o Modify or terminate the exchange privilege after 60 days' written notice to
shareholders.
o Modify or terminate the checkwriting privilege after 30 days' written
notice to shareholders.
o 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.
-20-
<PAGE> 211
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.
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.
o TREASURY 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.
o TAX-EXEMPT MONEY MARKET PORTFOLIO
The Portfolio intends to meet certain federal tax requirements so that
distribution 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.
-21-
<PAGE> 212
o 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.
o For more information regarding the taxation of the Portfolios, consult the
Statement of Additional Information 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.
(sidebar)
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.
-22-
<PAGE> 213
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:
- ------------------------------------------------------------------------------
Investment advisory fees
Portfolio as a % of net assets
- ------------------------------------------------------------------------------
Treasury Money Market Portfolio
- ------------------------------------------------------------------------------
Money Market Portfolio
- ------------------------------------------------------------------------------
Tax-Exempt Money Market Portfolio
- ------------------------------------------------------------------------------
-23-
<PAGE> 214
FINANCIAL HIGHLIGHTS
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
[____________________], independent accountants, whose report, along with the
Portfolios' financial statements, is included in the Fund's Annual Report to
Shareholders, and [___________________________________________] the SAI.
-24-
<PAGE> 215
MONEY MARKETS INVESTOR A & B
TREASURY MONEY MARKET PORTFOLIO
(FOR A SHARE(a) OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
--------------------------------------------------------------------
1998 1997 1996 1995 1994(a)
---- ---- ---- ---- -------
INVESTOR A INVESTOR A INVESTOR A INVESTOR A INVESTOR A
SHARES SHARES SHARES SHARES SHARES
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period............... $ 1.00 $ 1.00 $ 1.00 $ 1.00
------ ------ ------ ------
Investment Activities
Net investment income............................ 0.044 0.044 0.048 0.031
------ ------ ------ ------
Total from Investment Activities................. 0.044 0.044 0.048 0.031
------ ------ ------ ------
Distributions
Net investment income............................ (0.044) (0.044) (0.048) (0.031)
------ ------ ------ ------
Total Distributions.............................. (0.044) (0.044) (0.048) (0.031)
------ ------ ------ ------
Net Asset Value, End of Period..................... $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ====== ====== ======
Total Return....................................... 4.53% 4.46% 4.93% 3.16%
Ratios/Supplemental Data:
Net Assets at end of period (000).................. $8,409 $7,667 $2,776 $1,713
Ratio of expenses to average net assets
(including waivers).............................. 0.77% 0.81% 0.78% 0.71%
Ratio of net investment income to average net
assets (including waivers)....................... 4.43% 4.35% 4.84% 3.14%
Ratio of expenses to average net assets
(before waivers)*................................ 0.92% 0.96% 0.93% 0.94%
Ratio of net investment income to
average net assets (before waivers)*............. 4.28% 4.20% 4.69% 2.90%
</TABLE>
- -----------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) On September 27, 1994, the Portfolio redesignated Investor Shares as
"Investor A" Shares.
-25-
<PAGE> 216
MONEY MARKET PORTFOLIO
(FOR A SHARE(a) OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
--------------------------------------------------------------------------------------------
JAN. 26, 1996
1998 1997 1996 1995 1994(a) 1998 1997 TO
---------- -------- -------- -------- -------- -------- -------- NOV. 30, 1996(c)
INVESTOR INVESTOR INVESTOR INVESTOR INVESTOR INVESTOR INVESTOR INVESTOR B
A SHARES A SHARES A SHARES A SHARES A SHARES B SHARES B SHARES SHARES
-------- -------- -------- -------- -------- -------- -------- ------
<S> <C> <C> <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............. 0.048 0.047 0.052 0.033 0.041 0.033
-------- -------- -------- -------- -------- -------
Total from Investment
Activities..................... 0.048 0.047 0.052 0.033 0.041 0.033
-------- -------- -------- -------- ------- -------
Distributions
Net investment income............. (0.048) (0.047) (0.052) (0.033) (0.041) (0.033)
--------- -------- -------- -------- ------- --------
Total Distributions............. (0.048) (0.047) (0.052) (0.033) (0.041) (0.033)
--------- -------- -------- -------- ------- --------
Net Asset Value,
End of Period..................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= ======= =======
Total Return........................ 4.93% 4.81% 5.33% 3.37% 4.15% 3.35%(b)
Ratios/Supplemental Data:
Net Assets at end of
period (000)...................... $164,777 $91,166 $64,865 $48,384 $ 73 $ 41
Ratio of expenses to average
net assets (including
waivers).......................... 0.77% 0.78% 0.77% 0.78% 1.52% 1.47%(d)
Ratio of net investment
income to average net
assets (including waivers)........ 4.84% 4.70 5.20% 3.35% 4.10% 3.73%(d)
Ratio of expenses to
average net assets
(before waivers)*................. 0.92% 0.93% 0.92% 0.93% 1.67% 1.68%(d)
Ratio of net investment
income to average net
assets (before waivers)*.......... 4.69% 4.55% 5.05% 3.20% 3.95% 3.52%(d)
</TABLE>
- ----------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) On September 27, 1994, the Portfolio redesignated Investor Shares as
"Investor A" Shares.
(b) Not Annualized.
(c) Period from date of initial public investment.
(d) Annualized.
-26-
<PAGE> 217
TAX-EXEMPT MONEY MARKET PORTFOLIO(a)
(FOR A SHARE(B) OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-----------------------------------------------------------------------
1998 1997 1996 1995(e) 1994(b)
---------- ---------- ---------- ---------- -----------
INVESTOR A INVESTOR A INVESTOR A INVESTOR A INVESTOR A
SHARES SHARES SHARES SHARES SHARES
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period........ $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- --------
Investment Activities
Net investment income...... 0.028 0.028 0.014 0.027
-------- ----- ------ --------
Total from Investment
Activities............... 0.028 0.028 0.014 0.027
-------- ----- ------ --------
Distributions
Net investment income...... (0.028) (0.028) (0.014) (0.027)
-------- ------ ------ --------
Total Distributions........ (0.028) (0.028) (0.014) (0.027)
-------- ------ ------ --------
Net Asset Value,
End of Period.............. $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ========
Total Return................. 2.88% 2.83% 1.45%(c) 2.70%
Ratios/Supplemental Data:
Net assets at end of period
(000)...................... $15,789 $17,984 $5,403 $5,138
Ratio of expenses to
average net assets
(including waivers)........ 0.77% 0.75% 0.94%(d) 0.84%
Ratio of net investment
income to average net
assets (including waivers). 2.82% 2.78% 2.87%(d) 2.63%
Ratio of expenses to
average net assets
(before waivers)*.......... 0.82% 0.80% 0.99%(d) 0.93%
Ratio of net investment
income to average
net assets (before
waivers)*.................. 2.77% 2.73% 2.82%(d) 2.54%
</TABLE>
- ------------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) The Portfolio commenced operations on July 10, 1986 as an investment
portfolio of The ARCH Tax-Exempt Trust. On October 27, 1995, it was
reorganized as a new portfolio of the Fund.
(b) On September 27, 1994, the Portfolio redesignated Investor Shares as
"Investor A" Shares.
(c) Not Annualized.
(d) Annualized.
(e) Upon its reorganization as a portfolio of the Fund the Portfolio changed
its fiscal year-end from May 31 to November 30.
-27-
<PAGE> 218
[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> 219
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 as an investment or
determined if this prospectus is truthful or complete. Anyone who tells you
otherwise is committing a criminal offense.
<PAGE> 220
CONTENTS
Overview
U.S. Government Securities Portfolio........................................
Intermediate Corporate Bond Portfolio.......................................
Bond Index Portfolio........................................................
Government & Corporate Bond Portfolio.......................................
Additional Information on Risk..............................................
Your Account................................................................
Distribution Arrangements/Sales Charges................................
Explanation of Sales Price.............................................
How to Buy Shares......................................................
How to Sell Shares.....................................................
Investor Programs......................................................
General Transaction Policies...........................................
Distributions and Taxes.....................................................
Management of the Fund......................................................
Financial Highlights........................................................
<PAGE> 221
OVERVIEW
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:
o A description of the Portfolio's investment objective (sometimes referred
to as its goal);
o The Portfolio's principal investment strategies (the steps it takes to try
to meet its goal);
o The principal risks associated with the Portfolio (factors that may prevent
it from meeting its goal);
o The Portfolio's past performance (how successful it's been in meeting its
goal); and
o 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?
The Mercantile 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.
Before investing in a Mercantile Taxable Bond 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.
(sidebar)
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.
-1-
<PAGE> 222
U.S. GOVERNMENT SECURITIES PORTFOLIO
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 invests 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 one to 30 years.
(sidebar)
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.
(sidebar)
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").
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, which could adversely affect the
Portfolio's value.
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.
Repurchase agreements carry the risk that the other party may not fulfill its
obligations under the agreement.
-2-
<PAGE> 223
(sidebar)
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.
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. 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 selected 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. 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.
INVESTOR A SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Since
U.S. GOVERNMENT SECURITIES PORTFOLIO 1 Year 5 Years 10 Years Inception*
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investor A Shares _____% _____% _____% _____%
- ------------------------------------------------------------------------------------------------------------
Investor B Shares _____% N/A N/A _____%
- ------------------------------------------------------------------------------------------------------------
Lehman Brothers Intermediate
Government Bond Index _____% _____% _____% _____%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
* June 2, 1988 for Investor A Shares; March 1, 1995 for Investor B Shares.
(sidebar)
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.
-3-
<PAGE> 224
FEES AND EXPENSES
The following tables show the fees and expenses that you pay if you buy and hold
shares of the U.S. Government Securities Portfolio.
SHAREHOLDER FEES (FEES YOU PAY DIRECTLY)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Maximum deferred sales
Maximum sales charge (load) charge (load) shown as a % of
to buy shares, shown as a % of the offering price or sale price,
the offering price whichever is less
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investor A Shares 2.50%(1) None
- -----------------------------------------------------------------------------------------------------------------
Investor B Shares None 5.00%(2)
- -----------------------------------------------------------------------------------------------------------------
</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.
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Total Annual
Distribution Portfolio
Management (12b-1) and Operating
Fees Service Fees Other Expenses Expenses
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investor A
Shares _____% _____% _____% _____%
- ------------------------------------------------------------------------------------------------------------
Investor B
Shares _____% _____% _____% _____%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Investor A Shares and Investor B Shares for the last fiscal year
were less than the amounts shown above because certain of the Portfolio's
service providers voluntarily waived a portion of their fees and/or reimbursed
the Portfolio for certain other expenses. These fee waivers or reimbursements
were 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, were ___% and ___%, respectively, for
Investor A Shares and ___% and ___%, respectively, for Investor B Shares. The
Fund's service providers intend to continue these fee waivers and expense
reimbursements but are not obligated to do so.
-4-
<PAGE> 225
EXAMPLE
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:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 year 3 years 5 years 10 years
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investor A
Shares $ $ $ $
- --------------------------------------------------------------------------------------------------------
Investor B
Shares $ $ $ $
- --------------------------------------------------------------------------------------------------------
If you hold Investor B Shares, you would pay the following expenses if you did
not sell your shares:
- --------------------------------------------------------------------------------------------------------
$ $ $ $
- --------------------------------------------------------------------------------------------------------
</TABLE>
-5-
<PAGE> 226
INTERMEDIATE CORPORATE BOND PORTFOLIO
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 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
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.
In making investment decisions, the Adviser will consider a number of factors
including current yield, maturity, yield to maturity, anticipated changes to
interest rates, and the overall quality of the investment. The Portfolio's
average weighted maturity will generally be between three and ten years.
(sidebar)
INVESTMENT GRADE DEBT SECURITIES are those of medium credit quality or better as
determined by a national rating agency, such as Standard & Poor's (debt
securities rated in the four highest rating categories, i.e. BBB or better) and
Moody's Investors Service (debt securities rated in the four highest rating
categories, i.e. Baa or better). The higher the credit rating, the less likely
it is that the issuer of the securities will default on its principal and
interest payments.
(sidebar)
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.
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
-6-
<PAGE> 227
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, which could adversely affect the Portfolio's
value.
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, different accounting standards and political
instability.
(sidebar)
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.
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. 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
selected 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. 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.
INVESTOR A SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
-7-
<PAGE> 228
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Since
INTERMEDIATE CORPORATE BOND PORTFOLIO 1 Year Inception*
- -------------------------------------------------------------------------------
<S> <C> <C>
Investor A Shares _____% _____%
- -------------------------------------------------------------------------------
Lehman Brothers Intermediate Corporate
Bond Index _____% _____%
- -------------------------------------------------------------------------------
</TABLE>
* February 17, 1997.
(sidebar)
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.
FEES AND EXPENSES
The following tables show the fees and expenses that you pay if you buy and hold
shares of the Intermediate Corporate Bond Portfolio.
SHAREHOLDER FEES (FEES YOU PAY DIRECTLY)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Maximum deferred sales
Maximum sales charge (load) charge (load) shown as a % of
to buy shares, shown as a % of the offering price or sale price,
the offering price whichever is less
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
Investor A Shares 4.75%(1) None
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Reduced sales charges may be available. See "Distribution Arrangements/Sales
Charges" below.
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Total Annual
Distribution Portfolio
Management (12b-1) and Operating
Fees Service Fees Other Expenses Expenses
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investor A
Shares _____% _____% _____% _____%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Management Fees, Other Expenses and Total Annual Portfolio Operating
Expenses for the Portfolio's Investor A Shares for the last fiscal year were
less than the amounts shown above because certain of the Portfolio's service
providers voluntarily waived a portion of their fees and/or reimbursed the
Portfolio for certain other expenses. These fee waivers or reimbursements were
made in order to keep the annual fees and expenses for the Portfolio's Investor
A Shares at
-8-
<PAGE> 229
certain levels. Management Fees, Other Expenses and Total Annual
Portfolio Operating Expenses, after taking these fee waivers and expense
reimbursements into account, were ___%, ___% and ___%, respectively, for
Investor A Shares. The Fund's service providers intend to continue these fee
waivers and expense reimbursements but are not obligated to do so.
EXAMPLE
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:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 year 3 years 5 years 10 years
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investor A
Shares $ $ $ $
- --------------------------------------------------------------------------------------------------------
</TABLE>
-9-
<PAGE> 230
BOND INDEX PORTFOLIO
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"). Unlike most of the Mercantile Taxable Bond Portfolios,
which require shareholder approval to change their investment objective, the
Bond Index Portfolio's investment objective can be changed by the Funds 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 sophisticated
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.
(sidebar)
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.
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,
which could adversely affect the Portfolio's value.
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.
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. 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 the
Lehman Aggregate. Both the bar chart and table assume
-10-
<PAGE> 231
reinvestment of all dividends and distributions. The Portfolio's past
performance does not necessarily indicate how it will perform in the future. 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.
INVESTOR A SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Since
BOND INDEX PORTFOLIO 1 Year Inception*
- --------------------------------------------------------------------------------
<S> <C> <C>
Investor A Shares _____% _____%
- --------------------------------------------------------------------------------
Lehman Brothers Aggregate Bond Index _____% _____%
- --------------------------------------------------------------------------------
</TABLE>
* February 10, 1997.
(sidebar)
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.
FEES AND EXPENSES
The following tables show the fees and expenses that you pay if you buy and hold
shares of the Bond Index Portfolio.
SHAREHOLDER FEES (FEES YOU PAY DIRECTLY)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Maximum deferred sales
Maximum sales charge (load) charge (load) shown as a % of
to buy shares, shown as a % of the offering price or sale price,
the offering price whichever is less
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
Investor A Shares 2.50%(1) None
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Reduced sales charges may be available. See "Distribution Arrangements/Sales
Charges" below.
-11-
<PAGE> 232
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Total Annual
Distribution Portfolio
Management (12b-1) and Operating
Fees Service Fees Other Expenses Expenses
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investor A
Shares _____% _____% _____% _____%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Management Fees, Other Expenses and Total Annual Portfolio Operating
Expenses for the Portfolio's Investor A Shares for the last fiscal year were
less than the amounts shown above because certain of the Portfolio's service
providers voluntarily waived a portion of their fees and/or reimbursed the
Portfolio for certain other expenses. These fee waivers or reimbursements were
made in order to keep the annual fees and expenses for the Portfolio's Investor
A Shares at certain levels. Management Fees, Other Expenses and Total Annual
Portfolio Operating Expenses, after taking these fee waivers and expense
reimbursements into account, were ___%, ___% and ___%, respectively, for
Investor A Shares. The Fund's service providers intend to continue these fee
waivers and expense reimbursements but are not obligated to do so.
EXAMPLE
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:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 year 3 years 5 years 10 years
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investor A
Shares $ $ $ $
- --------------------------------------------------------------------------------------------------------
</TABLE>
-12-
<PAGE> 233
GOVERNMENT & CORPORATE BOND PORTFOLIO
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, debentures and securities
convertible into common stock. 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. Under normal market conditions, however, the Portfolio intends
to invest at least 65% of its 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.
In making investment decisions, the Adviser considers 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 vary from time to time depending on current
market and economic conditions and the Adviser's assessment of probable changes
in interest rates.
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,
which could adversely affect the Portfolio's value.
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.
-13-
<PAGE> 234
Foreign investments may be riskier than U.S. investments because of government
restrictions, different accounting standards and political instability.
(sidebar)
PORTFOLIO MANAGER
George J. Schupp is the person primarily responsible for the day-to-day
management of the Portfolio. Mr. Schupp joined MVA in 1983 and has 22 years of
prior investment experience. He has managed the Portfolio since February 1998.
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. 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 selected 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. 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.
INVESTOR A SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
GOVERNMENT & CORPORATE BOND
PORTFOLIO Since
1 Year 5 Years 10 Years Inception*
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investor A Shares _____% _____% _____% _____%
- ------------------------------------------------------------------------------------------------------------
Investor B Shares _____% N/A N/A _____%
- ------------------------------------------------------------------------------------------------------------
Lehman Brothers Aggregate Bond Index _____% _____% _____% _____%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
* June 15, 1988 for Investor A Shares; March 1, 1995 for Investor B Shares.
-14-
<PAGE> 235
FEES AND EXPENSES
The following tables show the fees and expenses that you pay if you buy and hold
shares of the Government & Corporate Bond Portfolio.
SHAREHOLDER FEES (FEES YOU PAY DIRECTLY)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Maximum deferred sales
Maximum sales charge (load) charge (load) shown as a % of
to buy shares, shown as a % of the offering price or sale price,
the offering price whichever is less
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investor A Shares 4.75(1)% None
- -----------------------------------------------------------------------------------------------------------------
Investor B Shares None 5.00%(2)
- -----------------------------------------------------------------------------------------------------------------
</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.
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Total Annual
Distribution Portfolio
Management (12b-1) and Operating
Fees Service Fees Other Expenses Expenses
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investor A Shares _____% _____% _____% _____%
- ------------------------------------------------------------------------------------------------------------
Investor B Shares _____% _____% _____% _____%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Investor A Shares and Investor B Shares for the last fiscal year
were less than the amounts shown above because certain of the Portfolio's
service providers voluntarily waived a portion of their fees and/or reimbursed
the Portfolio for certain other expenses. These fee waivers or reimbursements
were 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, were ___% and ___%, respectively, for
Investor A Shares and ___% and ___%, respectively, for Investor B shares. The
Fund's service providers intend to continue these fee waivers and expense
reimbursements but are not obligated to do so.
-15-
<PAGE> 236
EXAMPLE
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:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 year 3 years 5 years 10 years
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investor A
Shares $ $ $ $
- --------------------------------------------------------------------------------------------------------
Investor B
Shares $ $ $ $
- --------------------------------------------------------------------------------------------------------
If you hold Investor B Shares, you would pay the following expenses if you did
not sell your shares:
$ $ $ $
- --------------------------------------------------------------------------------------------------------
</TABLE>
-16-
<PAGE> 237
ADDITIONAL INFORMATION ON RISK
The principal risks of investing in each Portfolio are described above. 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), 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.
SELECTION OF INVESTMENTS
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolios and how they may advance the Portfolios' investment
objectives. It is possible, however, that these evaluations will prove to be
inaccurate.
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.
FREQUENT TRADING
Each Portfolio may trade its investments frequently in trying to achieve its
investment goal. This strategy increases the chances that the Portfolio will pay
investors short-term capital gains. These gains are taxable at higher rates than
long-term capital gains. Frequent trading could also mean higher brokerage
commissions and other transaction costs, which could reduce the Portfolio's
returns.
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.
-17-
<PAGE> 238
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.
-18-
<PAGE> 239
YOUR ACCOUNT
DISTRIBUTION ARRANGEMENTS/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>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
TYPES OF CHARGES INVESTOR A SHARES INVESTOR B SHARES
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sales Charge (Load) A front-end sales charge is A contingent deferred sales
assessed at the time of your charge(CDSC) is assessed on
purchase. shares redeemed within six
years of purchase. Investor B
Shares automatically convert
to Investor A Shares eight
years after purchase.
- ------------------------------------------------------------------------------------------------------------------
Distribution (12b-1) and Subject to annual distribution Subject to annual distribution
Service Fees and shareholder servicing fees and 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>
-19-
<PAGE> 240
CALCULATION OF SALES CHARGES
INVESTOR A SHARES
INTERMEDIATE CORPORATE BOND AND GOVERNMENT & CORPORATE BOND PORTFOLIOS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Amount of Sales charge as a % Sales charge as a % Dealers'
transaction of the offering price of net asset value reallowance as a %
per share per share of 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% 1.75%
- -----------------------------------------------------------------------------------------------------
$1 million or more 0.50% 0.50% 0.40%
- -----------------------------------------------------------------------------------------------------
</TABLE>
U.S. GOVERNMENT SECURITIES AND BOND INDEX PORTFOLIOS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Amount of Sales charge as a % Sales charge as a % Dealers'
transaction of the offering price of net asset value reallowance as a %
per share per share of 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>
-20-
<PAGE> 241
The Fund's distributor reserves the right to pay the entire sales charges to
dealers. In addition, the 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.
CALCULATION OF SALES CHARGES
INVESTOR B SHARES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Number of years since purchase CDSC as a % of dollar amount subject to the charge
- -------------------------------------------------------------------------------------------------
<S> <C>
1 or less 5.0%
- -------------------------------------------------------------------------------------------------
1-2 4.0%
- -------------------------------------------------------------------------------------------------
2-3 3.0%
- -------------------------------------------------------------------------------------------------
3-4 3.0%
- -------------------------------------------------------------------------------------------------
4-5 2.0%
- -------------------------------------------------------------------------------------------------
5-6 1.0%
- -------------------------------------------------------------------------------------------------
More than 6 None
- -------------------------------------------------------------------------------------------------
</TABLE>
For purposes of calculating the CDSC, all purchases made during a calendar month
are considered to be made on the first day of that month. The CDSC is based on
the value of the Investor B Shares on the date that they are sold or the
original cost of the shares, whichever is lower. To keep your CDSC as low as
possible each time you sell shares, the Fund will first sell any shares in your
account that are not subject to a CDSC. If there are not enough of these, the
Fund will sell the shares that have the lowest CDSC.
SALES CHARGE REDUCTIONS AND WAIVERS
Additional purchases of Investor A Shares by existing Investor A shareholder
accounts at March 31, 1999 in the Intermediate Corporate Bond and Government &
Corporate Bond Portfolios are eligible for reduced sales charges. See the
Statement of Additional Information 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:
-21-
<PAGE> 242
o 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.
o QUANTITY DISCOUNTS. As the dollar amount of your purchase increases, your
sales charge may decrease (see the tables on page __). In addition, the
Fund will combine purchases made on the same day by you and your immediate
family members when calculating applicable sales charges.
o 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.
o 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.
In addition, there's no sales charge when you buy INVESTOR A SHARES if:
o You buy shares by reinvesting your dividends and capital gains
distributions.
o You're an officer or director of the Fund (or an immediate family member of
any such individual).
o 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).
o 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).
o You buy shares pursuant to a wrap-free program offered by a broker-dealer
or other financial institution.
o 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 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.
o You buy shares through a payroll deduction program
o You're an employee of any sub-adviser to the Fund.
o 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.
o 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.
o You're another investment company distributed by the Fund's distributor or
its affiliates.
-22-
<PAGE> 243
If you think you qualify for any these exemptions, please call the Fund at
1-800-452-2724 before buying any shares.
(sidebar)
PURCHASE OF INVESTOR A SHARES AT NET ASSET VALUE
From time to time, the 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.
No CDSC is assessed on redemptions of INVESTOR B SHARES if:
o The shares were purchased with reinvested dividends or capital gains
distributions.
o The shares were purchased through an exchange of Investor B Shares of
another Portfolio.
o 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.
o The redemption is in connection with the death or disability of the
shareholder.
o You participate in the Automatic Withdrawal Plan and your annual
withdrawals do not exceed 12% of your account's value.
o Your account falls below the Portfolio's minimum account size, and the Fund
liquidates your account (see page __).
o 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.
-23-
<PAGE> 244
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.
EXPLANATION OF SALES PRICE
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.
(sidebar)
BUSINESS DAYS DEFINED
A business day is any day that both the New York Stock Exchange (NYSE) and the
Federal Reserve Bank of St. Louis are open for business. Currently, the Fund
observes the following holidays: New Year's Day, Martin Luther King Jr. Day,
Presidents' Day, Good Friday, Memorial Day (observed), Independence Day
(observed), Labor Day, Columbus Day, Veterans' Day, Thanksgiving and Christmas.
o 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.
o If you properly place a purchase order 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 canceled.
HOW TO BUY SHARES
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:
-24-
<PAGE> 245
o 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.
o 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.
o 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
the Fund at P.O. Box 78069, 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.
<TABLE>
<CAPTION>
MINIMUM INVESTMENTS
- ------------------------------------------------------------------------------------------------
To Open Your Account To Add to Your Account
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Regular accounts $1,000 $100
- ------------------------------------------------------------------------------------------------
Sweep program through your None None
financial institution
- ------------------------------------------------------------------------------------------------
Wrap fee program through your
financial institution None None
- ------------------------------------------------------------------------------------------------
Payroll Deduction Program* None $ 25
- ------------------------------------------------------------------------------------------------
Automatic Exchange $1,000 minimum account
Program* $5,000 balance
- ------------------------------------------------------------------------------------------------
Automatic Investment
Program* $ 50 $ 50
- ------------------------------------------------------------------------------------------------
</TABLE>
* See Investor Programs below.
HOW TO SELL SHARES
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:
o 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.
-25-
<PAGE> 246
o BY MAIL. Send your written redemption request to: Mercantile Mutual Funds,
Inc., P.O. Box 78069 - Tram 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.
o 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. The proceeds of the sale
of Investor B Shares will be reduced by the applicable contingent deferred sales
charge (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.
(sidebar)
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 or more, 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.
-26-
<PAGE> 247
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 20th day
(or the next business day after 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 from 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 contingent deferred sales
charge 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.
-27-
<PAGE> 248
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 25th 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.
-28-
<PAGE> 249
GENERAL TRANSACTION POLICIES
The Fund reserves the right to:
o Refuse any order to buy shares.
o Reject any exchange request.
o Change or cancel the procedures for selling or exchanging shares by
telephone at any time.
o 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.
o Send redemption proceeds within seven days after receiving a request, if an
earlier payment could adversely affect a Portfolio.
o Modify or terminate the Automatic Exchange, Automatic Investment and
Automatic Withdrawal programs at any time.
o Modify or terminate the exchange privilege after 60 days' written notice to
shareholders.
o 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.
-29-
<PAGE> 250
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.
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.
o 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.
o 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.
o 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.
o Distributions on, and sales, exchanges and redemptions of, shares held in
an IRA or other tax-qualified plan will not be currently taxable.
o For more information regarding the taxation of the Portfolios, consult the
Statement of Additional Information 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 you
specific situation.
-30-
<PAGE> 251
(sidebar)
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.
-31-
<PAGE> 252
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
- ------------------------------------------------------------------------------------
Intermediate Corporate Bond Portfolio
- ------------------------------------------------------------------------------------
Bond Index Portfolio
- ------------------------------------------------------------------------------------
Government & Corporate Bond Portfolio
- ------------------------------------------------------------------------------------
</TABLE>
-32-
<PAGE> 253
FINANCIAL HIGHLIGHTS
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
[____________________], independent accountants, whose report, along with the
Portfolios' financial statements, is included in the Fund's Annual Report to
Shareholders, and [___________________________________________] the SAI.
-33-
<PAGE> 254
U.S. GOVERNMENT SECURITIES PORTFOLIO
(FOR A SHARE(a) OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994(a)
---- ---- ---- ---- -------
INVESTOR A INVESTOR A INVESTOR A INVESTOR A INVESTOR
SHARES SHARES SHARES SHARES SHARES
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period................... $10.67 $10.85 $10.05 $11.20
------ ------ ------ -------
Investment Activities
Net investment income................. 0.60 0.62 0.64 0.61
Net realized and unrealized gains
(losses) from investments............ (0.07) (0.15) 0.80 (1.00)
------ ------- ------ --------
Total from Investment Activities...... .53 0.47 1.44 (0.39)
----- ------ ------ --------
Distributions
Net investment income................. (0.58) (0.62) (0.64) (0.61)
In excess of net investment income.... -- (0.03) -- --
Net realized gains.................... -- -- -- --
In excess of net realized gains....... -- -- -- (0.18)
----- ------ --------
Total Distributions.................. (0.58) (0.65) (0.64) (0.79)
------- ------ -------- -------
Net Asset Value, End of Period.......... $10.62 $10.67 $10.85 $10.05
====== ====== ====== ======
Total Return (excludes sales charges)... 5.20% 4.57% 14.66% (3.14)%
Ratios/Supplemental Data:
Net Assets at end of period (000)....... $5,181 $7,153 $8,179 $9,631
Ratio of expenses to average net
assets (including waivers)............ 0.97% 0.97% 0.97% 0.96%
Ratio of net investment income to
average net assets (including
waivers).............................. 5.56% 5.82% 6.05% 5.98%
Ratio of expenses to average net
assets (before waivers)*.............. 1.07% 1.07% 1.07% 1.06%
Ratio of net investment income to
average net assets (before
waivers)*............................. 5.46% 5.72% 5.95% 5.88%
Portfolio turnover**.................... 100.33% 53.76% 93.76% 50%
</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 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.
-34-
<PAGE> 255
U.S. GOVERNMENT SECURITIES PORTFOLIO
(FOR A SHARE(a) OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
INVESTOR B SHARES
---------------------------------------------------------
YEAR YEAR YEAR MARCH 1,
ENDED ENDED ENDED 1995 TO
NOV. 30, NOV. 30, NOV. 30, NOV. 30,
1998 1997 1996 1995(b)
---- ---- ---- -------
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.................................. $10.66 $10.84 $10.34
------ ------ ------
Investment Activities
Net investment income................................ 0.51 0.55 0.31
Net realized and unrealized gains
(losses) from investments........................... (0.05) (0.15) 0.50
------ ------ ------
Total from Investment Activities..................... 0.46 0.40 0.81
------ ------ ------
Distributions
Net investment income................................ (0.51) (0.55) (0.31)
Net realized gains................................... -- -- --
------ ------ ------
In excess of realized gains.......................... -- (0.03) --
------ ------ ------
Total Distributions................................. (0.51) (0.58) (0.31)
------ ------ ------
Net Asset Value, End of Period......................... $10.61 $10.66 $10.84
====== ====== ======
Total Return (excludes sales charges).................. 4.47% 3.85% 12.85%(c)
Ratios/Supplemental Data:
Net Assets at end of period (000)...................... $466 $359 $41
Ratio of expenses to average net
assets (including waivers)........................... 1.67% 1.66% 1.68%(d)
Ratio of net investment income to
average net assets (including
waivers)............................................. 4.84% 5.06% 5.37%(d)
Ratio of expenses to average net
assets (before waivers)*............................. 1.77% 1.76% 1.78%(d)
Ratio of net investment income to
average net assets (before
waivers)*............................................ 4.74% 4.96% 5.27%(d)
Portfolio turnover**................................. 100.33% 53.76% 93.76%
</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 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 date of initial public investment.
(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.
-35-
<PAGE> 256
INTERMEDIATE CORPORATE BOND PORTFOLIO
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 10, 1997
NOV. 30, TO
1998 NOVEMBER 30, 1997(a)
-------------- --------------------
INVESTOR A INVESTOR A
SHARES SHARES
------ ------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.......................... $10.00
------
Investment Activities
Net investment income..................................... 0.52
Net realized and unrealized gains (losses)
from investments......................................... 0.11
-----
Total from Investment Activities........................... 0.63
-----
Distributions
Net investment income..................................... (0.52)
-------
Total Distributions....................................... (0.52)
-----
NET ASSET VALUE, END OF PERIOD................................ $10.11
======
Total Return (excludes sales charges)......................... 6.48%(b)
RATIOS/SUPPLEMENTARY DATA:
Net assets at the end of period (000)..................... $277
Ratio of expenses to average net assets................... 0.58%(c)
Ratio of net investment income to average net assets...... 6.52%(c)
Ratio of expenses to average net assets*.................. 1.31%(c)
Ratio of net investment income to average net assets*..... 5.79%(c)
Portfolio turnover**...................................... 61.98%
</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) Period from commencement of operations.
(b) Not Annualized.
(c) Annualized.
-36-
<PAGE> 257
BOND INDEX PORTFOLIO
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
Year Ended February 10, 1997
Nov. 30, to
1998 November 30, 1997(a)
-------------- --------------------
Investor A Investor A
Shares Shares
---------- ----------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.......................... $10.00
------
Investment Activities
Net investment income..................................... 0.50
Net realized and unrealized gains (losses)
from investments........................................ 0.17
------
Total from Investment Activities.......................... 0.67
------
Distributions
Net investment income..................................... (0.50)
------
Total Distributions....................................... (0.50)
------
NET ASSET VALUE, END OF PERIOD................................ $10.17
======
Total Return (excludes sales charges)......................... 6.93%(b)
RATIOS/SUPPLEMENTARY DATA:
Net assets at the end of period (000)......................... $55
Ratio of expenses to average net assets....................... 0.54%(c)
Ratio of net investment income to average net assets.......... 6.71%(c)
Ratio of expenses to average net assets*....................... 0.95%(c)
Ratio of net investment income to average net assets*......... 6.30%(c)
Portfolio turnover**.......................................... 46.16%
</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) Period from commencement of operations.
(b) Not Annualized.
(c) Annualized.
-37-
<PAGE> 258
GOVERNMENT & CORPORATE BOND PORTFOLIO
(FOR A SHARE(a) OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30
---------------------------------------------------------------------
1998 1997 1996 1995 1994(a)
---- ---- ---- ---- ----
INVESTOR INVESTOR INVESTOR INVESTOR INVESTOR
A SHARES A SHARES A SHARES A SHARES A SHARES
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period........................ $10.34 $10.53 $ 9.64 $10.65
------ ------ ------ ------
Investment Activities
Net investment income...................... 0.56 0.64 0.61 0.60
Net realized and unrealized gains
(losses) from investments................. 0.01 (0.19) 0.89 (0.94)
------ ------ ------ ------
Total from Investment Activities........... 0.57 0.45 1.50 (0.34)
------ ------ ------ ------
Distributions
Net investment income...................... (0.56) (0.64) (0.61) (0.60)
In excess of net realized gains............ -- -- -- (0.07)
------ ------ ------ ------
Total Distributions....................... (0.56) (0.64) (0.61) (0.67)
------ ------ ------ ------
Net Asset Value, End of Period............... $10.35 $10.34 $10.53 $ 9.64
====== ====== ====== ======
Total Return (excludes sales charges)........ 5.78% 4.51% 15.98% (3.32)%
Ratios/Supplemental Data:
Net Assets at end of period (000) $4,774 $4,915 $5,496 $5,167
Ratio of expenses to average net
assets (including waivers)................. 0.95% 0.95% 0.95% 0.95%
Ratio of net investment income to
average net assets (including
waivers)................................... 5.46% 6.06% 6.03% 6.00%
Ratio of expenses to average net
assets (before waivers)*................... 1.05% 1.05% 1.05% 1.05%
Ratio of net investment income to
average net assets (before
waivers)*.................................. 5.36% 5.96% 5.93% 5.90%
Portfolio turnover**......................... 140.72% 149.20% 59.32% 50%
</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 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> 259
GOVERNMENT & CORPORATE BOND PORTFOLIO
(FOR A SHARE(a) OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
INVESTOR B SHARES
-----------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED MARCH 1, 1995 TO
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
1998 1997 1996 1995(b)
----------- ----------- ------------ ----------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period........ $10.34 $ 10.53 $ 9.92
------- ------- -------
Investment Activities
Net investment income..................... 0.49 0.57 0.38
Net realized and unrealized gains
(losses) from investments............... 0.03 0.19 0.61
------- ------- -------
Total from Investment Activities.......... 0.52 0.38 0.99
------- ------- -------
Distributions
Net investment income..................... (0.49) (0.57) (0.38)
------- ------- -------
Total Distributions....................... (0.49) (0.57) (0.38)
------- ------- -------
Net Asset Value, End of Period.............. $10.37 $ 10.34 $ 10.53
====== ======= =======
Total Return (excludes sales charges)....... 5.26% 3.79% 15.27%(c)
Ratios/Supplemental Data:
Net assets at end of period (000)........... $545 $511 $106
Ratio of expenses to average net assets
(including waivers)....................... 1.65% 1.65% 1.65%(d)
Ratio of net investment income
to average net assets (including
waivers).................................. 4.84% 5.37% 5.19%(d)
Ratio of expenses to average net assets
(before waivers)*......................... 1.75% 1.75% 1.75%(d)
Ratio of net investment income
to average net assets (before
waivers)*................................ 4.74% 5.27% 5.09%(d)
Portfolio turnover**........................ 140.72% 149.20% 59.32%
</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 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 date of initial public investment.
(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.
-39-
<PAGE> 260
[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> 261
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 as an investment or
determined if this prospectus is truthful or complete. Anyone who tells you
otherwise is committing a criminal offense.
<PAGE> 262
CONTENTS
Overview
Short-Intermediate Municipal Portfolio.........................................
Missouri Tax-Exempt Bond Portfolio.............................................
National Municipal Bond Portfolio..............................................
Additional Information on Risk.................................................
Your Account...................................................................
Distribution Arrangements/Sales Charges...................................
Explanation of Sales Price................................................
How to Buy Shares.........................................................
How to Sell Shares........................................................
Investor Programs.........................................................
General Transaction Policies..............................................
Distributions and Taxes........................................................
Management of the Fund.........................................................
Financial Highlights...........................................................
<PAGE> 263
OVERVIEW
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:
o A description of the Portfolio's investment objective (sometimes referred
to as its goal);
o The Portfolio's principal investment strategies (the steps it takes to try
to meet its goal);
o The principal risks associated with the Portfolio (factors that may prevent
it from meeting its goal);
o The Portfolio's past performance (how successful it's been in meeting its
goal); and
o 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?
The Mercantile 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 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 Mercantile Tax-Exempt Bond 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.
(sidebar)
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.
<PAGE> 264
SHORT-INTERMEDIATE MUNICIPAL PORTFOLIO
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 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.
(sidebar)
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.
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 or Moody's Investors Service, 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.
The Portfolio's average weighted maturity will generally be between two and five
years.
(sidebar)
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
-2-
<PAGE> 265
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.
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, which could adversely affect the
Portfolio's value.
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.
(sidebar)
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. Prior to joining MVA, Mr. Merzian was employed as a
portfolio manager at another financial institution.
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. 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
selected 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. 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.
INVESTOR A SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
-3-
<PAGE> 266
Best quarter:
Worst quarter:
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1 Year Since
SHORT-INTERMEDIATE MUNICIPAL PORTFOLIO Inception*
- --------------------------------------------------------------------------------
<S> <C> <C>
Investor A Shares _____% _____%
- --------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index--
3 Year _____% _____%
- --------------------------------------------------------------------------------
</TABLE>
* July 10, 1995.
(sidebar)
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.
FEES AND EXPENSES
The following tables show the fees and expenses that you pay if you buy and hold
shares of the Short-Intermediate Municipal Portfolio.
SHAREHOLDER FEES (FEES YOU PAY DIRECTLY)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Maximum deferred sales
Maximum sales charge (load) charge (load) shown as a % of
to buy shares, shown as a % of the offering price or sale price,
the offering price whichever is less
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investor A Shares 2.50%(1) None
- ---------------------------------------- -------------------------------------- --------------------------------------
</TABLE>
(1) Reduced sales charges may be available. See "Distribution
Arrangements/Sales Charges" below.
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Total Annual
Distribution Portfolio
Management (12b-1) and Operating
Fees Service Fees Other Expenses Expenses
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investor A Shares _____% _____% _____% _____%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
-4-
<PAGE> 267
Note: Management Fees, Other Expenses and Total Annual Portfolio Operating
Expenses for the Portfolio's Investor A Shares for the last fiscal year were
less than the amounts shown above because certain of the Portfolio's service
providers voluntarily waived a portion of their fees and/or reimbursed the
Portfolio for certain other expenses. These fee waivers or reimbursements were
made in order to keep the annual fees and expenses for the Portfolio's Investor
A Shares at certain levels. Management Fees, Other Expenses and Total Annual
Portfolio Operating Expenses, after taking these fee waivers and expense
reimbursements into account, were ___%, ___% and ___%, respectively, for
Investor A Shares. The Fund's service providers intend to continue these fee
waivers and expense reimbursements but are not obligated to do so.
EXAMPLE
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:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 year 3 years 5 years 10 years
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investor A
Shares $ $ $ $
- --------------------------------------------------------------------------------------------------------
</TABLE>
-5-
<PAGE> 268
MISSOURI TAX-EXEMPT BOND PORTFOLIO
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 assets in municipal
securities that pay interest that is exempt from federal income tax, and at
least 65% of its 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.
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 or Moody's Investors Service, 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.
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.
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, which could adversely affect
the Portfolio's value.
-6-
<PAGE> 269
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.
(sidebar)
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 then. Prior to joining MVA, Mr. Merzian was
employed as a portfolio manager at another financial institution.
-7-
<PAGE> 270
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. 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 selected 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. 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.
Note: 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.
INVESTOR A SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Since
MISSOURI TAX-EXEMPT BOND PORTFOLIO 1 Year 5 Years 10 Years Inception*
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investor A Shares _____% _____% _____% _____%
- ------------------------------------------------------------------------------------------------------------
Investor B Shares _____% N/A N/A _____%
- ------------------------------------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index _____% _____% _____% _____%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
* July 15, 1988 for Investor A Shares; March 1, 1995 for Investor B Shares.
(sidebar)
KNOW YOUR INDEX
THE LEHMAN BROTHERS MUNICIPAL BOND INDEX is an unmanaged index that tracks the
performance of municipal bonds.
-8-
<PAGE> 271
FEES AND EXPENSES
The following tables show the fees and expenses that you pay if you buy and hold
shares of the Missouri Tax-Exempt Bond Portfolio.
SHAREHOLDER FEES (FEES YOU PAY DIRECTLY)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Maximum deferred sales
Maximum sales charge (load) charge (load) shown as a % of
to buy shares, shown as a % of the offering price or sale price,
the offering price whichever is less
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investor A Shares 4.75%(1) None
- -----------------------------------------------------------------------------------------------------------------
Investor B Shares None 5.00%(2)
- -----------------------------------------------------------------------------------------------------------------
</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.
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Total Annual
Distribution Portfolio
Management (12b-1) and Operating
Fees Service Fees Other Expenses Expenses
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investor A
Shares _____% _____% _____% _____%
- ------------------------------------------------------------------------------------------------------------
Investor B
Shares _____% _____% _____% _____%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Investor A Shares and Investor B Shares for the last fiscal year
were less than the amounts shown above because certain of the Portfolio's
service providers voluntarily waived a portion of their fees and/or reimbursed
the Portfolio for certain other expenses. These fee waivers or reimbursements
were 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, were ___% and ___%, respectively for
Investor A Shares and ___% and ___%, respectively, for Investor B shares. The
Fund's service providers intend to continue these fee waivers and expense
reimbursements but are not obligated to do so.
-9-
<PAGE> 272
EXAMPLE
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:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 year 3 years 5 years 10 years
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investor A
Shares $ $ $ $
- --------------------------------------------------------------------------------------------------------
Investor B
Shares $ $ $ $
- --------------------------------------------------------------------------------------------------------
If you hold Investor B Shares, you would pay the following expenses if you did
not sell your shares:
- --------------------------------------------------------------------------------------------------------
$ $ $ $
- --------------------------------------------------------------------------------------------------------
</TABLE>
-10-
<PAGE> 273
NATIONAL MUNICIPAL BOND PORTFOLIO
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 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.
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 or Moody's Investors Service, 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.
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.
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, which could adversely affect
the Portfolio's value.
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.
-11-
<PAGE> 274
(sidebar)
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.
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. 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
selected 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. 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.
INVESTOR A SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
1 Year Since
NATIONAL MUNICIPAL BOND PORTFOLIO Inception*
- --------------------------------------------------------------------------------
Investor A Shares _____% _____%
- --------------------------------------------------------------------------------
Investor B Shares _____% _____%
- --------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index--
10 Year _____% _____%
- --------------------------------------------------------------------------------
* November 18, 1996.
(sidebar)
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.
-12-
<PAGE> 275
FEES AND EXPENSE
The following tables show the fees and expenses that you pay if you buy and hold
shares of the National Municipal Bond Portfolio.
SHAREHOLDER FEES (FEES YOU PAY DIRECTLY)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Maximum deferred sales
Maximum sales charge (load) charge (load) shown as a % of
to buy shares, shown as a % of the offering price or sale price,
the offering price whichever is less
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investor A Shares 4.75%(1) None
- -----------------------------------------------------------------------------------------------------------------
Investor B Shares None 5.00%(2)
- -----------------------------------------------------------------------------------------------------------------
</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.
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Total Annual
Distribution Portfolio
Management (12b-1) and Operating
Fees Service Fees Other Expenses Expenses
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investor A
Shares _____% _____% _____% _____%
- ------------------------------------------------------------------------------------------------------------
Investor B
Shares _____% _____% _____% _____%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Management Fees, Other Expense and Total Annual Portfolio Operating
Expenses for the Portfolio's Investor A Shares and Investor B Shares for the
last fiscal year were less than the amounts shown above because certain of the
Portfolio's service providers voluntarily waived a portion of their fees and/or
reimbursed the Portfolio for certain other expenses. These fee waivers or
reimbursements were 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, were
___%, ___% and ___%, respectively, for Investor A Shares and ___%, ___% and
___%, respectively, for Investor B shares. The Fund's service providers intend
to continue these fee waivers and expense reimbursements but are not obligated
to do so.
-13-
<PAGE> 276
EXAMPLE
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:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 year 3 years 5 years 10 years
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investor A
Shares $ $ $ $
- --------------------------------------------------------------------------------------------------------
Investor B
Shares $ $ $ $
- --------------------------------------------------------------------------------------------------------
If you hold Investor B Shares, you would pay the following expenses if you did
not sell your shares:
- --------------------------------------------------------------------------------------------------------
$ $ $ $
- --------------------------------------------------------------------------------------------------------
</TABLE>
-14-
<PAGE> 277
ADDITIONAL INFORMATION ON RISK
The principal risks of investing in each Portfolio are described above. 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.
SELECTION OF INVESTMENTS
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolios and how they may advance the Portfolios' investment
objectives. It is possible, however, that these evaluations will prove to be
inaccurate.
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.
FREQUENT TRADING
Each Portfolio may trade its investments frequently in trying to achieve its
investment goal. This strategy increases the chances that the Portfolio will pay
investors short-term capital gains. These gains are taxable at higher rates than
long-term capital gains. Frequent trading could also mean higher brokerage
commissions and other transaction costs, which could reduce the Portfolio's
returns.
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.
-15-
<PAGE> 278
YOUR ACCOUNT
DISTRIBUTION ARRANGEMENTS/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>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
TYPES OF CHARGES INVESTOR A SHARES INVESTOR B SHARES
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sales Charge (Load) A front-end sales charge is A contingent deferred sales
assessed at the time of your charge(CDSC) is assessed on
purchase. shares redeemed within six
years of purchase. Investor B
Shares automatically convert
to Investor A Shares eight
years after purchase.
- ------------------------------------------------------------------------------------------------------------------
Distribution (12b-1) and Subject to annual distribution Subject to annual distribution
Service Fees and shareholder servicing fees and 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>
-16-
<PAGE> 279
CALCULATION OF SALES CHARGES
INVESTOR A SHARES
MISSOURI TAX-EXEMPT BOND AND NATIONAL MUNICIPAL BOND PORTFOLIOS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Amount of Sales charge as a % Sales charge as a % Dealers'
transaction of the offering price of net asset value reallowance as a %
per share per share of 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% 1.75%
- -----------------------------------------------------------------------------------------------------
$1 million or more 0.50% 0.50% 0.40%
- -----------------------------------------------------------------------------------------------------
</TABLE>
SHORT-INTERMEDIATE MUNICIPAL PORTFOLIO
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Amount of Sales charge as a % Sales charge as a % Dealers'
transaction of the offering price of net asset value reallowance as a %
per share per share of 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>
-17-
<PAGE> 280
The Fund's distributor reserves the right to pay the entire sales charges to
dealers. In addition, the 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.
CALCULATION OF SALES CHARGES
INVESTOR B SHARES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Number of years since purchase CDSC as a % of dollar amount subject to the charge
- -------------------------------------------------------------------------------------------------
<S> <C>
1 or less 5.0%
- -------------------------------------------------------------------------------------------------
1-2 4.0%
- -------------------------------------------------------------------------------------------------
2-3 3.0%
- -------------------------------------------------------------------------------------------------
3-4 3.0%
- -------------------------------------------------------------------------------------------------
4-5 2.0%
- -------------------------------------------------------------------------------------------------
5-6 1.0%
- -------------------------------------------------------------------------------------------------
More than 6 None
- -------------------------------------------------------------------------------------------------
</TABLE>
For purposes of calculating the CDSC, all purchases made during a calendar month
are considered to be made on the first day of that month. The CDSC is based on
the value of the Investor B Shares on the date that they are sold or the
original cost of the shares, whichever is lower. To keep your CDSC as low as
possible each time you sell shares, the Fund will first sell any shares in your
account that are not subject to a CDSC. If there are not enough of these, the
Fund will sell the shares that have the lowest CDSC.
SALES CHARGE REDUCTIONS AND WAIVERS
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
Statement of Additional Information or call the Fund's distributor at
1-800-452-2724 for further information.
You may reduce the sales charge on INVESTOR A Shares through:
-18-
<PAGE> 281
o 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.
o QUANTITY DISCOUNTS. As the dollar amount of your purchase increases, your
sales charge may decrease (see the tables on page __). In addition, the
Fund will combine purchases made on the same day by you and your immediate
family members when calculating applicable sales charges.
o 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.
o 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.
In addition, there's no sales charge when you buy INVESTOR A SHARES if:
o You buy shares by reinvesting your dividends and capital gains
distributions.
o You're an officer or director of the Fund (or an immediate family member of
any such individual).
o 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).
o 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).
o You buy shares pursuant to a wrap-free program offered by a broker-dealer
or other financial institution.
o 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 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.
o You buy shares through a payroll deduction program
o You're an employee of any sub-adviser to the Fund.
o 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.
o 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.
o You're another investment company distributed by the Fund's distributor or
its affiliates.
-19-
<PAGE> 282
If you think you qualify for any these exemptions, please call the Fund at
1-800-452-2724 before buying any shares.
(sidebar)
PURCHASE OF INVESTOR A SHARES AT NET ASSET VALUE
From time to time, the 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.
No CDSC is assessed on redemptions of INVESTOR B SHARES if:
o The shares were purchased with reinvested dividends or capital gains
distributions.
o The shares were purchased through an exchange of Investor B Shares of
another Portfolio.
o 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.
o The redemption is in connection with the death or disability of the
shareholder.
o You participate in the Automatic Withdrawal Plan and your annual
withdrawals do not exceed 12% of your account's value.
o Your account falls below the Portfolio's minimum account size, and the Fund
liquidates your account (see page __).
o 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.
-20-
<PAGE> 283
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.
EXPLANATION OF SALES PRICE
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.
(sidebar)
BUSINESS DAYS DEFINED
A business day is any day that both the New York Stock Exchange (NYSE) and the
Federal Reserve Bank of St. Louis are open for business. Currently, the Fund
observes the following holidays: New Year's Day, Martin Luther King Jr. Day,
Presidents' Day, Good Friday, Memorial Day (observed), Independence Day
(observed), Labor Day, Columbus Day, Veterans' Day, Thanksgiving and Christmas.
o 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.
o If you properly place a purchase order 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 canceled.
HOW TO BUY SHARES
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:
-21-
<PAGE> 284
o 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.
o 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.
o 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
the Fund at P.O. Box 78069, 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.
<TABLE>
<CAPTION>
MINIMUM INVESTMENTS
- ------------------------------------------------------------------------------------------------
To Open Your Account To Add to Your Account
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Regular accounts $1,000 $100
- ------------------------------------------------------------------------------------------------
Sweep program through your None None
financial institution
- ------------------------------------------------------------------------------------------------
Wrap fee program through your
financial institution None None
- ------------------------------------------------------------------------------------------------
Payroll Deduction Program* None $ 25
- ------------------------------------------------------------------------------------------------
Automatic Exchange $1,000 minimum account
Program* $5,000 balance
- ------------------------------------------------------------------------------------------------
Automatic Investment
Program* $ 50 $ 50
- ------------------------------------------------------------------------------------------------
</TABLE>
* See Investor Programs below.
HOW TO SELL SHARES
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:
o 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.
-22-
<PAGE> 285
o BY MAIL. Send your written redemption request to: Mercantile Mutual Funds,
Inc., P.O. Box 78069 - Tram 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.
o 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. The proceeds of the sale
of Investor B Shares will be reduced by the applicable contingent deferred sales
charge (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.
(sidebar)
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 or more, 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.
-23-
<PAGE> 286
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 20th day
(or the next business day after 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 from 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 contingent deferred sales
charge 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.
-24-
<PAGE> 287
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 25th 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.
-25-
<PAGE> 288
GENERAL TRANSACTION POLICIES
The Fund reserves the right to:
o Refuse any order to buy shares.
o Reject any exchange request.
o Change or cancel the procedures for selling or exchanging shares by
telephone at any time.
o 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.
o Send redemption proceeds within seven days after receiving a request, if an
earlier payment could adversely affect a Portfolio.
o Modify or terminate the Automatic Exchange, Automatic Investment and
Automatic Withdrawal programs at any time.
o Modify or terminate the exchange privilege after 60 days' written notice to
shareholders.
o 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.
-26-
<PAGE> 289
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.
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.
o 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.
o 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."
o 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.
-27-
<PAGE> 290
o 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.
o 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.
o For more information regarding the taxation of the Portfolios, consult the
Statement of Additional Information 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.
(sidebar)
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.
-28-
<PAGE> 291
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
- --------------------------------------------------------------------------------
Missouri Tax-Exempt Bond
Portfolio
- --------------------------------------------------------------------------------
National Municipal Bond
Portfolio
- --------------------------------------------------------------------------------
</TABLE>
-29-
<PAGE> 292
FINANCIAL HIGHLIGHTS
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
[____________________], independent accountants, whose report, along with the
Portfolios' financial statements, is included in the Fund's Annual Report to
Shareholders, and [___________________________________________] the SAI.
-30-
<PAGE> 293
SHORT-INTERMEDIATE MUNICIPAL PORTFOLIO
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED JULY 10, 1995 TO
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
1998 1997 1996 1995(a)
---- ---- ---- -------
INVESTOR A INVESTOR A INVESTOR A INVESTOR A
SHARES SHARES SHARES SHARES
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period........ $10.08 $ 10.08 $ 10.00
------ ------- -------
Investment Activities
Net investment income..................... 0.37 0.40 --
Net realized and unrealized gains
(losses) from investments............... 0.03 -- 0.08
------ ------- -------
Total from Investment Activities........ 0.40 0.40 0.08
------ ------- -------
Distributions
Net investment income..................... (0.37) (0.40) --
------ ------- -------
Total Distributions..................... (0.37) (0.40) --
------ ------- -------
Net Asset Value, End of Period.............. $10.11 $ 10.08 $ 10.08
====== ======= =======
Total Return (excludes sales charges)....... 4.12% 4.02% 0.80%(b)
Ratios/Supplemental Data:
Net assets at end of period (000)........... $16 $51 --(c)
Ratio of expenses to average net assets
(including waivers)....................... 0.62% 0.56% 0.00%(d)
Ratio of net investment income
to average net assets (including
waivers).................................. 3.78% 3.83% 0.00%(d)
Ratio of expenses to average net assets
(before waivers)*......................... 1.32% 1.26% 0.00%(d)
Ratio of net investment income
to average net assets (before
waivers)*................................. 3.08% 3.13% 0.00%(d)
Portfolio turnover**........................ 0.00% 0.00% 0.00%
</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) 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.
-31-
<PAGE> 294
MISSOURI TAX-EXEMPT BOND PORTFOLIO(a)
(FOR A SHARE(b) OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX
YEAR YEAR YEAR MONTHS
ENDED ENDED ENDED ENDED YEAR ENDED MAY 31,
NOV. 30, NOV. 30, NOV. 30, NOV. 30 ------------------
1998 1997 1996 1995(c) 1995(b) 1994
---- ---- ---- ------- ------- ----
INVESTOR A INVESTOR A INVESTOR A INVESTOR A INVESTOR A INVESTOR
SHARES SHARES SHARES SHARES SHARES SHARES
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period................... $11.69 $11.74 $11.52 $11.13 $11.54
------ ------ ------ ------ ------
Investment Activities
Net investment income................. 0.53 0.55 0.27 0.55 0.55
Net realized and unrealized
gains (losses) on
investments........................ 0.18 (0.05) 0.22 0.40 (0.37)
------ ------ ------ ------ ------
Total from Investment
Activities.......................... 0.71 0.50 0.49 0.95 0.18
------ ------ ------ ------ ------
Distributions
Net investment income................. (0.53) (0.55) (0.27) (0.55) (0.55)
Net realized gains.................... -- -- -- (0.01) (0.04)
------ ------ ------ ------ ------
Total Distributions.................. (0.53) (0.55) (0.27) (0.56) (0.59)
------ ------ ------ ------ ------
Net Asset Value, End of Period......... $11.87 $11.69 $11.74 $11.52 $11.13
====== ====== ====== ====== ======
Total Return (excludes sales
charges)............................. 6.27% 4.41% 4.32%(d) 8.91% 1.53%
Ratios/Supplemental Data:
Net assets at end of period (000)...... $23,722 $25,144 $24,726 $24,318 $27,919
Ratio of expenses to average
net assets (including
waivers)............................. 0.86% 0.85% 0.95%(e) 0.84% 0.65%
Ratio of net investment income
to average net assets (including
waivers)............................. 4.57% 4.75% 4.64%(e) 5.02% 4.75%
Ratio of expenses to average
net assets (before waivers)*......... 1.06% 1.05% 1.18%(e) 1.18% 1.12%
Ratio of net investment income to
average net assets (before
waivers)*............................ 4.37% 4.55% 4.44%(e) 4.68% 4.28%
Portfolio turnover rate**.............. 3.50% 3.66% 1.55% -- 20%
</TABLE>
- -------------------
* During the period, certain fees were voluntary 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) The Portfolio (formerly, the Long-Term Tax-Exempt Portfolio) commenced
operations on July 15, 1988 as an investment portfolio of The ARCH
Tax-Exempt Trust. On October 2, 1995, it was reorganized as a new portfolio
of the Fund.
(b) 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.
(c) Upon its reorganization as a portfolio of the Fund, the Portfolio changed
its fiscal year-end from May 31 to November 30.
(d) Not Annualized.
(e) Annualized.
-32-
<PAGE> 295
MISSOURI TAX-EXEMPT BOND PORTFOLIO(a)
(FOR A SHARE(b) OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
INVESTOR B SHARES
---------------------------------------------------------------------------------------
YEAR YEAR YEAR SIX MONTHS
ENDED ENDED ENDED ENDED
NOV. 30, NOV. 30, NOV. 30, NOV. 30, MARCH 1, 1995 TO
1998 1997 1996 1995(c) MAY 31, 1995(d)
---- ---- ---- ------- ---------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period................ $11.68 $11.74 $11.52 $11.19
------ ------ ------ ------
Investment Activities
Net investment income.............. 0.44 0.45 0.22 0.11
Net realized and unrealized
gains (losses) on
investments..................... 0.18 (0.06) 0.22 0.33
------ ------ ------ ------
Total from Investment
Activities....................... 0.62 0.39 0.44 0.44
------ ------ ------ ------
Distributions
Net investment income.............. (0.44) (0.45) (0.22) (0.11)
Net realized gains................. -- -- -- --
------ ------ ------ ------
Total Distributions............... (0.44) (0.45) (0.22) (0.11)
------ ------ ------ ------
Net Asset Value, End of Period...... $11.86 $11.68 $11.74 $11.52
====== ====== ====== ======
Total Return (excludes sales
charges).......................... 5.43% 3.48% 3.88%(f) 8.61%(e)
Ratios/Supplemental Data:
Net assets at end of period (000)... $1,398 $ 675 $ 433 $ 94
Ratio of expenses to average
net assets (including
waivers).......................... 1.66% 1.65% 1.77%(g) 1.76%(g)
Ratio of net investment income
to average net assets (including
waivers).......................... 3.76% 3.96% 3.82%(g) 4.00%(g)
Ratio of expenses to average
net assets (before waivers)*...... 1.76% 1.75% 1.87%(g) 1.88%(g)
Ratio of net investment income to
average net assets (before
waivers)*......................... 3.66% 3.86% 3.72%(g) 3.89%(g)
Portfolio turnover rate**........... 3.50% 3.66% 1.55% --
</TABLE>
- -------------------
* During the period, certain fees were voluntary 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) The Portfolio (formerly, the Long-Term Tax-Exempt Portfolio) commenced
operations on July 15, 1988 as an investment portfolio of The ARCH
Tax-Exempt Trust. On October 2, 1995, it was reorganized as a new portfolio
of the Fund.
(b) 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. These financial highlights of Investor B
Shares cover the period from March 1, 1995 (date of initial public
investment) through May 31, 1995.
(c) Upon its reorganization as a portfolio of the Fund, the Portfolio changed
its fiscal year-end from May 31 to November 30.
(d) For period from date of initial public investment.
(e) Represents total return for Investor A Shares from June 1, 1994 to February
28, 1995 plus total return for Investor B Shares from March 1, 1995 to May
31, 1995.
(f) Not Annualized.
(g) Annualized.
-33-
<PAGE> 296
NATIONAL MUNICIPAL BOND PORTFOLIO
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
NOV. 18, 1996 NOV. 18, 1996
YEAR ENDED YEAR ENDED THROUGH YEAR ENDED YEAR ENDED THROUGH
NOV. 30, NOV. 30, NOV. 30, NOV. 30, NOV. 30, NOV. 30,
1998 1997 1996(a) 1998 1997 1997(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................ $10.05 $10.00 $10.05 $10.00
------ ------ ------ ------
Investment Activities
Net investment income.............. 0.52 0.02 0.44 0.02
Net realized and unrealized gains
(losses) from investments......... 0.22 0.05 0.24 0.05
------ ------ ------ ------
Total from Investment Activities... 0.74 0.07 0.68 0.07
------ ------ ------ ------
Distributions
Net investment income............. (0.52) (0.02) (0.44) (0.02)
------ ------ ------ ------
Total Distributions.............. (0.52) (0.02) (0.44) (0.02)
------ ------ ------ ------
Net Asset Value, End of Period...... $10.27 $10.05 $10.29 $10.05
====== ====== ====== ======
Total Return (excludes sales
charge).......................... 7.61% 0.73%(b) 7.01% 0.70%(b)
Ratios/Supplemental Data:
Net assets at end of period (000)... $717 $ 1 $408 $ 1
Ratio of expenses to average
net assets (including waivers)..... 0.35% 0.37%(c) 1.17% 1.10%(c)
Ratio of net investment income
to average net assets (including
waivers)........................... 4.71% 9.08%(c) 4.08% 8.35%(c)
Ratio of expenses to average
net assets (before waivers)*....... 1.17% 1.07%(c) 1.89% 1.80%(c)
Ratio of net investment income
to average net assets (before
waivers)*.......................... 3.89% 8.38%(c) 3.36% 7.65%(c)
Portfolio turnover**................ 83.94% 0.00% 83.94% 0.00%
</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) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
-34-
<PAGE> 297
[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> 298
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 as an investment or
determined if this prospectus is truthful or complete. Anyone who tells you
otherwise is committing a criminal offense.
<PAGE> 299
CONTENTS
<TABLE>
<CAPTION>
Overview
<S> <C>
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............................................................
Additional Information on Risk............................................................
Your Account..............................................................................
Distribution Arrangements/Sales Charges..............................................
Explanation of Sales Price...........................................................
How to Buy Shares....................................................................
How to Sell Shares...................................................................
Investor Programs....................................................................
General Transaction Policies.........................................................
Distributions and Taxes...................................................................
Management of the Fund....................................................................
Financial Highlights......................................................................
</TABLE>
<PAGE> 300
OVERVIEW
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?
The Mercantile 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 one of the Mercantile Stock Portfolios, 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.
(sidebar)
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.
<PAGE> 301
BALANCED PORTFOLIO
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.
(sidebar)
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.
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. 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.
Under normal market conditions, the Portfolio invests at least 25% of its assets
in fixed-income securities and no more than 75% of its 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.
(sidebar)
INVESTMENT GRADE BONDS are those of medium credit quality or better as
determined by a national rating agency, such as Standard & Poor's (bonds rated
BBB or better) and Moody's Investors Service (bonds rated Baa or better). The
higher the credit rating, the less likely it is that the bond issuer will
default on its principal and interest payments.
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
<PAGE> 302
securities and mortgage-backed securities, to be paid off much sooner or later
than expected, which could adversely affect the value of the Portfolio.
Fixed-income securities are subject to other risks, including the risk that the
issuer will be unable to repay the debt.
(sidebar)
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
Balanced Portfolio since May 1996. He also manages the Fund's three municipal
bond portfolios. Prior to joining MVA, Mr. Merzian was employed as a portfolio
manager at another financial organization.
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. 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 selected 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. 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.
INVESTOR A SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 1998
- ---------------------------------------------- ----------------- ----------------- --------------
1 Year 5 Years Since
BALANCED PORTFOLIO Inception*
- ---------------------------------------------- ----------------- ----------------- --------------
<S> <C> <C> <C>
-----% -----% -----%
Investor A Shares
- ---------------------------------------------- ----------------- ----------------- --------------
-----% -----%
Investor B Shares N/A
- ---------------------------------------------- ----------------- ----------------- --------------
-----% -----% -----%
S&P 500 Index
- ---------------------------------------------- ----------------- ----------------- --------------
-----% -----% -----%
Lehman Brothers Aggregate Bond Index
- ---------------------------------------------- ----------------- ----------------- --------------
</TABLE>
* April 1, 1993 for Investor A Shares; March 1, 1995 for Investor B Shares.
<PAGE> 303
(sidebar)
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.
FEES AND EXPENSES
The following tables show the fees and expenses that you pay if you buy and hold
shares of the Balanced Portfolio.
<TABLE>
<CAPTION>
SHAREHOLDER FEES (FEES YOU PAY DIRECTLY)
- --------------------------------------- -------------------------------------- --------------------------------------
Maximum deferred sales
Maximum sales charge (load) charge (load) shown as a % of
to buy shares, shown as a % of the offering or sale price,
the offering price whichever is less price
- --------------------------------------- -------------------------------------- --------------------------------------
<S> <C> <C>
Investor A Shares 5.50%(1) None
- --------------------------------------- -------------------------------------- --------------------------------------
Investor B Shares None 5.00%(2)
- --------------------------------------- -------------------------------------- --------------------------------------
</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.
<TABLE>
<CAPTION>
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS)
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Total Annual
Distribution Portfolio
Management (12b-1) and Operating
Fees Service Fees Other Expenses Expenses
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Investor A Shares -----% -----% -----% -----%
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Investor B Shares -----% -----% -----% -----%
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
Note: Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Investor A Shares and Investor B Shares for the last fiscal year
were less than the amounts shown above because certain of the Portfolio's
service providers voluntarily waived a portion of their fees and/or reimbursed
the Portfolio for certain other expenses. These fee waivers or reimbursements
were made in order to keep the annual fees and expenses for the Portfolio's
<PAGE> 304
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, were ___% and ___%, respectively, for
Investor A Shares and ____% and ___%, respectively, for Investor B Shares. The
Fund's service providers intend to continue these fee waivers and expense
reimbursements but are not obligated to do so.
EXAMPLE
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:
<TABLE>
<CAPTION>
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
1 year 3 years 5 years 10 years
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Investor A Shares $ $ $ $
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Investor B Shares $ $ $ $
- ---------------------------------------------------------------------------------------------------------------------
If you hold Investor B Shares, you would pay the following expenses if you did not sell your shares:
- ---------------------------------------------------------------------------------------------------------------------
$ $ $ $
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
<PAGE> 305
EQUITY INCOME PORTFOLIO
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. 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 assets
in income-producing (dividend-paying) equity securities. 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.
(sidebar)
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.
(sidebar)
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.
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.
(sidebar)
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.
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. The bar chart shows how the performance of the Portfolio's Investor
A Shares has varied from
<PAGE> 306
year to year. The table shows how the Portfolio's average annual returns for one
year and since inception compare to those of a selected 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. 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.
INVESTOR A SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 1998
- ---------------------------------- --------------- ----------------------
Since
EQUITY INCOME PORTFOLIO 1 Year Inception*
- ---------------------------------- --------------- ----------------------
<S> <C> <C>
-----% -----%
Investor A Shares
- ---------------------------------- --------------- ----------------------
-----% -----%
Investor B Shares
- ---------------------------------- --------------- ----------------------
-----% -----%
Russell 1000 Value Index
- ---------------------------------- --------------- ----------------------
</TABLE>
* February 27, 1997 for both Investor A Shares and Investor B Shares.
(sidebar)
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 companies in the
Russell 3000 Index as ranked by total market capitalization.
FEES AND EXPENSES
The following tables show the fees and expenses that you pay if you buy and hold
shares of the Equity Income Portfolio.
<PAGE> 307
<TABLE>
<CAPTION>
SHAREHOLDER FEES (FEES YOU PAY DIRECTLY)
- --------------------------------------- -------------------------------------- --------------------------------------
Maximum deferred sales
Maximum sales charge (load) charge (load) shown as a % of
to buy shares, shown as a % of the offering price or sale price,
the offering price whichever is less
- --------------------------------------- -------------------------------------- --------------------------------------
<S> <C> <C>
Investor A Shares 5.50%(1) None
- --------------------------------------- -------------------------------------- --------------------------------------
Investor B Shares None 5.00%(2)
- --------------------------------------- -------------------------------------- --------------------------------------
</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.
<TABLE>
<CAPTION>
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS)
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Total Annual
Distribution Portfolio
Management (12b-1) and Operating
Fees Service Fees Other Expenses Expenses
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Investor A Shares -----% -----% -----% -----%
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Investor B Shares -----% -----% -----% -----%
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
Note: Management Fees, Other Expenses and Total Annual Portfolio Operating
Expenses for the Portfolio's Investor A Shares and Investor B Shares for the
last fiscal year were less than the amounts shown above because certain of the
Portfolio's service providers voluntarily waived a portion of their fees and/or
reimbursed the Portfolio for certain other expenses. These fee waivers or
reimbursements were 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, were
___%, ___% and ___%, respectively, for Investor A Shares and ___%, ___% and
___%, respectively, for Investor B Shares. The Fund's service providers intend
to continue these fee waivers and expense reimbursements but are not obligated
to do so.
EXAMPLE
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:
<PAGE> 308
<TABLE>
<CAPTION>
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
1 year 3 years 5 years 10 years
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Investor A Shares $ $ $ $
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Investor B Shares $ $ $ $
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
If you hold Investor B Shares, you would pay the following expenses if you did not sell your shares:
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
$ $ $ $
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
<PAGE> 309
EQUITY INDEX PORTFOLIO
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.
Unlike most of the Mercantile Stock Portfolios, which require shareholder
approval to change their investment objectives, the Equity Index 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 to approximate the investment
performance of the S&P 500 Index through the use of sophisticated computer
models. The Portfolio invests substantially all of its 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 cash flow and
in the composition of the S&P 500 Index.
(sidebar)
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.
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.
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. The bar chart shows how the performance of the Portfolio's Investor
A Shares has varied from year to year, and 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. The bar chart does not reflect any
sales
<PAGE> 310
charges on purchases of the Portfolio's Investor A Shares. If these sales
charges were included, returns would be lower than those shown.
INVESTOR A SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 1998
- ------------------------------ ------------------ -------------
Since
EQUITY INDEX PORTFOLIO 1 Year Inception*
- ------------------------------ ------------------ -------------
<S> <C> <C>
-----% -----%
Investor A Shares
- ------------------------------ ------------------ -------------
-----% -----%
S&P 500 Index
- ------------------------------ ------------------ -------------
</TABLE>
* May 1, 1997
FEES AND EXPENSES
The following tables show the fees and expenses that you pay if you buy and hold
shares of the Equity Index Portfolio.
<TABLE>
<CAPTION>
SHAREHOLDER FEES (FEES YOU PAY DIRECTLY)
- --------------------------------------- -------------------------------------- --------------------------------------
Maximum deferred sales
Maximum sales charge (load) charge (load) shown as a % of
to buy shares, shown as a % of the offering price or sale price,
the offering price whichever is less
- --------------------------------------- -------------------------------------- --------------------------------------
<S> <C> <C>
Investor A Shares 2.50%(1) None
- --------------------------------------- -------------------------------------- --------------------------------------
</TABLE>
(1) Reduced sales charges may be available. See "Distribution
Arrangements/Sales Charges" below.
<TABLE>
<CAPTION>
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE
PORTFOLIO'S ASSETS)
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Total Annual
Distribution Portfolio
Management (12b-1) and Operating
Fees Service Fees Other Expenses Expenses
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Investor A Shares -----% -----% -----% -----%
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
Note: Management Fees, Other Expenses and Total Annual Portfolio Operating
Expenses for the Portfolio's Investor A Shares for the last fiscal year were
less than the amounts shown above
<PAGE> 311
because certain of the Portfolio's service providers voluntarily waived a
portion of their fees and/or reimbursed the Portfolio for certain other
expenses. These fee waivers or reimbursements were made in order to keep the
annual fees and expenses for the Portfolio's Investor A Shares at certain
levels. Management Fees, Other Expenses and Total Annual Portfolio Operating
Expenses, after taking these fee waivers and expense reimbursements into
account, were ___%, ___% and ___%, respectively, for Investor A Shares. The
Fund's service providers intend to continue these fee waivers and expense
reimbursements but are not obligated to do so.
EXAMPLE
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:
<TABLE>
<CAPTION>
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
1 year 3 years 5 years 10 years
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Investor A Shares $ $ $ $
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
<PAGE> 312
GROWTH & INCOME EQUITY PORTFOLIO
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.
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 a major 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.
(sidebar)
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.
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. The bar chart shows how the performance of the Portfolio's Investor
A Shares has varied from year to year, and the table shows how the Portfolio's
average annual returns for one year, five years and ten years and since
inception compare to those of a selected 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. 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.
<PAGE> 313
INVESTOR A SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 1998
- ------------------------------------------ -------------- -------------- ----------- ------------
GROWTH & INCOME EQUITY PORTFOLIO Since
1 Year 5 Years 10 Years inception*
- ------------------------------------------ -------------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
-----% -----% -----% -----%
Investor A Shares
- ------------------------------------------ -------------- -------------- ----------- ------------
-----% -----%
Investor B Shares N/A N/A
- ------------------------------------------ -------------- -------------- ----------- ------------
-----% -----% -----% -----%
S&P 500 Index
- ------------------------------------------ -------------- -------------- ----------- ------------
</TABLE>
* June 2, 1988 for Investor A Shares; March 1, 1995 for Investor B Shares.
FEES AND EXPENSES
The following tables show the fees and expenses that you pay if you buy and hold
shares of the Growth & Income Equity Portfolio.
<TABLE>
<CAPTION>
SHAREHOLDER FEES (FEES YOU PAY DIRECTLY)
- --------------------------------------- -------------------------------------- --------------------------------------
Maximum deferred sales
Maximum sales charge (load) charge (load) shown as a % of
to buy shares, shown as a % of the offering price or sale price,
the offering price whichever is less
- --------------------------------------- -------------------------------------- --------------------------------------
<S> <C> <C>
Investor A Shares 5.50%(1) None
- --------------------------------------- -------------------------------------- --------------------------------------
Investor B Shares None 5.00%(2)
- --------------------------------------- -------------------------------------- --------------------------------------
</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.
<PAGE> 314
<TABLE>
<CAPTION>
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE PORTFOLIO'S
ASSETS)
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Total Annual
Distribution Portfolio
Management (12b-1) and Operating
Fees Service Fees Other Expenses Expenses
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Investor A Shares
-----% -----% -----% -----%
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Investor B Shares
-----% -----% -----% -----%
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
Note: Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Investor A Shares and Investor B Shares for the last fiscal year
were less than the amounts shows above because certain of the Portfolio's
service providers voluntarily waived a portion of their fees and/or reimbursed
the Portfolio for certain other expenses. These fee waivers or reimbursements
were 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, were ___% and ___%, respectively, for
Investor A Shares and ___% and ___%, respectively, for Investor B Shares. The
Fund's service providers intend to continue these fee waivers and expense
reimbursements but are not obligated to do so.
EXAMPLE
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:
<TABLE>
<CAPTION>
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
1 year 3 years 5 years 10 years
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Investor A Shares $ $ $ $
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Investor B Shares $ $ $ $
- ---------------------------------------------------------------------------------------------------------------------
If you hold Investor B Shares, you would pay the following expenses if you did not sell your shares:
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
$ $ $ $
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
<PAGE> 315
GROWTH EQUITY PORTFOLIO
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 Portfolio securities, 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 market share, but company
earnings are the primary consideration.
Under normal market conditions, the Portfolio invests at least 65% of its assets
in stocks or other equity securities. 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.
(sidebar)
GROWTH STOCKS offer strong revenue and earnings potential and accompanying
capital growth, with less dividend income than value stocks.
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.
(sidebar)
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.
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. The bar chart shows how the performance of the Portfolio's Investor
A Shares has varied from year to year, and the table shows how the Portfolio's
average annual returns for one year, five years and since inception compare to
those of a selected 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. The returns for
Investor B Shares would have 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
<PAGE> 316
Portfolio's Investor A Shares. If these sales charges were included, returns
would be lower than those shown.
Note: 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.
INVESTOR A SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 1998
- ------------------------------ --------------- ------------ ------------
1 Year 5 Years Since
GROWTH EQUITY PORTFOLIO Inception*
- ------------------------------ --------------- ------------ ------------
<S> <C> <C> <C>
-----% -----% -----%
Investor A Shares
- ------------------------------ --------------- ------------ ------------
-----% -----% -----%
S&P 500 Index
- ------------------------------ --------------- ------------ ------------
</TABLE>
* January 4, 1993 for Investor A Shares; Investor B shares do not have a
long-term performance record because they have been offered for less than one
calendar year.
FEES AND EXPENSES
The following tables show the fees and expenses that you pay if you buy and hold
shares of the Growth Equity Portfolio.
<TABLE>
<CAPTION>
SHAREHOLDER FEES (FEES YOU PAY DIRECTLY)
- --------------------------------------- -------------------------------------- --------------------------------------
Maximum deferred sales
Maximum sales charge (load) charge (load) shown as a % of
to buy shares, shown as a % of the offering price or sale price,
the offering price whichever is less
- --------------------------------------- -------------------------------------- --------------------------------------
<S> <C> <C>
Investor A Shares 5.50%(1) None
- --------------------------------------- -------------------------------------- --------------------------------------
Investor B Shares None 5.00%(2)
- --------------------------------------- -------------------------------------- --------------------------------------
</TABLE>
(1) Reduced sales charges may be available. See "Distribution
Arrangements/Sales Charges" below.
<PAGE> 317
(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.
<TABLE>
<CAPTION>
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE PORTFOLIO'S
ASSETS)
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Total Annual
Distribution Portfolio
Management (12b-1) and Operating
Fees Service Fees Other Expenses Expenses
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Investor A Shares
----% ----% ----% ----%
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Investor B Shares
----% ----% ----% ----%
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
Note: Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Investor A Shares and Investor B shares for the last fiscal year
were less than the amounts shows above because certain of the Portfolio's
service providers voluntarily waived a portion of their fees and/or reimbursed
the Portfolio for certain other expenses. These fee waivers or reimbursements
were 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, were ___% and ___%, respectively, for
Investor A Shares and ___% and ___%, respectively, for Investor B Shares. The
Fund's service providers intend to continue these fee waivers and expense
reimbursements but are not obligated to do so.
EXAMPLE
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:
<TABLE>
<CAPTION>
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
1 year 3 years 5 years 10 years
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Investor A Shares $ $ $ $
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Investor B Shares $ $ $ $
- ---------------------------------------------------------------------------------------------------------------------
If you hold Investor B Shares, you would pay the following expenses if you did not sell your shares:
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
$ $ $ $
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
<PAGE> 318
SMALL CAP EQUITY PORTFOLIO
INVESTMENT OBJECTIVE
The Portfolio's investment objective is capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
Under normal conditions, the Portfolio invests at least 65% of its assets in
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. Purchased stocks 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. In addition, the Portfolio is subject to the
additional risk that the growth 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 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.
<PAGE> 319
(sidebar)
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.
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. The bar chart shows how the performance of the Portfolio's Investor
A Shares has varied from year to year, and the table shows how the Portfolio's
average annual returns for one year, five years and since inception compare to
those of a selected 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. 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.
INVESTOR A SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 1998
- --------------------------------- ---------------- ------------- ------------
1 Year 5 Years Since
SMALL CAP EQUITY PORTFOLIO inception*
- --------------------------------- ---------------- ------------- ------------
<S> <C> <C> <C>
----% ----% ----%
Investor A Shares
- --------------------------------- ---------------- ------------- ------------
----% ----%
Investor B Shares N/A
- --------------------------------- ---------------- ------------- ------------
----% ----% ----%
Russell 2000 Index
- --------------------------------- ---------------- ------------- ------------
</TABLE>
* May 6, 1992 for Investor A Shares; March 1, 1995 for Investor B Shares.
(sidebar)
KNOW YOUR INDEX
THE RUSSELL 2000 INDEX is an unmanaged index comprised of the 2,000 smallest
companies in the Russell 3000 Index.
<PAGE> 320
FEES AND EXPENSES
The following tables show the fees and expenses that you pay if you buy and hold
shares of the Small Cap Equity Portfolio.
<TABLE>
<CAPTION>
SHAREHOLDER FEES (FEES YOU PAY DIRECTLY)
- --------------------------------------- -------------------------------------- --------------------------------------
Maximum deferred sales
Maximum sales charge (load) charge (load) shown as a % of
to buy shares, shown as a % of the offering price or sale price,
the offering price whichever is less
- --------------------------------------- -------------------------------------- --------------------------------------
<S> <C> <C>
Investor A Shares 5.50%(1) None
- --------------------------------------- -------------------------------------- --------------------------------------
Investor B Shares None 5.00%(2)
- --------------------------------------- -------------------------------------- --------------------------------------
</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.
<TABLE>
<CAPTION>
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE PORTFOLIO'S
ASSETS)
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Total Annual
Distribution Portfolio
Management (12b-1) and Operating
Fees Service Fees Other Expenses Expenses
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Investor A Shares
----% ----% ----% ----%
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Investor B Shares
----% ----% ----% ----%
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
Note: Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Investor A Shares and Investor B Shares for the last fiscal year
were less than the amounts shows above because certain of the Portfolio's
service providers voluntarily waived a portion of their fees and/or reimbursed
the Portfolio for certain other expenses. These fee waivers or reimbursements
were 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, were ___% and ___%, respectively, for
Investor A Shares and ___% and ___%, respectively, for Investor B Shares. The
Fund's service providers intend to continue these fee waivers and expense
reimbursements but are not obligated to do so.
<PAGE> 321
EXAMPLE
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:
<TABLE>
<CAPTION>
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
1 year 3 years 5 years 10 years
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Investor A Shares $ $ $ $
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Investor B Shares $ $ $ $
- ---------------------------------------------------------------------------------------------------------------------
If you hold Investor B Shares, you would pay the following expenses if you did not sell your shares:
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
$ $ $ $
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
<PAGE> 322
SMALL CAP EQUITY INDEX PORTFOLIO
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.
Unlike most of the Mercantile Stock Portfolios, which require shareholder
approval to change their investment objectives, the Small Cap Equity Index
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 sophisticated
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 cash flow 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 Stock Portfolios. By
typically investing in all 600 stocks in the Index, the Portfolio remains
broadly diversified, which may reduce some of this risk.
<PAGE> 323
RETURN HISTORY
The Portfolio does not have a long-term performance record because it has been
in operation for less than one calendar year.
FEES AND EXPENSES
The following tables show the fees and expenses that you pay if you buy and hold
shares of the Equity Index Portfolio.
<TABLE>
<CAPTION>
SHAREHOLDER FEES (FEES YOU PAY DIRECTLY)
- --------------------------------------- -------------------------------------- --------------------------------------
Maximum deferred sales
Maximum sales charge (load) charge (load) shown as a % of
to buy shares, shown as a % of the offering price or sale price,
the offering price whichever is less
- --------------------------------------- -------------------------------------- --------------------------------------
<S> <C> <C>
Investor A Shares 2.50%(1) None
- --------------------------------------- -------------------------------------- --------------------------------------
</TABLE>
(1) Reduced sales charges may be available. See "Distribution
Arrangements/Sales Charges" below.
<TABLE>
<CAPTION>
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE PORTFOLIO'S
ASSETS)
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Total Annual
Distribution Portfolio
Management (12b-1) and Operating
Fees Service Fees Other Expenses Expenses
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Investor A Shares ----% ----% ----% ----%
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
Note: 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 show 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 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___%, ___%
and ___%, respectively, for Investor A Shares. The Fund's service providers
intend to continue these fee waivers and expense reimbursements but are not
obligated to do so.
EXAMPLE
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
<PAGE> 324
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:
<TABLE>
<CAPTION>
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
1 year 3 years 5 years 10 years
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Investor A Shares $ $ $ $
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
<PAGE> 325
INTERNATIONAL EQUITY PORTFOLIO
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 of its 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 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.
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, 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. 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.
(sidebar)
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.
<PAGE> 326
RETURN HISTORY
The bar chart and table below show the Portfolio's annual returns and long-term
performance. The bar chart shows how the performance of the Portfolio's Investor
A Shares has varied from year to year, and the table shows how the Portfolio's
average annual returns for one year and since inception compare to those of a
selected 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. 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.
INVESTOR A SHARES YEAR-BY-YEAR TOTAL RETURNS
(AS OF DECEMBER 31 EACH YEAR)
(insert bar chart)
Best quarter:
Worst quarter:
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDING DECEMBER 31, 1998
- ------------------------------------------------------- ---------------- --------------
Since
INTERNATIONAL EQUITY PORTFOLIO 1 Year inception*
- ------------------------------------------------------- ---------------- --------------
<S> <C> <C>
----% ----%
Investor A Shares
- ------------------------------------------------------- ---------------- --------------
----% ----%
Investor B Shares
- ------------------------------------------------------- ---------------- --------------
----% ----%
Morgan Stanley Capital International Europe,
Australia & Far East (EAFE) Index
- ------------------------------------------------------- ---------------- --------------
</TABLE>
* April 4, 1994 for Investor A Shares; March 1, 1995 for Investor B Shares.
(sidebar)
KNOW YOUR INDEX
The Morgan Stanley Capital International Europe, Australia and Far East Index,
or EAFE Index, is an unmanaged index consisting of companies in Australia, New
Zealand, Europe and the Far East.
FEES AND EXPENSES
The following tables show the fees and expenses that you pay if you buy and hold
shares of the International Equity Portfolio.
<PAGE> 327
<TABLE>
<CAPTION>
SHAREHOLDER FEES (FEES YOU PAY DIRECTLY)
- --------------------------------------- -------------------------------------- --------------------------------------
Maximum deferred sales
Maximum sales charge (load) charge (load) shown as a % of
to buy shares, shown as a % of the offering price or sale price,
the offering price whichever is less
- --------------------------------------- -------------------------------------- --------------------------------------
<S> <C> <C>
Investor A Shares 5.50%(1) None
- --------------------------------------- -------------------------------------- --------------------------------------
Investor B Shares None 5.00%(2)
- --------------------------------------- -------------------------------------- --------------------------------------
</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.
<TABLE>
<CAPTION>
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM THE PORTFOLIO'S
ASSETS)
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Total Annual
Distribution Portfolio
Management (12b-1) and Operating
Fees Service Fees Other Expenses Expenses
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Investor A Shares ----% ----% ----% ----%
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Investor B Shares ----% ----% ----% ----%
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
Note: Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Investor A Shares and Investor B Shares for the last fiscal year
were less than the amounts shows above because certain of the Portfolio's
service providers voluntarily waived a portion of their fees and/or reimbursed
the Portfolio for certain other expenses. These fee waivers or reimbursements
were 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, were __% and __% respectively, for Investor
A Shares __% and __%, respectively, for Investor B Shares. The Fund's service
providers intend to continue these fee waivers and expense reimbursements but
are not obligated to do so.
EXAMPLE
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:
<PAGE> 328
<TABLE>
<CAPTION>
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
1 year 3 years 5 years 10 years
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Investor A Shares $ $ $ $
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Investor B Shares $ $ $ $
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
If you hold Investor B Shares, you would pay the following expenses if you did not sell your shares:
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
$ $ $ $
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
<PAGE> 329
ADDITIONAL INFORMATION ON RISK
The principal risks of investing in each Portfolio are described above. 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), money
market instruments, 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.
SELECTION OF INVESTMENTS
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolios and how they may advance the Portfolios' investment
objectives. It is possible, however, that these evaluations will prove to be
inaccurate.
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.
FREQUENT TRADING
Each Portfolio may trade its investments frequently in trying to achieve its
investment goal. This strategy increases the chances that the Portfolio will pay
investors short-term capital gains. These gains are taxable at higher rates than
long-term capital gains. Frequent trading could also mean higher brokerage
commissions and other transaction costs, which could reduce the Portfolio's
returns.
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.
<PAGE> 330
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.
<PAGE> 331
YOUR ACCOUNT
DISTRIBUTION ARRANGEMENTS/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>
<CAPTION>
- --------------------------------------- -------------------------------------- --------------------------------------
TYPES OF CHARGES INVESTOR A SHARES INVESTOR B SHARES
- --------------------------------------- -------------------------------------- --------------------------------------
<S> <C> <C>
Sales Charge (Load) A front-end sales charge is A contingent deferred sales
assessed at the time of your charge (CDSC) is assessed on
purchase. shares redeemed within six
years of purchase. Investor B
Shares automatically convert
to Investor A Shares eight
years after purchase.
- --------------------------------------- -------------------------------------- --------------------------------------
Distribution (12b-1) and Subject to annual distribution Subject to annual distribution
Service Fees and shareholder servicing fees and 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>
<PAGE> 332
CALCULATION OF SALES CHARGES
INVESTOR A SHARES
<TABLE>
<CAPTION>
BALANCED, EQUITY INCOME, GROWTH & INCOME EQUITY, GROWTH EQUITY,
SMALL CAP EQUITY, INTERNATIONAL EQUITY PORTFOLIOS
- --------------------------- -------------------------- -------------------------- --------------------------
Amount of transaction Sales charge as a % of Sales charge as a % of Dealers' reallowance as
the offering price per net asset value per share a % of offering price
share
- --------------------------- -------------------------- -------------------------- --------------------------
<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% 1.75%
- --------------------------- -------------------------- -------------------------- --------------------------
$1 million or more 0.50% 0.50% 0.40%
- --------------------------- -------------------------- -------------------------- --------------------------
</TABLE>
<TABLE>
<CAPTION>
EQUITY INDEX AND SMALL CAP EQUITY INDEX PORTFOLIOS
- --------------------------- -------------------------- -------------------------- --------------------------
Amount of transaction Sales charge as a % of Sales charge as a % of Dealers' reallowance as
the offering price per net asset value per share a % of offering price
share
- --------------------------- -------------------------- -------------------------- --------------------------
<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>
<PAGE> 333
The Fund's distributor reserves the right to pay the entire sales charges to
dealers. In addition, the 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.
CALCULATION OF SALES CHARGES
INVESTOR B SHARES
<TABLE>
<CAPTION>
- -------------------------------------------- ---------------------------------------------------------------
Number of years since purchase CDSC as a % of dollar amount subject to the charge
- -------------------------------------------- ---------------------------------------------------------------
<S> <C>
1 or less 5.0%
- -------------------------------------------- ---------------------------------------------------------------
1-2 4.0%
- -------------------------------------------- ---------------------------------------------------------------
2-3 3.0%
- -------------------------------------------- ---------------------------------------------------------------
3-4 3.0%
- -------------------------------------------- ---------------------------------------------------------------
4-5 2.0%
- -------------------------------------------- ---------------------------------------------------------------
5-6 1.0%
- -------------------------------------------- ---------------------------------------------------------------
More than 6 None
- -------------------------------------------- ---------------------------------------------------------------
</TABLE>
For purposes of calculating the CDSC, all purchases made during a calendar month
are considered to be made on the first day of that month. The CDSC is based on
the value of the Investor B Shares on the date that they are sold or the
original cost of the shares, whichever is lower. To keep your CDSC as low as
possible each time you sell shares, the Fund will first sell any shares in your
account that are not subject to a CDSC. If there are not enough of these, the
Fund will sell the shares that have the lowest CDSC.
SALES CHARGE REDUCTIONS AND WAIVERS
Additional purchases of Investor A Shares by existing Investor A shareholder
accounts at March 31, 1999 in the Balanced, Equity Income, Growth & Income
Equity, Growth Equity, Small Cap Equity and International Equity Portfolios
are eligible for reduced sales charges. See the Statement of Additional
Information or call Fund's distributor at 1-800-452-2724 for further
information.
You may also reduce the sales charge on INVESTOR A Shares through:
<PAGE> 334
- - 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 __). 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.
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 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.
<PAGE> 335
If you think you qualify for any these exemptions, please call the Fund at
1-800-452-2724 before buying any shares.
(sidebar)
PURCHASE OF INVESTOR A SHARES AT NET ASSET VALUE
From time to time, the 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.
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 __).
- - 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.
<PAGE> 336
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.
EXPLANATION OF SALES PRICE
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.
(sidebar)
BUSINESS DAYS DEFINED
A business day is any day that both the New York Stock Exchange (NYSE) and the
Federal Reserve Bank of St. Louis are open for business. Currently, the Fund
observes the following holidays: New Year's Day, Martin Luther King Jr. Day,
Presidents' Day, Good Friday, Memorial Day (observed), Independence Day
(observed), Labor Day, Columbus Day, Veterans' Day, Thanksgiving and Christmas.
- - 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 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.
- - If you properly place a purchase order 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 canceled.
<PAGE> 337
HOW TO BUY SHARES
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
the Fund at P.O. Box 78069, 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.
<TABLE>
<CAPTION>
MINIMUM INVESTMENTS
- ------------------------------------ ----------------------------------- -----------------------------------
To Open Your Account To Add to Your Account
- ------------------------------------ ----------------------------------- -----------------------------------
<S> <C> <C>
Regular accounts $1,000 $100
- ------------------------------------ ----------------------------------- -----------------------------------
Sweep program through your None None
financial institution
- ------------------------------------ ----------------------------------- -----------------------------------
Wrap fee program through your
financial institution None None
- ------------------------------------ ----------------------------------- -----------------------------------
Payroll Deduction Program* None $ 25
- ------------------------------------ ----------------------------------- -----------------------------------
Automatic Exchange $1,000 minimum account balance
Program* $5,000
- ------------------------------------ ----------------------------------- -----------------------------------
Automatic Investment Program*
$ 50 $ 50
- ------------------------------------ ----------------------------------- -----------------------------------
</TABLE>
* See Investor Programs below.
HOW TO SELL SHARES
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
<PAGE> 338
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 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. The proceeds of the sale
of Investor B Shares will be reduced by the applicable contingent deferred sales
charge (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.
(sidebar)
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 or more, 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.
<PAGE> 339
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 20th day
(or the next business day after 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 from 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 contingent deferred sales
charge 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.
<PAGE> 340
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 25th 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.
<PAGE> 341
GENERAL TRANSACTION POLICIES
The Fund reserves the right to:
- - 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.
<PAGE> 342
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 Equity Income, Equity Index, Growth & Income Equity and
Growth Equity Balanced 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.
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 under current view, which may be subject to
change in the future, generally affecting the Portfolios and their shareholders.
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 International
<PAGE> 343
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.
- - For more information regarding the taxation of the Portfolios, consult the
Statement of Additional Information 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 you specific situation.
(sidebar)
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.
<PAGE> 344
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 as a
Portfolio % of net assets
- ------------------------------------------- --------------------------------
<S> <C>
Balanced Portfolio
- ------------------------------------------- --------------------------------
Growth & Income Equity Portfolio
- ------------------------------------------- --------------------------------
Equity Income Portfolio
- ------------------------------------------- --------------------------------
Equity Index Portfolio
- ------------------------------------------- --------------------------------
Growth Equity Portfolio
- ------------------------------------------- --------------------------------
Small Cap Equity Portfolio
- ------------------------------------------- --------------------------------
Small Cap Equity Index Portfolio*
- ------------------------------------------- --------------------------------
International Equity Portfolio
- ------------------------------------------- --------------------------------
</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.
<PAGE> 345
FINANCIAL HIGHLIGHTS
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
[____________________], independent accountants, whose report, along with the
Portfolios' financial statements, is included in the Fund's Annual Report to
Shareholders, and [___________________________________________] the SAI. The
Small Cap Equity Index Portfolio did not conduct investment operations during
the periods covered by the tables.
<PAGE> 346
<TABLE>
<CAPTION>
Balanced Portfolio
(For a Share(a) outstanding throughout each period)
Investor A Shares
-----------------------------------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended
Nov. 30, Nov. 30, Nov. 30, Nov. 30, Nov. 30
1998 1997 1996 1995 1994(a)
---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.................. $12.58 $11.65 $9.61 $10.22
------ ------ ----- ------
Investment Activities
Net investment income................ 0.32 0.32 0.32 0.28
Net realized and unrealized
gains from investments.............. 1.47 1.34 2.02 (0.47)
---- ---- ---- ------
Total from Investment
Activities.......................... 1.79 1.66 2.34 (0.19)
---- ---- ---- ------
Distributions
Net investment income................ (0.40) (0.31) (0.30) (0.29)
Net realized gains................... (0.71) (0.42) -- --
In excess of net
investment income................... -- -- (0.13) --
------ ------ ------ ------
Total Distributions................. (1.11) (0.73) (0.30) (0.42)
------ ------ ------ ------
Net Asset Value, End of Period......... $13.26 $12.58 $11.65 $9.61
====== ====== ====== =====
Total Return (excludes
sales charges)....................... 15.38% 15.10% 24.85% (1.91%)
Ratios/Supplemental Data:
Net Assets at end of period (000) $9,923 $9,328 $8,348 $7,321
Ratio of expenses to average net
assets (including waivers)........... 1.27% 1.27% 1.27% 1.27%
Ratio of net investment income to
Average net assets (including
waivers)............................. 2.57% 2.79% 2.98% 2.77%
Ratio of expenses to average net
assets (including waivers)*.......... 1.37% 1.37% 1.37% 1.39%
Ratio of net investment income
to average net assets
(before waivers)*.................... 2.47% 2.69% 2.88% 2.65%
Portfolio turnover**................... 43.60% 85.16% 58.16% 49%
</TABLE>
<TABLE>
<CAPTION>
Balanced Portfolio
(For a Share(a) outstanding throughout each period)
Investor B Shares
---------------------------------------------------------
Year Ended Year Ended Year Ended March 1, 1995 to
Nov. 30, Nov. 30, Nov. 30, November 30,
1998 1997 1996 1995(b)
---- ---- ---- -------
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.................. $12.49 $11.59 $10.13
------ ------ ------
Investment Activities
Net investment income................ 0.25 0.25 0.22
Net realized and unrealized
gains from investments.............. 1.43 1.33 1.44
---- ---- ----
Total from Investment
Activities.......................... 1.68 1.58 1.66
---- ---- ----
Distributions
Net investment income................ (0.26) (0.26) (0.20)
Net realized gains................... (0.71) (0.42) --
In excess of net
investment income................... (0.05) -- --
------ ------ ------
Total Distributions................. (1.02) (0.68) (0.20)
------ ------ ------
Net Asset Value, End of Period......... $13.15 $12.49 $11.59
====== ====== ======
Total Return (excludes
sales charges)....................... 14.57% 14.35% 23.92%(c)
Ratios/Supplemental Data:
Net Assets at end of period (000) $522 $321 $36
Ratio of expenses to average net
assets (including waivers)........... 1.96% 1.96% 1.93%(d)
Ratio of net investment income to
Average net assets (including
waivers)............................. 1.85% 2.09% 2.28%(d)
Ratio of expenses to average net
assets (including waivers)*.......... 2.06% 2.06% 2.03%(d)
Ratio of net investment income
to average net assets
(before waivers)*.................... 1.75% 1.99% 2.18%(d)
Portfolio turnover**................... 43.60% 85.16% 58.16%
</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 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 initial public investment.
(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 through November 30, 1995.
(d) Not Annualized.
<PAGE> 347
<TABLE>
<CAPTION>
Equity Income Portfolio
(For a Share outstanding throughout the period)
February 27, 1997 February 27, 1997
Fiscal Year Ended to Fiscal Year Ended 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 $10.00 $10.00
------- ------
Investment Activities
Net investment income..................... 0.16 0.10
Net realized and unrealized gains
from investments.......................... 1.57 1.57
---- ----
Total from Investment Activities....... 1.73 1.67
---- ----
Distributions
Net investment income....................... (0.16) (0.10)
In excess of net investment income.......... (0.01) (0.02)
----- -----
Total Distributions......................... (0.17) (0.12)
----- -----
Net Asset Value, End of Period $11.56 $11.55
======= ======
Total Return (excludes sales charges)....... 17.42%(b) 16.75%(b)
Ratios/Supplementary Data:
Net assets at the end of period (000)....... $173 $131
Ratio of expenses to average net
Assets (including waivers)................ 0.45%(c) 1.14%(c)
Ratio of net investment income to
average net assets (including waivers).... 2.29%(c) 1.53%(c)
Ratio of expenses to average net
assets*................................... 1.38%(c) 2.07%(c)
Ratio of net investment income to
average net assets*....................... 1.36%(c) 0.60%(c)
Portfolio turnover**........................ 48.33% 48.33%
</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) Period from commencement of operations.
(b) Not Annualized.
(c) Annualized.
<PAGE> 348
Equity Index Portfolio
(For a Share outstanding throughout the period)
<TABLE>
<CAPTION>
Fiscal Year May 1, 1997
Ended to
November 30, 1998 November 30, 1997(a)
----------------- --------------------
Investor A Investor A
Shares Shares
------ ------
<S> <C> <C>
Net Asset Value, Beginning of Period............................................ $10.00
------
Investment Activities
Net investment income........................................................ 0.07
Net realized and unrealized gains from investments........................... 1.94
-----
Total from Investment Activities....................................... 2.01
-----
Distributions
Net investment income........................................................ (0.07)
In excess of net investment income........................................... (0.01)
Total Distributions.................................................... (0.08)
-----
Net Asset Value, End of Period.................................................. $11.93
======
Total Return (excludes sales charges)........................................... 20.14%(b)
Ratios/Supplementary Data:
Net assets at the end of period (000)........................................ $206
Ratio of expenses to average net assets...................................... 0.78%(c)
Ratio of net investment income to average net assets......................... 1.02%(c)
Ratio of expenses to average net assets*..................................... 1.21%(c)
Ratio of net investment income to average net assets*........................ 0.59%(c)
Portfolio turnover**......................................................... 1.66%
</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) Period from commencement of operations.
(b) Not Annualized.
(c) Annualized.
<PAGE> 349
<TABLE>
<CAPTION>
Growth & Income Equity Portfolio
(For a Share(a) outstanding throughout each period)
Year Ended November 30,
--------------------------------------------------------------------------------------
1998 1997 1996 1995 1994(a)
---- ---- ---- ---- -------
Investor Investor Investor Investor Investor
A Shares A Shares A Shares A Shares A Shares
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period............... $18.67 $16.30 $12.70 $14.74
------ ------ ------ ------
Investment Activities
Net investment income............. 0.11 0.20 0.23 0.20
Net realized and unrealized gains
(losses) from investments....... 3.96 3.32 3.74 (0.17)
---- ---- ---- -----
Total from Investment Activities.. 4.07 3.52 3.97 0.03
---- ---- ---- ----
Distributions
Net investment income............. (0.13) (0.20) (0.23) (0.21)
In excess of net investment income (0.03) (0.01) -- --
Net realized gain................. (1.46) (0.94) (0.14) (0.18)
In excess of net realized gains... -- -- -- (1.68)
-- -- -- -----
Total Distributions............... (1.62) (1.15) (0.37) (2.07)
----- ----- ------ -----
Net Asset Value, End of Period....... $21.12 $18.67 $16.30 $12.70
====== ====== ====== ======
Total Return (excludes sales charges) 23.90% 22.99% 31.95% 0.20%
Ratios/Supplemental Data:
Net Assets of end of period (000) $46,372 $38,229 $25,082 $18,343
Ratio of expenses to average net assets
(including waivers) ............. 1.04% 1.05% 1.05% 1.05%
Ratio of net investment income to
average net assets (including
waivers) ......................... 0.60% 1.20% 1.59% 1.45%
Ratio of expenses to average net assets
(before waivers)*................. 1.14% 1.15% 1.15% 1.15%
Ratio of net investment income to
average net assets (before waivers)* 0.50% 1.10% 1.49% 1.35%
Portfolio turnover** 57.11% 63.90% 58.50% 65%
</TABLE>
- -----------------------------
* During the period, 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) As of December 1, 1990, the Portfolio designated the existing series of
Shares as "Investor" Shares. 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.
<PAGE> 350
Growth & Income Equity Portfolio
(For a Share(a) outstanding throughout the period)
<TABLE>
<CAPTION>
Investor B Shares
---------------------------------------------------------------
March 1, 1995
Year Ended Year Ended Year Ended TO
Nov. 30, 1998 Nov. 30, 1997 Nov. 30, 1996 Nov. 30, 1995(b)
------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $18.58 $16.23 $13.43
------- ------- ------
Investment Activities
Net investment income..................... (0.02) 0.11 0.14
Net realized and unrealized gains
from investments.......................... 3.93 3.30 2.81
---- ---- ----
Total from Investment Activities....... 3.91 3.41 2.95
---- ---- ----
Distributions
Net investment income....................... -- (0.11) (0.15)
In excess of net investment income.......... (0.09) (0.01) --
----- -----
Net realized gains.......................... (1.46) (0.94) --
----- -----
In excess of net realized gains............ -- -- --
Total Distributions......................... (1.55) (1.06) (0.15)
----- ----- ------
Net Asset Value, End of Period $20.94 $18.58 $16.23
====== ====== ======
Total Return (excludes sales charges)....... 23.04% 22.29% 31.20%(c)
Ratios/Supplementary Data:
Net assets at the end of period (000)....... $6,349 $3,537 $781
Ratio of expenses to average net
assets (including waivers) 1.73%(c) 1.75% 1.75%(d)
Ratio of net investment income (loss) to
average net assets (including waivers)... (0.11)%(c) 0.49% 0.87%(d)
Ratio of expenses to average net
assets (before waivers)*.................. 1.83%(c) 1.85% 1.85%(d)
Ratio of net investment income to
average net assets (before waivers)*...... (0.21)%(c) 0.39% 0.77%(d)
Portfolio turnover**........................ 57.11% 63.90 58.50%(d)
</TABLE>
- --------------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** 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.
(b) Period from initial public investment.
(c) Represents the 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) Not Annualized.
<PAGE> 351
Growth Equity Portfolio(a)
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
Year Ended October 1, 1997 Feb. 23, 1998
Nov. 30, through through
1998 November 30, 1997 Year Ended September 30, Nov. 30, 1998
---------- ----------------- ------------------------------------------------ -------------
Investor A Investor A Investor B
Shares Shares(a) 1997 1996 1995 1994 Shares(b)
---------- ----------------- ---- ---- ---- ---- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period............... $18.75 $15.06 $13.80 $9.74 $10.02
Income from investment operations
Net investment income............. (0.01) 0.08 0.12 0.10 0.07
Net realized and unrealized
gain (loss) on investments...... (0.24) 4.75 1.32 4.05 (0.25)
------ ---- ------ ----- ------
Total from investment operations.. (0.25) 4.83 1.44 4.15 (0.18)
------ ---- ------ ----- ------
Distributions
Net investment income............. -- (0.09) (0.11) (0.09) (0.07)
Net realized gain on investments.. (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..................... $16.26 $18.75 $15.06 $13.80 $9.74
===== ===== ====== ====== =====
Total return (excludes sales charges) (1.25)%(c) 33.85% 10.48% 42.90% (1.84%)
Ratios/Supplemental Data
Net assets, end of period (000)... $3,467 $68,965 $55,573 $43,708 $30,282
Ratio of expenses to average
net assets...................... 1.17%(d) 1.14% 1.17% 1.28% 1.36%
Ratio of net investment income to
average net assets.............. (0.27)%(d) 0.44% 0.86% 0.90% 0.74%
Ratio of expenses to average
net assets*..................... 1.42%(d) 1.39% 1.45% 1.58% 1.64%
Ratio of net investment income to
average net assets*............. (0.52)% (d) 0.19% 0.58% 0.60% 0.46%
Portfolio turnover**.............. 24.45% 42% 45% 45% 127%
- --------------------
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
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) The Portfolio commenced operations on January 4, 1993 as a portfolio of
Arrow Funds. On November 21, 1997, it was reorganized as a new portfolio of
the Fund. Upon it reorganization as portfolio of the Fund, the Portfolio
changed its fiscal year-end from September 30 to November 30.
(b) Period from initial public investment.
(c) Not Annualized.
(d) Annualized.
<PAGE> 352
Small Cap Equity Portfolio
(For a Share(a) outstanding throughout each period)
<TABLE>
<CAPTION>
Year Year Year Year Year
Ended Ended Ended Ended Ended
Nov. 30, Nov. 30, Nov. 30, Nov. 30, Nov. 30,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Investor Investor Investor Investor Investor
A Shares A Shares A Shares A Shares A Shares
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period........... $ 13.40 $ 13.44 $ 11.99 $ 13.14
Investment activities
Net investment income (loss)................. (0.05) (0.01) -- (0.03)
Net realized and unrealized gains from
investments................................ 2.50 1.03 2.36 0.89
------- ------- ------- -------
Total from investment activities............... 2.45 1.02 2.36 0.86
------- ------- ------- -------
Distributions
Net investment income........................ -- -- -- --
In excess of net investment income........... -- (0.01) -- --
Net realized gains........................... (0.82) (1.05) (0.91) (1.78)
-------- -------- -------- --------
In excess of net realized gains.............. -- -- -- (0.23)
------- ------- ------- --------
Total distributions.......................... (0.82) (1.06) (0.91) (2.01)
-------- -------- -------- --------
Net asset value, end of period................. $ 15.03 $ 13.40 $ 13.44 $ 11.99
======= ======= ======= =======
Total return (excludes sales charges).......... 19.45% 8.36% 21.47% 7.38%
Ratios/Supplemental Data:
Net Assets at end of period (000)............ $14,213 $13,889 $15,056 $10,899
Ratio of expenses to average net assets
(including waivers)........................ 1.25% 1.26% 1.26% 1.25%
Ratio of net investment income (loss) to
average net assets (including waivers)..... (0.29)% (0.13)% (0.12)% (0.44)%
Ratio of expenses to average net assets
(before waivers)*.......................... 1.35% 1.36% 1.36% 1.36%
Ratio of net investment income (loss) to
average net assets (before waivers)*....... (0.39)% (0.23)% (0.22)% (0.55)%
Portfolio turnover**......................... 80.23% 65.85% 83.13% 85%
</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 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.
<PAGE> 353
Small Cap Equity Portfolio
(For a Share(a) outstanding throughout each period)
<TABLE>
<CAPTION>
Investor B Shares
--------------------------------------------------------------------------------
Year Ended Year Ended Year Ended March 1, 1995 to
Nov. 30, Nov. 30, Nov. 30, Nov. 30,
1998 1997 1996 1995(b)
---- ---- ---- -------
Investor Investor Investor Investor
B Shares B Shares B Shares B Shares
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period..................... $13.24 $13.37 $11.83
------ ------ ------
Investment Activities
Net investment income (loss)............ (0.13) (0.07) (0.03)
Net realized and unrealized
gains from investments................. 2.45 0.99 1.57
---- ---- ----
Total from Investment
Activities............................. 2.32 0.92 1.54
---- ---- ----
Distributions
Net investment income................... -- -- --
In excess of net investment
income................................ -- -- --
Net realized gains...................... (0.82) (1.05) --
In excess of net
realized gains......................... -- -- --
-- -- --
Total Distributions.................... (0.82) (1.05) --
----- ----- --
Net Asset Value, End of Period............ $14.74 $13.24 $13.37
====== ====== ======
Total Return (excludes
sales charges).......................... 18.62% 7.63% 20.83%(c)
Ratios/Supplemental Data:
Net Assets at end of period (000) $1,503 $1,272 $603
Ratio of expenses to average net
assets (including waivers).............. 1.95% 1.96% 1.96%(d)
Ratio of net investment income (Loss) to
average net assets (including
waivers)................................ (0.99%) (0.83%) (0.78%)(d)
Ratio of expenses to average net
assets (before waivers)*................ 2.05% 2.06% 2.06%(d)
Ratio of net investment income (Loss)to
average net assets (before
waivers)*............................... (1.09%) (0.93%) (0.88%)(d)
Portfolio turnover**...................... 80.23% 65.85% 83.13%
</TABLE>
- ---------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the 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 initial public investment.
(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 through November 30, 1995.
(d) Not Annualized.
<PAGE> 354
<TABLE>
<CAPTION>
International Equity Portfolio
(For a Share(c) outstanding throughout each period)
Investor A Shares
------------------------------------------------------------------
Year Ended Year Ended Year Ended Year Ended April 4, 1994
Nov. 30, Nov. 30, Nov. 30, Nov. 30, to Nov. 30,
1998 1997 1996 1995 1994(a)(b)
---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.................. $12.05 $10.76 $9.90 $10.00
------ ------ -----
Investment Activities
Net investment income (loss)......... (0.02) 0.02 0.02 (0.01)
Net realized and unrealized
gains from investments and
foreign currency.................... 0.32 1.27 0.86 (0.09)
---- ---- ---- ------
Total from Investment
Activities.......................... 0.30 1.29 0.88 (0.10)
---- ---- ---- ------
Distributions
In excess of net investment ncome.... (0.05) -- -- --
Net realized gains................... (0.31) -- (0.01) --
Tax return of capital................ -- -- (0.01) --
------ ------ ------- -----
Total Distributions................. (0.36) -- (0.02) --
------ ------ ------- -----
Net Asset Value, End of Period......... $11.99 $12.05 $10.76 $9.90
====== ====== ====== =====
Total Return (excludes
sales charges)....................... 2.58% 11.99% 8.89% (1.00%)(f)
Ratios/Supplemental Data:
Net Assets at end of period (000) $2,854 $2,573 $1,568 $791
Ratio of expenses to average net
assets (including waivers)........... 1.59% 1.44% 1.45% 1.55%(g)
Ratio of net investment income
(loss) to average net assets
(including waivers).................. (0.20%) 0.19% 0.07% (0.39%)(g)
Ratio of expenses to average net
assets (before waivers)*............. 1.75% 1.75% 1.76% 1.89%(g)
Ratio of net investment income
(loss) to average net assets
(before waivers)*.................... (0.36%) (0.12)% (0.24)% (0.73%)(g)
Portfolio turnover**................... 75.18% 77.63% 62.78% 21%
</TABLE>
<TABLE>
<CAPTION>
International Equity Portfolio
(For a Share(c) outstanding throughout each period)
Investor B Shares
--------------------------------------------------------
Year Ended Year Ended Year Ended March 1, 1995 to
Nov. 30, Nov. 30, Nov. 30, November 30,
1998 1997 1996 1995(d)
---- ---- ---- -------
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.................. $11.90 $10.71 $9.26
Investment Activities
Net investment income (loss)......... (0.09) (0.04) (0.03)
Net realized and unrealized
gains from investments and
foreign currency.................... 0.30 1.23 1.48
---- ---- ----
Total from Investment
Activities.......................... (0.21) 1.19 1.45
------ ---- ----
Distributions
In excess of net investment ncome.... (0.03) -- --
Net realized gains................... (0.31) -- --
Tax return of capital................ -- -- --
------ ------ -----
Total Distributions................. (0.34) -- --
------ ----- ----
Net Asset Value, End of Period......... $11.77 $11.90 $10.71
====== ====== ======
Total Return (excludes
sales charges)....................... 1.82% 11.11% 8.38%(f)
Ratios/Supplemental Data:
Net Assets at end of period (000) $562 $437 $102
Ratio of expenses to average net
assets (including waivers)........... 2.29% 2.14% 2.02%(g)
Ratio of net investment income
(loss) to average net assets
(including waivers).................. (0.91)% (0.50)% (0.96%)(g)
Ratio of expenses to average net
assets (before waivers)*............. 2.45% 2.46% 2.44%(g)
Ratio of net investment income
(loss) to average net assets
(before waivers)*.................... (1.07%) (0.08%) (1.38%)(g)
Portfolio turnover**................... 75.18% 77.63% 62.78%
</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) Period from commencement of operations.
(b) On April 4, 1994, the Portfolio issued a series of Shares which were
designated as "Trust" Shares. In addition, on May 2, 1994, the Portfolio
issued a new series of Shares which were designated as "Investor" Shares.
The financial highlights presented for April 4, 1994 to May 2, 1994
represent financial highlights applicable to Trust Shares.
(c) 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.
(d) Period from date of initial public offering.
(e) 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.
(f) Not Annualized.
(g) Annualized
<PAGE> 355
[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
<PAGE> 356
MERCANTILE MUTUAL FUNDS, INC.
(FORMERLY KNOWN AS THE ARCH FUND(R), INC.)
Statement of Additional Information
for
Treasury Money Market Portfolio
Money Market Portfolio
Tax-Exempt Money Market Portfolio
U.S. Government Securities Portfolio
Intermediate Corporate Bond Portfolio
Bond Index Portfolio
Government & Corporate Bond Portfolio
Short-Intermediate Municipal Portfolio
Missouri Tax-Exempt Bond Portfolio
National Municipal Bond Portfolio
Balanced Portfolio
Equity Income Portfolio
Equity Index Portfolio
Growth & Income Equity Portfolio
Growth Equity Portfolio
Small Cap Equity Portfolio
Small Cap Equity Index Portfolio
International Equity Portfolio
March 31, 1999
TRUST SHARES, TRUST II SHARES, INSTITUTIONAL SHARES
INVESTOR A SHARES AND INVESTOR B SHARES
This Statement of Additional Information, which provides supplemental
information applicable to the above-listed Portfolios of Mercantile Mutual
Funds, Inc. (the "Fund"), is not a prospectus. No investment in shares of any
Portfolio should be made without reading the applicable prospectus. The
prospectuses for the Portfolios listed below, as they may be supplemented or
revised from time to time (the "Prospectuses"), as well as the Annual Report to
Shareholders dated November 30, 1998 (the "Annual Report"), may be obtained,
without charge, by writing:
Mercantile Mutual Funds, Inc.
P.O. Box 78069
St. Louis, MO 63178
or by calling 1-800-452-2724.
<PAGE> 357
Current Prospectuses
o Prospectus for Trust Shares and Trust II Shares of the Portfolios dated
March 31, 1999
o Prospectus for Trust Shares of the Money Market Portfolios dated March 31,
1999
o Prospectus for Institutional Shares of the Portfolios dated March 31, 1999
o Prospectus for Investor A Shares and Investor B Shares of the Money Market
Portfolios dated March 31, 1999
o Prospectus for Investor A Shares and Investor B Shares of the Taxable Bond
Portfolios dated March 31, 1999
o Prospectus for Investor A Shares and Investor B Shares of the Tax-Exempt
Bond Portfolios dated March 31, 1999
o Prospectus for Investor A Shares and Investor B Shares of the Stock
Portfolios dated March 31, 1999
The financial statements included in the Annual Report and the report
thereon of ______________________, the Fund's independent accountants, are
_________________ into this Statement of Additional Information.
<PAGE> 358
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
GENERAL INFORMATION..........................................................
DESCRIPTION OF THE FUND......................................................
DESCRIPTION OF SHARES........................................................
INVESTMENT STRATEGIES, POLICIES AND RISKS....................................
PRICING OF SHARES............................................................
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION...............................
YIELD AND TOTAL RETURN INFORMATION...........................................
ADDITIONAL INFORMATION CONCERNING TAXES......................................
MANAGEMENT OF THE FUND.......................................................
INDEPENDENT AUDITORS.........................................................
COUNSEL
MISCELLANEOUS................................................................
APPENDIX A...................................................................
APPENDIX B...................................................................
</TABLE>
<PAGE> 359
GENERAL INFORMATION
This Statement of Additional Information should be read in conjunction
with a current Prospectus. This Statement of Additional Information relates to
the Prospectuses for Trust Shares, Trust II Shares, Institutional Shares,
Investor A Shares and Investor B Shares of the eighteen separate investment
portfolios ("Portfolios") listed on the cover page. This Statement of Additional
Information is incorporated by reference in its entirety into the Prospectuses.
No investment in shares of the Portfolios should be made without reading a
Prospectus.
PORTFOLIO SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, MERCANTILE BANK NATIONAL ASSOCIATION, MERCANTILE TRUST COMPANY
NATIONAL ASSOCIATION, MISSISSIPPI VALLEY ADVISORS INC., OR ANY OF THEIR
RESPECTIVE AFFILIATES. PORTFOLIO SHARES ALSO ARE NOT FEDERALLY INSURED BY,
GUARANTEED BY, OBLIGATIONS OF OR OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT, THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT RETURN AND PRINCIPAL VALUE WILL VARY AS A RESULT
OF MARKET CONDITIONS OR OTHER FACTORS SO THAT PORTFOLIO SHARES, WHEN REDEEMED,
MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. AN INVESTMENT IN THE
PORTFOLIOS INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL
AMOUNT INVESTED. THERE IS NO ASSURANCE THAT THE TREASURY MONEY MARKET, MONEY
MARKET AND TAX-EXEMPT MONEY MARKET PORTFOLIO WILL BE ABLE TO MAINTAIN A STABLE
NET ASSET VALUE OF $1.00 PER SHARE.
DESCRIPTION OF MERCANTILE MUTUAL FUNDS, INC.
Mercantile Mutual Funds, Inc. (the "Fund"), formerly known as The ARCH
Fund, Inc., is an open-end investment company currently offering sixty-five
classes of shares in nineteen investment portfolios.
The Fund was organized on September 9, 1982 as a Maryland corporation.
This Statement of Additional Information relates to the Treasury Money Market
Portfolio, Money Market Portfolio, Tax-Exempt Money Market Portfolio (the "Money
Market Portfolios"), U.S. Government Securities Portfolio, Intermediate
Corporate Bond Portfolio, Bond Index Portfolio, Government & Corporate Bond
Portfolio, Short-Intermediate Municipal Portfolio, Missouri Tax-Exempt Bond
Portfolio, National Municipal Bond Portfolio (the "Bond Portfolios"), Balanced
Portfolio, Equity Income Portfolio, Equity Index Portfolio, Growth & Income
Equity Portfolio, Growth Equity Portfolio, Small Cap Equity Portfolio, Small Cap
Equity Index Portfolio and International Equity Portfolio (the "Equity
Portfolios"). The Tax-Exempt Money Market Portfolio (the "Predecessor Tax-Exempt
Money Market Portfolio") and the Missouri Tax Exempt Bond Portfolio (the
"Predecessor Missouri Tax-Exempt Bond Portfolio") commenced operations on July
10, 1986 and July 15, 1988, respectively, as separate investment portfolios of
The ARCH Tax-Exempt Trust, which was organized as a Massachusetts business
trust. On October 2, 1995, the Predecessor Tax-Exempt Money Market Portfolio and
the Predecessor Missouri Tax-Exempt Bond Portfolio were reorganized as new
portfolios of the
<PAGE> 360
Fund. Prior to the reorganization, these Predecessor Portfolios offered and sold
shares of beneficial interest that were similar to the Fund's Trust Shares,
Investor A Shares and Investor B Shares. The Growth Equity Portfolio commenced
operations on January 4, 1993 as a separate investment portfolio (the
"Predecessor Growth Equity Portfolio") of Arrow Funds, which was organized as a
Massachusetts business trust. On November 21, 1997, the Predecessor Growth
Equity Portfolio was reorganized as a new Portfolio of the Fund. Prior to the
reorganization, the Predecessor Growth Equity Portfolio offered and sold shares
of beneficial interests that were similar to the Fund's Investor A Shares.
DESCRIPTION OF SHARES
The Fund's Articles of Incorporation authorize the Board of Directors
to issue up to twenty billion full and fractional shares of capital stock, and
to classify or reclassify any unissued shares of the Fund into one or more
additional classes by setting or changing in any one or more respects their
respective preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption. Pursuant to such authority the Fund's Board of Directors has
authorized the issuance of sixty-five classes of shares representing interests
in one of nineteen investment Portfolios, including the Treasury Money Market,
Money Market, Tax-Exempt Money Market, U.S. Government Securities, Intermediate
Corporate Bond, Bond Index, Government & Corporate Bond, Short-Intermediate
Municipal, Missouri Tax-Exempt Bond, National Municipal Bond, Balanced, Equity
Income, Equity Index, Growth & Income Equity, Growth Equity, Small Cap Equity,
Small Cap Equity Index and International Equity Portfolios. Trust Shares, Trust
II Shares, Institutional Shares, Investor A Shares and Investor B Shares in each
Portfolio (except the Treasury Money Market, Intermediate Corporate Bond, Bond
Index, Equity Index and Small Cap Equity Index Portfolios, which do not offer
Investor B Shares, the Tax-Exempt Money Market and Short-Intermediate Municipal
Portfolios, which do not offer Institutional or Investor B Shares, the Missouri
Tax-Exempt Bond and National Municipal Bond Portfolios, which do not offer
Institutional Shares and the Equity and Bond Portfolios, which do not offer
Trust II Shares) are offered through separate prospectuses to different
categories of investors. The Fund also offers shares without class designation
in the Conning Money Market Portfolio through a separate prospectus. Portfolio
shares have no preemptive rights and only such conversion or exchange rights as
the Board may grant in its discretion. When issued for payment as described in
the Prospectuses, the shares will be fully paid and nonassessable.
Shares of each class in a Portfolio represent equal pro rata interests
in the investments held by that Portfolio and are identical in all respects,
except that Shares of each class bear separate distribution and/or shareholder
administrative servicing fees and certain other operating expenses, and enjoy
certain exclusive voting rights on matters relating to these fees. As a result
of payments for distribution and/or shareholder administrative servicing fees
and certain other operating expenses that may be made in differing amounts, the
net investment income of Trust Shares, Trust II Shares, Institutional Shares,
Investor A Shares and Investor B Shares of a Portfolio can be expected, at any
given time, to be different.
-2-
<PAGE> 361
Pursuant to its authority, the Board of Directors has authorized the
issuance of the following series of shares representing interests in the
Portfolios, each of which (except the Tax-Exempt Money Market and Missouri
Tax-Exempt Bond Portfolios) is classified as a diversified company under the
1940 Act: 1 billion Trust Shares, 2 billion Trust II Shares, 300 million
Institutional Shares and 100 million Investor A Shares, representing interests
in the Treasury Money Market Portfolio; 1.8 billion Trust Shares, 2 billion
Trust II Shares, 300 million Institutional Shares, 550 million Investor A Shares
and 50 million Investor B Shares, representing interests in the Money Market
Portfolio; 300 million Trust Shares, 2 billion Trust II Shares and 50 million
Investor A Shares, representing interests in the Tax-Exempt Money Market
Portfolio; 15 million Trust Shares, 20 million Institutional Shares, 5 million
Investor A Shares and 50 million Investor B Shares, representing interests in
the U.S. Government Securities Portfolio; 50 million Trust Shares, 25 million
Institutional Shares and 25 million Investor A Shares, representing interests in
the Intermediate Corporate Bond Portfolio; 50 million Trust Shares, 25 million
Institutional Shares and 25 million Investor A Shares representing interests in
the Bond Index Portfolio; 50 million Trust Shares, 20 million Institutional
Shares, 5 million Investor A Shares and 50 million Investor B Shares,
representing interests in the Government & Corporate Bond Portfolio; 25 million
Trust Shares and 25 million Investor A Shares, representing interests in the
Short-Intermediate Municipal Portfolio; 25 million Trust Shares, 25 million
Investor A Shares and 25 million Investor B Shares, representing interests in
the Missouri Tax-Exempt Bond Portfolio; 50 million Trust Shares, 25 million
Investor A Shares and 25 million Investor B Shares, representing interests in
the National Municipal Bond Portfolio; 15 million Trust Shares, 20 million
Institutional Shares, 5 million Investor A shares and 50 million Investor B
Shares, representing interests in the Balanced Portfolio; 50 million Trust
Shares, 25 million Institutional Shares, 25 million Investor A Shares and 25
million Investor B Shares representing interests in the Equity Income Portfolio;
50 million Trust Shares, 25 million Institutional Shares and 25 million Investor
A Shares representing interests in the Equity Index Portfolio; 50 million Trust
Shares, 20 million Institutional Shares, 5 million Investor A Shares and 50
million Investor B Shares, representing interests in the Growth & Income Equity
Portfolio; 50 million Trust Shares, 25 million Institutional Shares, 25 million
Investor A Shares and 25 million Investor B Shares, representing interests in
the Growth Equity Portfolio; 35 million Trust Shares, 20 million Institutional
Shares, 5 million Investor A Shares and 50 million Investor B Shares,
representing interests in the Small Cap Equity Portfolio; 50 million Trust
Shares, 25 million Institutional Shares and 25 million Investor A Shares,
representing interests in the Small Cap Equity Index Portfolio; and 10 million
Trust Shares, 10 million Institutional Shares, 10 million Investor A Shares and
50 million Investor B Shares, representing interests in the International Equity
Portfolio. Shares in the Fund's Portfolios will be issued without Share
certificates.
Trust Shares are offered to financial institutions acting on their own
behalf or on behalf of discretionary and non-discretionary accounts for which
they may receive account-level asset-based management fees. Trust Shares also
are offered to financial institutions for accounts for which they provide cash
management services. Trust II Shares are offered to financial institutions
acting on their own behalf or on behalf of certain qualified accounts.
Institutional Shares are offered to financial institutions acting on behalf of
discretionary and non-discretionary accounts for which they do not receive
account-level asset-based management fees. Investor A Shares and Investor B
Shares are sold through selected broker/dealers and other financial
-3-
<PAGE> 362
intermediaries to individual or institutional customers. Trust Shares, Trust II
Shares and Institutional Shares are sold without a sales charge. Investor A
Shares of the Money Market Portfolios are sold without a sales charge, Investor
A Shares of the Equity Portfolios (other than the U.S. Government Securities,
Equity Index and Small Cap Equity Index Portfolios) are sold with a maximum 5.5%
front-end sales charge, Investor A Shares of the Bond Portfolios (other than the
Bond Index and Short-Intermediate Municipal Portfolios) are sold with a maximum
4.75% front-end sales charge, and Investor A Shares of the U.S. Government
Securities, Equity Index, Small Cap Equity Index, Bond Index and
Short-Intermediate Municipal Portfolios are sold with a maximum 2.5% front-end
sales charge. Investor B Shares are sold with a maximum 5.0% contingent deferred
sales charge. Trust Shares, Trust II Shares, Institutional Shares, Investor A
Shares and Investor B Shares bear their pro rata portion of all operating
expenses paid by a Portfolio, except that Trust Shares and Institutional Shares
bear all payments under the Portfolio's respective Administrative Services Plans
adopted for such Shares and Investor A Shares and Investor B Shares bear all
payments under the Portfolio's respective Distribution and Services Plans
adopted for such Shares. In addition, Institutional Shares of a Portfolio bear
the expense of certain sub-transfer agency fees.
Except as noted in the Prospectuses with respect to certain
sub-transfer agency expenses borne by Institutional Shares and below with
respect to the Administrative Services Plans for Trust Shares and Institutional
Shares and the Distribution and Services Plans for Investor A Shares and
Investor B Shares, shares of the Portfolios bear the same types of ongoing
expenses with respect to the Portfolio to which they belong. In addition,
Investor A Shares (other than Investor A Shares of the Money Market Portfolios)
are subject to a front-end sales charge and Investor B Shares are subject to a
contingent deferred sales charge as described in the Prospectuses. The classes
also have different exchange privileges, and Investor B Shares are subject to
conversion as described in the Prospectuses for those shares.
Payments under the Administrative Services Plans for Trust Shares and
Institutional Shares are made to Service Organizations (defined below) for
administrative services provided to the Service Organizations' clients or
account holders who are the beneficial owners of Trust Shares or Institutional
Shares, respectively. Payments under the Administrative Services Plans may not
exceed .25% (on an annual basis) of the average daily net asset value of the
outstanding Trust Shares or Institutional Shares, as the case may be, of the
Money Market Portfolios or .30% (on an annual basis) of the average daily net
asset value of the outstanding Trust Shares or Institutional Shares, as the case
may be, of the Equity and Bond Portfolios.
Payments under the Distribution and Services Plans for Investor A
Shares and Investor B Shares are made to (i) the Fund's distributor or another
person for providing distribution assistance and assuming certain related
expenses, and (ii) Service Organizations for administrative services provided to
the Service Organizations' clients or account holders who are the beneficial
owners of Investor A Shares or Investor B Shares. Payments under the
Distribution and Services Plan for Investor A Shares may not exceed .25% (on an
annual basis) of the average daily net asset value of outstanding Investor A
Shares of the Money Market Portfolios or .30% (on an annual basis) of the
average daily net asset value of Investor A Shares of the Equity and Bond
Portfolios. Payments under the Distribution and Services Plan for Investor B
Shares may not exceed 1.00% (on an annual basis) of the average daily net asset
value
-4-
<PAGE> 363
of outstanding Investor B Shares of a Portfolio. Distribution payments made
under the Distribution and Services Plans are subject to the requirements of
Rule 12b-1 under the 1940 Act.
The Fund offers various services and privileges in connection with
Investor A Shares and Investor B Shares of a Portfolio that are not offered in
connection with the Portfolio's Trust Shares, Trust II Shares or Institutional
Shares, including an automatic investment program and an automatic withdrawal
plan. Each class of shares also offers different exchange privileges. Investor B
Shares convert automatically into Investor A Shares eight years after the
beginning of the calendar month in which the Shares were purchased.
In the event of a liquidation or dissolution of the Fund, shares of a
Portfolio are entitled to receive the assets available for distribution
belonging to that Portfolio, and a proportionate distribution, based upon the
relative asset values of the respective Portfolios, of any general assets not
belonging to any particular Portfolio which are available for distribution.
Shareholders of a Portfolio are entitled to participate equally in the net
distributable assets of the particular Portfolio involved on liquidation, except
that Trust Shares of a particular Portfolio will be solely responsible for that
Portfolio's payments pursuant to the Administrative Services Plan for Trust
Shares, Institutional Shares of a particular Portfolio will be solely
responsible for that Portfolio's payments pursuant to the Administrative Service
Plan for Institutional Shares, Investor A Shares of a particular Portfolio will
be solely responsible for that Portfolio's payments pursuant to the Distribution
and Services Plan for Investor A Shares and Investor B Shares of a particular
Portfolio will be solely responsible for that Portfolio's payments pursuant to
the Distribution and Services Plan for Investor B Shares. In addition,
Institutional Shares will be solely responsible for the payment of certain
sub-transfer agency fees attributable to those shares.
Shareholders are entitled to one vote for each full share held and
proportionate fractional votes for fractional shares held. Holders of all
outstanding shares of a particular Portfolio will vote together in the aggregate
and not by class, unless otherwise required by law or permitted by the Board of
Directors. However, only Trust Shares of a Portfolio will be entitled to vote on
matters submitted to a vote of shareholders pertaining to a Portfolio's
Administrative Services Plan for Trust Shares, only Institutional Shares of a
Portfolio will be entitled to vote on matters submitted to a vote of
shareholders pertaining to such Portfolio's Administrative Services Plan for
Institutional Shares, only Investor A Shares of a Portfolio will be entitled to
vote on matters submitted to a vote of shareholders pertaining to such
Portfolio's Distribution and Services Plan for Investor A Shares and only
Investor B Shares of a Portfolio will be entitled to vote on matters submitted
to a vote of shareholders pertaining to such Portfolio's Distribution and
Services Plan for Investor B Shares. Further, shareholders of all of the
Portfolios, irrespective of class, will vote in the aggregate and not separately
on a Portfolio-by-Portfolio basis, except as otherwise required by law or when
the Board of Directors determines that the matter to be voted upon affects only
the interests of the shareholders of a particular Portfolio or class of shares.
Rule 18f-2 under the 1940 Act provides that any matter required to be submitted
to the holders of the outstanding voting securities of a "series" investment
company such as the Fund shall not be deemed to have been effectively acted upon
unless approved by the holders of a majority of the outstanding shares of each
series (Portfolio) affected by the matter. A Portfolio is considered to be
affected by a matter unless it is clear that the interests of each Portfolio in
the matter are
-5-
<PAGE> 364
identical or that the matter does not affect any interest of the Portfolio.
Under the Rule, the approval of an investment advisory (or sub-advisory)
agreement or any change in a fundamental investment objective or investment
policy would be effectively acted upon with respect to a Portfolio only if
approved by a majority of the outstanding shares of that Portfolio. However, the
Rule also provides that the ratification of the appointment of independent
auditors, the approval of principal underwriting contracts, and the election of
directors may be effectively acted upon by shareholders of the Fund's Portfolios
voting without regard to Portfolio or class.
The Fund is not required, and currently does not intend, to hold annual
meetings except as required by the 1940 Act or other applicable law. Upon the
written request of the holders of 10% or more of the outstanding Shares, the
Fund will call a special meeting to vote on the question of removal of a
director.
Shares of the Portfolios have noncumulative voting rights and,
accordingly, the holders of more than 50% of the Fund's outstanding Shares
(irrespective of Portfolio or class) may elect all of the Directors. Shares have
no preemptive rights and only such conversion and exchange rights as the Board
may grant in its discretion. When issued for payment as described in the
Prospectuses and this Statement of Additional Information, Shares will be fully
paid and nonassessable.
Shares in the Fund's Portfolios will be issued without certificates.
MISCELLANEOUS
As used in this Statement of Additional Information, a "vote of a
majority of the outstanding Shares" of a Portfolio or a particular class of
Shares means, with respect to the approval of an investment advisory or
sub-advisory agreement, the approval of a Rule 12b-1 distribution plan or a
change in an investment objective, if fundamental, or a fundamental investment
policy, the affirmative vote of the lesser of (a) more than 50% of the
outstanding Shares of such Portfolio or class of Shares or (b) 67% or more of
the Shares of such Portfolio or class of Shares present at a meeting if more
than 50% of the outstanding Shares of such Portfolio or class of Shares are
represented at the meeting in person or by proxy.
INVESTMENT STRATEGIES, POLICIES AND RISKS
The following discussion supplements the description of the investment
objectives and policies of the Portfolios described in the Prospectuses.
Although management will use its best efforts to achieve the investment
objective of each Portfolio, there can be no assurance that it will be able to
do so. The investment objective of each Portfolio may be changed only with the
affirmative vote of a majority of the outstanding Shares of the Portfolio,
except that the investment objectives of the Bond Index, Equity Index and Small
Cap Equity Index Portfolios may be changed by the Fund's Board of Directors
without shareholder approval. Shareholders of the latter Portfolios will be
given at least 30 days' written notice before any such change occurs.
-6-
<PAGE> 365
TREASURY MONEY MARKET PORTFOLIO
The Adviser makes investment decisions with respect to the Treasury
Money Market Portfolio in accordance with the rules and regulations of the
Securities and Exchange Commission ("SEC") for money market funds.
As stated in the Prospectuses, the Treasury Money Market Portfolio
invests primarily in selected money market obligations issued by the U.S.
Government or its agencies or instrumentalities that are guaranteed as to
principal and interest by the U.S. Government, the income from which is
generally exempt from state income tax. Securities that are generally eligible
for this exemption include those issued by the U.S. Treasury (bills,
certificates of indebtedness, notes and certain bonds) and certain U.S.
Government agencies and instrumentalities, including the General Services
Administration and Small Business Administration. For a current list of the
types of investments that are and are not exempt from your state's income tax,
please consult your tax adviser or write to your state's Department of Revenue.
Under normal market conditions, the Portfolio intends to invest substantially
all (but not less than 65% of its total assets in securities with the above
characteristics and (except to the extent discussed below) will not enter into
repurchase agreements or purchase any U.S. Government security that Mississippi
Valley Advisors Inc. ("MVA" or the "Adviser") believes is subject to state
income tax.
Under extraordinary circumstances, such as when appropriate exempt
securities are unavailable or pending investment, the Portfolio may temporarily
hold cash or invest in repurchase agreements collateralized by U.S. Government
securities, the securities of other U.S. Government agencies or
instrumentalities, securities of other investment companies that invest in
securities in which the Portfolio is permitted to invest, or cash equivalents.
MONEY MARKET PORTFOLIO
The Adviser makes investment decisions with respect to the Money Market
Portfolio in accordance with the SEC's rules and regulations for money market
funds. The following descriptions illustrate the types of instruments in which
the Portfolio invests.
BANKING OBLIGATIONS. The Money Market Portfolio may purchase
obligations of issuers in the banking industry, such as certificates of deposit,
letters of credit, bankers' acceptances and time deposits, including U.S.
dollar-denominated instruments issued or supported by the credit of U.S. or
foreign banks or savings institutions having total assets at the time of
purchase in excess of $1 billion. The Portfolio may invest in obligations of
foreign banks or foreign branches of U.S. banks in amounts not in excess of 25%
of its assets where the Adviser deems the instrument to present minimal credit
risks. (See "Special Risk Considerations -- Risks Associated with Foreign
Securities and Currencies" below.) The Portfolio may also make interest-bearing
savings deposits in commercial and savings banks in amounts not in excess of 5%
of the value of its total assets.
Certificates of deposit are negotiable certificates issued against
funds deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter
-7-
<PAGE> 366
to pay for specific merchandise, which are "accepted" by a bank, meaning, in
effect, that the bank unconditionally agrees to pay the face value of the
instrument on maturity. Fixed time deposits are bank obligations payable at a
stated maturity date and bearing interest at a fixed rate. Fixed time deposits
may be withdrawn on demand by the investor but may be subject to early
withdrawal penalties that vary depending upon market conditions and the
remaining maturity of the obligation. There are no contractual restrictions on
the right to transfer a beneficial interest in a fixed time deposit to a third
party, although there is no market for such deposits.
Obligations of foreign banks and foreign branches of U.S. banks may
include Eurodollar Certificates of Deposit ("ECDs") which are U.S.
dollar-denominated certificates of deposit issued by offices of foreign and
domestic banks located outside the United States; Eurodollar Time Deposits
("ETDs") which are U.S. dollar-denominated deposits in a foreign branch of a
U.S. bank or a foreign bank; Canadian Time Deposits ("CTDs") which are
essentially the same as ETDs except they are issued by Canadian offices of major
Canadian banks; Schedule Bs, which are obligations issued by Canadian branches
of foreign or domestic banks; Yankee Certificates of Deposit ("Yankee CDs")
which are U.S. dollar-denominated certificates of deposit issued by a U.S.
branch of a foreign bank and held in the United States; and Yankee Bankers'
Acceptances ("Yankee BAs") which are U.S. dollar-denominated bankers'
acceptances issued by a U.S. branch of a foreign bank and held in the United
States.
COMMERCIAL PAPER AND VARIABLE AND FLOATING RATE INSTRUMENTS. The Money
Market Portfolio may invest in commercial paper, including asset-backed
commercial paper representing interests in a pool of corporate receivables,
dollar-denominated obligations issued by domestic and foreign bank holding
companies, and corporate bonds that meet the quality and maturity requirements
of Rule 2a-7 under the Investment Company Act of 1940, as amended (the "1940
Act"). Commercial paper represents short-term unsecured promissory notes issued
in bearer form by banks or bank holding companies, corporations and finance
companies. The Portfolio may also invest in variable or floating rate notes that
may have a stated maturity in excess of thirteen months but will, in any event,
permit the Portfolio to demand payment of the principal of the instrument at
least once every thirteen months upon no more than 30 days' notice (unless the
instrument is guaranteed by the U.S. Government or an agency or instrumentality
thereof). Such instruments may include variable amount master demand notes,
which are unsecured instruments that permit the indebtedness thereunder to vary
in addition to providing for periodic adjustments in the interest rate. Unrated
variable and floating rate instruments will be determined by the Adviser (under
the supervision of the Board of Directors) to be of comparable quality at the
time of purchase to First Tier Eligible Securities as (defined in Rule 2a-7).
There may be no active secondary market in the instruments, which could make it
difficult for the Portfolio to dispose of an instrument in the event the issuer
were to default on its payment obligation or during periods that the Portfolio
could not exercise its demand rights. The Portfolio could, for these or other
reasons, suffer a loss with respect to such instruments. Variable and floating
rate instruments held by the Portfolio will be subject to the Portfolio's 10%
limitation on illiquid investments when the Portfolio may not demand payment of
the principal amount within seven days and a liquid trading market is absent.
GOVERNMENT OBLIGATIONS. The Money Market Portfolio may invest in
obligations issued or guaranteed by the U.S. Government, its agencies and
instrumentalities. In addition, the
-8-
<PAGE> 367
Portfolio may, when deemed appropriate by the Adviser, invest in short-term
obligations issued by state and local governmental issuers that meet the quality
requirements described above and, as a result of the Tax Reform Act of 1986,
carry yields that are competitive with those of other types of money market
instruments of comparable quality.
TAX-EXEMPT MONEY MARKET PORTFOLIO
The Adviser makes investment decisions with respect to the Tax-Exempt
Money Market Portfolio in accordance with the SEC's rules and regulations for
money market funds.
As a matter of fundamental policy, under normal market conditions or
when the Adviser deems suitable tax-exempt municipal securities to be available,
at least 80% of the Portfolio's total assets will be invested in municipal
securities. In addition to the types of municipal securities specified in the
Prospectuses, the Portfolio may also hold tax-exempt derivative securities such
as tender option bonds, participations, beneficial interests in trusts and
partnership interests.
In addition, during temporary defensive periods or if, in the opinion
of the Adviser, suitable municipal securities are unavailable and subject to the
quality standards described above, the Portfolio may invest up to 20% of its
total assets in money market instruments, the income from which is subject to
federal income tax. Such instruments may include obligations of the U.S.
Government, its agencies or instrumentalities; debt securities (including
commercial paper) of issuers having, at the time of purchase, a quality rating
within the highest rating category by a rating agency; certificates of deposit
or bankers' acceptances of domestic branches of U.S. banks with total assets at
the time of purchase of $1 billion or more; or repurchase agreements with
respect to such obligations.
Dividends paid by the Portfolio that are derived from interest
attributable to tax-exempt obligations of a particular state and its political
subdivisions as well as of certain other governmental issuers, including Puerto
Rico, Guam and the Virgin Islands, may be exempt from federal and state income
tax. Dividends derived from interest on obligations of other governmental
issuers are exempt from federal income tax but may be subject to state income
tax.
U.S. GOVERNMENT SECURITIES PORTFOLIO
In addition to the types of mortgage-backed securities specified in the
Prospectuses, the U.S. Government Securities Portfolio may also hold
collateralized mortgage obligations ("CMOs"). For further information regarding
mortgage-backed securities, including CMOs, see "Other Investment Policies and
Risk Considerations -- Asset-Backed Securities" below.
The Portfolio may invest in certificates issued by government-backed
trusts. Such certificates represent an undivided fractional interest in the
respective government-backed trust's assets. The assets of each
government-backed trust consist of (i) a promissory note issued by a foreign
government (the "Note"), (ii) a guaranty by the U.S. Government, acting through
the Defense Security Assistance Agency of the Department of Defense, of the due
and punctual payment of 90% of all principal and interest due on such Note, and
(iii) a beneficial interest in a
-9-
<PAGE> 368
government securities trust holding U.S. Treasury bills, notes and other direct
obligations of the U.S. Treasury sufficient to provide the Portfolio with funds
in an amount equal to at least 10% of all principal and interest payments due on
the Note.
INTERMEDIATE CORPORATE BOND PORTFOLIO
In addition to those instruments specified in the Prospectuses, the
Intermediate Corporate Bond Portfolio may also invest in asset-backed
securities, including CMOs and other mortgage-related securities. For further
information regarding these instruments, see "Other Investment Policies and Risk
Considerations -- Asset-Backed Securities" below.
The Portfolio may only purchase investment grade debt securities, which
are those rated in one of the four highest rating categories assigned by one or
more rating agencies. Securities that are rated in the lowest of the four
highest rating categories have speculative characteristics, even though they are
of investment grade quality, and such securities will be purchased (and
retained) only if the Adviser believes that the issuers have an adequate
capacity to pay interest and repay principal. Debt securities purchased by the
Portfolio whose ratings are subsequently downgraded below the four highest
rating categories assigned by a rating agency will be disposed of in an orderly
manner, normally within 30 to 60 days. The applicable ratings issued by rating
agencies are described in Appendix A to this Statement of Additional
Information.
The Portfolio reserves the right to hold as a temporary defensive
measure up to 100% of its total assets in cash and short-term obligations
(having remaining maturities of 13 months or less) at such times and in such
proportions as, in the opinion of the Adviser, prevailing market or economic
conditions warrant. Short-term obligations in which the Portfolio may invest
include (i) money market instruments, such as commercial paper, including
variable and floating rate instruments, rated at the time of purchase in one of
the two highest rating categories assigned by a rating agency or, if unrated,
deemed to be of comparable quality by the Adviser at the time of purchase, and
bank obligations, including bankers' acceptances, negotiable certificates of
deposit and non-negotiable time deposits of U.S. and foreign banks having total
assets at the time of purchase in excess of $1 billion, (ii) obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities, and
(iii) repurchase agreements. For further information regarding variable and
floating rate instruments, see "Money Market Portfolio - Commercial Paper and
Variable and Floating Rate Instruments" above. Although the Portfolio will
invest in obligations of foreign banks or foreign branches of U.S. banks only
when the Adviser determines that the instrument presents minimal credit risks,
such investments nevertheless entail risks that are different from those of
investments in domestic obligations of U.S. banks. See "Special Risk
Considerations --Risks Associated with Foreign Securities and Currencies" below.
Investments in the obligations of foreign banks or foreign branches of U.S.
banks will not exceed 25% of the Portfolio's total assets at the time of
purchase.
An increase in interest rates will generally reduce the value of the
investments in the Portfolio, and a decline in interest rates will generally
increase the value of those investments. Depending upon the prevailing market
conditions, the Adviser may purchase debt securities at a discount from face
value, which produces a yield greater than the coupon rate. Conversely, if debt
securities are purchased at a premium over face value, the yield will be lower
-10-
<PAGE> 369
than the coupon rate. In response to changing conditions in fixed-income
markets, the Portfolio may make modest shifts in terms of anticipated interest
rate and sector spread changes.
BOND INDEX PORTFOLIO
The Bond Index Portfolio will only purchase a security that is included
in the Lehman Brothers Aggregate Bond Index (the "Lehman Aggregate") at the time
of such purchase. The Portfolio may, however, temporarily continue to hold a
security that has been deleted from the Lehman Aggregate pending the rebalancing
of the Portfolio's holdings. For further information, see "Other Investment
Policies and Risk Considerations -- The Indexing Approach" below. In addition to
holding securities represented by the Lehman Aggregate, the Portfolio has the
ability to hold temporary cash balances which may be invested in U.S. Government
obligations and money market instruments. See "Intermediate Corporate Bond
Portfolio" above for a description of the types of money market instruments in
which the Portfolio may invest and the applicable limitations with respect to
such investments. If appropriate, the Portfolio may use options, futures
contracts and depository receipts to hedge its positions or for other
permissible purposes. The Portfolio also may enter into reverse repurchase
agreements and lend its portfolio securities.
The Lehman Aggregate. The Lehman Aggregate is composed of U.S.
Government, mortgage-backed, asset-backed and non-convertible corporate debt
securities that meet the following criteria: the securities have at least $100
million par amount outstanding; the securities are rated investment grade (at
least Baa or BBB) by Moody's Investor Services, Inc. ("Moody's") or Standard &
Poor's Ratings Group ("S&P") (if not rated by Moody's); have at least one year
until maturity; and have coupons with fixed rates. The Lehman Aggregate excludes
CMOs, adjustable rate mortgages, manufactured homes, non-agency bonds, buydowns,
graduated equity mortgages, project loans and non-conforming (i.e., "jumbo")
mortgages. As of December 31, 1998, over _____ issues were included in the
Lehman Aggregate, representing approximately $_____ trillion in market value.
U.S. Treasury and agency securities represented approximately _____% of the
total market value, asset-backed and mortgage-backed securities represented
approximately _____% of the total market value, with corporate debt securities
representing the balance of approximately _____%. The average maturity of the
Lehman Aggregate was approximately _____ years. The Adviser believes that the
Lehman Aggregate is an appropriate benchmark for the Portfolio because it is
diversified, it is familiar to investors, and it is widely accepted as a
reference for bonds and other fixed income investments.
Because of the large number of issues included in the Lehman Aggregate,
the Portfolio cannot invest in all such issues. Instead, the Portfolio will hold
a representative sample of approximately 100 of the securities in the Lehman
Aggregate, selecting one or two issues to represent an entire "class" or type of
securities in the Lehman Aggregate. At a minimum, the Portfolio seeks to hold
securities which reflect the major asset classes in the Lehman Aggregate - U.S.
Treasury and agency issues, mortgage-backed securities, asset-backed securities
and non-convertible corporate debt securities. As the Portfolio's assets
increase, these classes will be further delineated along the lines of sector,
term-to-maturity, coupon and credit ratings. This sampling technique is expected
to be an effective means of substantially duplicating the price and performance
provided by the securities comprising the Lehman Aggregate.
-11-
<PAGE> 370
Securities rated Baa by Moody's or BBB by S&P have speculative
characteristics even though they are of investment-grade quality, and changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than is the case with
higher-grade securities. The applicable ratings issued by rating agencies are
described in Appendix A to this Statement of Additional Information.
The value of the fixed income investments of the Portfolio is generally
sensitive to changes in interest rates. (See "Intermediate Corporate Bond
Portfolio" above for a discussion of the effects of interest rate changes).
GOVERNMENT & CORPORATE BOND PORTFOLIO
In addition to the types of debt obligations specified in the
Prospectuses, the Government & Corporate Bond Portfolio may also invest in first
mortgage loans, income participation loans, participation certificates in pools
of mortgages, including mortgages issued or guaranteed by the U.S. Government,
its agencies or instrumentalities, CMOs and other mortgage-related securities,
and other asset-backed securities. For further information regarding
asset-backed securities, see "Other Investment Policies and Risk Considerations
- --Asset-Backed Securities" below. The Portfolio may invest up to 10% of its
total assets at the time of purchase in dollar-denominated debt obligations of
foreign issuers, either directly or through American Depository Receipts
("ADRs") and European Depository Receipts ("EDRs"), and up to 25% of its total
assets at the time of purchase in non-mortgage asset-backed securities,
respectively. See "Special Risk Considerations -- Risks Associated with Foreign
Securities and Currencies" and "Other Applicable Policies and Risk
Considerations -- ADRs and EDRs" below.
The Portfolio may only purchase investment grade debt securities, which
are those rated in one of the four highest rating categories assigned by one or
more rating agencies. Securities rated in the lowest of the four highest rating
categories have speculative characteristics, even though they are of investment
grade quality, and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than is the case with higher rated securities. The Portfolio's
dollar-weighted average portfolio quality is expected to be at least "A" or
higher. The applicable ratings issued by rating agencies are described in
Appendix A to this Statement of Additional Information.
The Portfolio reserves the right to hold as a temporary defensive
measure up to 100% of its total assets in cash and short-term obligations
(having remaining maturities of 13 months or less) at such times and in such
proportions as, in the opinion of the Adviser, prevailing market or economic
conditions warrant. Short-term obligations include, but are not limited to,
commercial paper, bankers' acceptances, certificates of deposit, demand and time
deposits of domestic and foreign banks and savings and loan associations,
repurchase agreements and obligations issued or guaranteed by the U.S.
Government or its agencies or instrumentalities.
The value of the fixed income investments of the Portfolio is generally
sensitive to changes in interest rates. (See "Intermediate Corporate Bond
Portfolio" above for a discussion of the effects of interest rate changes).
-12-
<PAGE> 371
SHORT-INTERMEDIATE MUNICIPAL PORTFOLIO
As a matter of fundamental policy, under normal market conditions, the
Short-Intermediate Municipal Portfolio invests at least 80% of its total assets
in municipal securities primarily bonds (at least 65% under normal market
conditions). The Portfolio may only purchase investment grade municipal
securities, which are those rated in one of the four highest rating categories
assigned by me or more rating agencies. Municipal securities rated in the lowest
of the four highest rating categories are considered to have speculative
characteristics, even though they are of investment grade quality. Such
securities will be purchased only if the Adviser believes they have an adequate
capacity to pay interest and repay principal. Municipal securities purchased by
the Portfolio whose ratings are subsequently downgraded below the four highest
rating categories assigned by a rating agency will be disposed of in an orderly
manner, normally within 30-60 days. The applicable ratings issued by rating
agencies are described in Appendix A to this Statement of Additional
Information.
The value of the municipal securities held by the Portfolio is
generally sensitive to changes in interest rates. (See "Intermediate Corporate
Bond Portfolio" above for a discussion of the effects of interest rate changes).
In addition, the Short-Intermediate Municipal Portfolio may from time
to time during temporary defensive periods invest in taxable obligations in such
proportions as, in the opinion of the Adviser, prevailing market or economic
conditions warrant. Such instruments may include obligations of the U.S.
Government, its agencies or instrumentalities; debt securities (including
commercial paper) of issuers having, at the time of purchase, a quality rating
within the two highest rating categories assigned by a rating agency; or
repurchase agreements with respect to such obligations.
During temporary defensive periods or if, in the opinion of the
Adviser, suitable tax-exempt obligations are unavailable, the Short-Intermediate
Municipal Portfolio may also hold uninvested cash reserves which do not earn
income pending investment. There is no percentage limitation on the amount of
assets that may be held uninvested during these temporary defensive periods.
MISSOURI TAX-EXEMPT BOND PORTFOLIO
Dividends paid by the Missouri Tax-Exempt Bond Portfolio that are
derived from interest attributable to tax-exempt obligations of the State of
Missouri and its political subdivisions as well as of certain other governmental
issuers including Puerto Rico, Guam and the Virgin Islands ("Missouri municipal
securities") are exempt from federal and Missouri income tax. Dividends derived
from interest on obligations of other governmental issuers are exempt from
federal income tax but may be subject to Missouri income tax.
As a matter of fundamental policy, under normal market conditions or
when the Adviser deems suitable tax-exempt municipal securities to be available,
at least 80% of the Missouri Tax-Exempt Bond Portfolio's total assets will be
invested in municipal securities. In
-13-
<PAGE> 372
addition, as a matter of fundamental policy, under normal market conditions, at
least 65% of the Portfolio's total assets will be invested in Missouri municipal
securities.
The Portfolio may only invest in investment grade municipal securities,
which are those rated in one or the four highest rating categories assigned by
one or more rating agencies. Municipal securities rated in the lowest of the
four highest rating categories are considered to have speculative
characteristics, even though they are of investment grade quality. Such
securities will be purchased only if the Adviser believes the issuers have an
adequate capacity to pay interest and repay principal. The applicable ratings
issued by ratings agencies are described in Appendix A to this Statement of
Additional Information.
The Portfolio may hold uninvested cash reserves pending investment
during temporary defensive periods or if, in the opinion of the Adviser,
suitable municipal securities are unavailable. There is no percentage limitation
on the amount of assets which may be held uninvested during temporary defensive
periods. In addition, during temporary defensive periods or if, in the opinion
of the Adviser, suitable municipal securities are unavailable and subject to the
quality standards described above, the Portfolio may invest up to 20% of its
assets in money market instruments, the income from which is subject to federal
income tax. See "Tax-Exempt Money Market Portfolio" above for a description of
the types of taxable money market instruments in which the Portfolio may invest.
The Portfolio's average weighted maturity will vary in light of market
and economic conditions, the comparative yields on instruments with different
maturities, and other factors. The value of the municipal securities held by the
Portfolio is generally sensitive to changes in interest rates. (See
"Intermediate Corporate Bond Portfolio" above for a discussion of the effects of
interest rate changes.)
NATIONAL MUNICIPAL BOND PORTFOLIO
As a matter of fundamental policy, under normal market and economic
conditions, at least 80% of the National Municipal Bond Portfolio's total assets
will be invested in municipal securities, primarily bonds (at least 65% under
normal market conditions).
During temporary defensive periods or if, in the opinion of the
Adviser, suitable tax-exempt obligations are unavailable, the Portfolio may also
hold uninvested cash reserves which do not earn income pending investment. There
is no percentage limitation on the amount of assets that may be held uninvested
during these temporary defensive periods. The Portfolio does not intend to hold
uninvested cash reserves under normal market conditions.
In addition, the Portfolio may from time to time during temporary
defensive periods, invest in taxable obligations in such proportions as, in the
opinion of the Adviser, prevailing market or economic conditions warrant. Such
instruments may include obligations of the U.S. Government, its agencies or
instrumentalities and debt securities (including commercial paper) of issuers
having, at the time of purchase, a quality rating within the two highest rating
categories assigned by one or more rating agencies. The Portfolio does not
intend to invest in taxable obligations under normal market conditions.
-14-
<PAGE> 373
The Portfolio may only invest in investment grade municipal securities,
which are those rated in one of the four highest rating categories assigned by
one or more rating agencies. Municipal securities rated in the lowest of the
four highest rating categories are considered to have speculative
characteristics, even though they are of investment grade quality, and will be
purchased (and retained) only if the Adviser believes that the issuers have an
adequate capacity to pay interest and repay principal. Municipal securities
purchased by the Portfolio whose ratings are subsequently downgraded below the
four highest rating categories assigned by a rating agency will be disposed of
in an orderly manner, normally within 30 to 60 days. The applicable ratings
issued by rating agencies are described in Appendix A to this Statement of
Additional Information.
The value of the Portfolio's securities is generally sensitive to
changes in interest rates. (See "Intermediate Corporate Bond Portfolio" above
for a discussion of the effects of interest rate changes.)
BALANCED PORTFOLIO
In addition to common stock, the equity securities in which the
Balanced Portfolio may invest include preferred stock, rights, warrants and
securities convertible into common stock. The fixed-income securities in which
the Portfolio may invest include U.S. Government securities and other fixed
income and debt securities that are rated investment grade. The Portfolio also
may purchase asset-backed securities. The Portfolio will not normally invest in
securities of issuers having a record, together with their predecessors, of less
than three years of continuous operations.
The value of the fixed income investments of the Portfolio is generally
sensitive to changes in interest rates. (See "Intermediate Corporate Bond
Portfolio" above for a discussion of the effects of interest rate changes).
The Portfolio reserves the right to hold as a temporary defensive
measure up to 100% of its total assets in cash and short-term obligations
(having remaining maturities of 13 months or less) at such times and in such
proportions as, in the opinion of the Adviser, prevailing market or economic
conditions warrant. (See "Government & Corporate Bond Portfolio" above for a
description of the types of short-term obligations in which the Portfolio may
invest.)
EQUITY INCOME PORTFOLIO
A convertible security may be purchased for the Portfolio when, in the
Adviser's opinion, the price and yield of the convertible security is favorable
as compared to the price and yield of the common stock.
The Equity Income Portfolio will not normally invest in securities of
issuers having a record, together with their predecessors, of less than three
years of continuous operations.
The Portfolio may invest indirectly in foreign securities through the
purchase of ADRs and EDRs, but will not do so if, immediately after and as a
result of the purchase, the value
-15-
<PAGE> 374
of ADRs and EDRs would exceed 15% of the Portfolio's total assets. For further
information, see "Special Risk Considerations -- Risks Associated with Foreign
Securities and Currencies" and "Other Investment Policies and Risk
Considerations -- ADRs and EDRs" below.
The Portfolio reserves the right to hold as a temporary defensive
measure during abnormal market or economic conditions up to 100% of its total
assets in cash and short-term obligations (having remaining maturities of 13
months or less) at such times and in such proportions as, in the opinion of the
Adviser, such abnormal market or economic conditions warrant. (See "Intermediate
Corporate Bond Portfolio" above for a description of the types of short-term
obligations in which the Portfolio may invest and the applicable limitations
with respect to such investments.)
EQUITY INDEX PORTFOLIO
The Adviser generally selects securities for the Equity Index Portfolio
on the basis of their weightings in the Standard & Poor's 500 Composite Stock
Price Index (the "S&P 500") and will only purchase a security for the Portfolio
that is included in the S&P 500 at the time of such purchase. The Portfolio
should exhibit price volatility similar to that of the S&P 500. For further
information, see "Other Investment Policies and Risk Considerations -- The
Indexing Approach" below.
With respect to the remaining portion of its total assets, the
Portfolio has the ability to hold temporary cash balances which may be invested
in U.S. Government obligations and money market instruments. (See "Intermediate
Corporate Bond Portfolio" above for a description of the money market
instruments in which the Portfolio may invest and the applicable limitations
with respect to such investments.) If appropriate, the Portfolio may use
options, futures contracts and depository receipts to hedge its positions or for
other permissible purposes. The Portfolio also may enter into reverse repurchase
agreements and lend its portfolio securities.
The S&P 500. The S&P 500 is composed of approximately 500 common
stocks, most of which are listed on the New York Stock Exchange. Standard &
Poor's chooses the stocks for the S&P 500 on statistical basis. As of December
31, 1998 the stocks in the S&P 500 have a market capitalization of $_____
trillion and account for approximately __% of the total market value of all U.S.
common stocks. Normally, the Portfolio will hold all 500 stocks in the S&P 500
and will hold each stock in approximately the same percentage as that stock
represents in the S&P 500. Under certain circumstances, the Portfolio may not
hold all 500 stocks in the S&P 500, for example because of changes in the S&P
500, or as a result of shareholder activity in the Portfolio. The Portfolio will
periodically rebalance its holdings as dictated by changes in cash flow and the
composition of the S&P 500. The Adviser believes that the S&P 500 is an
appropriate benchmark for the Portfolio because it is diversified, it is
familiar to many investors and it is widely accepted as a reference for common
stock investments.
GROWTH & INCOME EQUITY PORTFOLIO
In addition to common stock, the Growth & Income Equity Portfolio may
invest in preferred stock, rights, warrants and securities convertible into
common stock. A convertible
-16-
<PAGE> 375
security may be purchased for the Portfolio when, in the Adviser's opinion, the
price and yield of the convertible security is favorable compared to the price
and yield of the common stock.
The Portfolio may invest indirectly in foreign securities through the
purchase of ADRs and EDRs but will not do so if, immediately after and as a
result of the purchase, the value of ADRs and EDRs would exceed 15% of the
Portfolio's total assets. For further information, see "Special Risk
Considerations -- Risks Associated with Foreign Securities and Currencies" and
"Other Investment Policies and Risk Considerations -- ADRs and EDRs" below. The
Portfolio may also invest in Canadian securities listed on a national securities
exchange.
The Portfolio reserves the right to hold as a temporary defensive
measure up to 100% of its total assets in cash and short-term obligations
(having remaining maturities of 13 months or less) at such times and in such
proportions as, in the opinion of the Adviser, prevailing market or economic
conditions warrant. (See "Government & Corporate Bond Portfolio" above for a
description of the types of short-term obligations in which the Portfolio may
invest.)
GROWTH EQUITY PORTFOLIO
In addition to common stock, the Growth Equity Portfolio invests in
preferred stock, convertible securities, corporate bonds, debentures, notes,
warrants, and put and call options on stock. Under normal conditions, the
Portfolio will invest at least 65% of its total assets in equity securities,
including common stocks. Debt obligations purchased by the Portfolio may include
variable and floating rate instruments, including variable rate master demand
notes that permit the indebtedness thereunder to vary in addition to providing
for periodic adjustments in the interest rate. See "Money Market Portfolio"
above for a description of certain risks in investing in variable and floating
rate obligations. Debt obligations in which the Portfolio invests will be rated
at the time of purchase in one of the four highest rating categories assigned by
one or more rating agencies or, if unrated, deemed to be of comparable quality
by the Adviser. Securities that are rated in the lowest of the four highest
rating categories have speculative characteristics, even though they are of
investment grade quality, and changes in economic conditions or other
circumstances are more likely to lead to weakened capacity to make principal and
interest payments than higher rated securities. Downgrades will be evaluated on
a case by case basis by the Adviser. The Adviser will determine whether or not
the security continues to be an acceptable investment. If it is determined not
to be an acceptable investment, the security will be sold. The applicable
ratings categories of rating agencies are described in Appendix A to this
Statement of Additional Information.
The Portfolio may invest in the securities of foreign issuers which are
freely traded on United States securities exchanges or in the over-the-counter
market in the form of depository receipts, such as ADRs. Securities of a foreign
issuer may present greater risks in the form of nationalization, confiscation,
domestic marketability, or other national or international restrictions. As a
matter of practice, the Portfolio will not invest in the securities of a foreign
issuer if any such risk appears to the Adviser to be substantial. The Portfolio
may not invest more than 5% of its total assets in securities of foreign
issuers. For further information on the risks of foreign securities, see
"Special Risk Considerations -- Risks Associated with Foreign Securities and
Currencies" and "Other Investment Policies and Risk Considerations -- ADRs and
EDRs" below.
-17-
<PAGE> 376
In such proportions as, in the judgment of the Adviser, prevailing
market conditions warrant, the Portfolio may, for temporary defensive purposes,
invest in short-term money market instruments, securities issued and/or
guaranteed as to payment of principal and interest by the U.S. Government, its
agencies or instrumentalities, and repurchase agreements. (See "Intermediate
Corporate Bond Portfolio" above for further information on the types of
short-term obligations in which the Portfolio may invest.)
SMALL CAP EQUITY PORTFOLIO
In addition to those securities described in the Prospectuses, the
Small Cap Equity Portfolio may invest in preferred stock, rights, warrants, and
securities convertible into common stock. The Portfolio will not invest more
than 5% of its net assets, taken at market value, in warrants. A convertible
security may be purchased for the Portfolio when, in the Adviser's opinion, the
price of the convertible security is favorable compared to the price of the
common stock. The Portfolio does not intend to invest more than 5% of the value
of its total assets in the securities of unseasoned companies, that is,
companies (or their predecessors) with less than three years' continuous
operation. In general, the Portfolio's stocks and other securities will be
diversified over a number of industry groups in an effort to reduce the risks
inherent in such investments.
The Portfolio may invest indirectly in foreign securities through the
purchase of such obligations as ADRs and EDRs but will not do so if, immediately
after and as a result of the purchase, the value of ADRs and EDRs would exceed
25% of the Portfolio's total assets. For further information, see "Other
Investment Policies and Risk Considerations -- ADRs and EDRs" below. The
Portfolio may also invest in securities issued by Canadian corporations and
Canadian counterparts of U.S. corporations, which may or may not be listed on a
national securities exchange or traded in over-the-counter markets.
The Portfolio reserves the right to hold as a temporary defensive
measure up to 100% of its total assets in cash and short-term obligations
(having remaining maturities of 13 months or less) at such times and in such
proportions as, in the opinion of the Adviser, prevailing market or economic
conditions warrant. (See "Government & Corporate Bond Portfolio" above for a
description of the types of short-term obligations in which the Portfolio may
invest.)
SMALL CAP EQUITY INDEX PORTFOLIO
The Small Cap Equity Index Portfolio will invest substantially all but
no less than 80% of its total assets in securities listed in the Standard &
Poor's SmallCap 600 Stock Price Index (the "S&P SmallCap 600"). The Adviser
generally selects securities for the Portfolio on the basis of their weightings
in the S&P SmallCap 600. The Portfolio will only purchase a common stock that is
included in the S&P SmallCap 600 at the time of such purchase. The Portfolio
should exhibit price volatility similar to that of the S&P SmallCap 600. For
further information, see "Other Investment Policies and Risk Considerations --
The Indexing Approach" below.
With respect to the remaining portion of its total assets, the
Portfolio has the ability to hold temporary cash balances which may be invested
in U.S. Government obligations and
-18-
<PAGE> 377
money market instruments, including variable and floating rate obligations such
as variable rate master demand notes. (See "Intermediate Corporate Bond
Portfolio" above for a description of the money market instruments in which the
Portfolio may invest and the applicable limitations with respect to such
instruments.) If appropriate, the Portfolio may use options, futures contracts
and depository receipts to hedge its positions or for other permissible
purposes. The Portfolio also may enter into repurchase and reverse repurchase
agreements and lend its portfolio securities.
The S&P SmallCap 600. The S&P SmallCap 600 is composed of approximately
600 common stocks. These companies are chosen to be a part of the S&P SmallCap
600 based upon their market size, liquidity and industry group representation.
As of December 31, 1998, stocks in the S&P SmallCap 600 had a market
capitalization of $_____ billion. To be included in the S&P SmallCap 600, stock
selections are also screened by S&P for trading volume, ownership concentration,
share price and bid/ask spreads. Normally, the Portfolio will hold all 600
stocks in the S&P SmallCap 600 and will hold each stock in approximately the
same percentage as that stock represents in the S&P SmallCap 600. Under certain
circumstances, the Portfolio may not hold all 600 stocks in the S&P SmallCap
600, for example because of changes in the S&P SmallCap 600, or as a result of
shareholder activity in the Portfolio. The Portfolio will rebalance its holdings
periodically as dictated by changes in cash flow and the composition of the S&P
SmallCap 600. The Adviser believes that the S&P SmallCap 600 is an appropriate
benchmark for the Portfolio because it represents a diversified array of small
capitalization companies, it is familiar to many investors and it is widely
accepted as a reference for small capitalization common stock investments.
The S&P SmallCap 600 Index has above-average risk and may fluctuate
more than the S&P 500 Stock Price Index, which lists stocks of larger, more
established companies. Small capitalization companies may be subject to more
abrupt or erratic price movements than the stocks of larger, established
companies or the stock market as a whole. Among the reasons for this greater
price volatility are the less than certain growth prospects of smaller
companies, the lower degree of liquidity in the markets for such stocks and the
greater exposure of small capitalization companies to changing economic
conditions. In addition, such companies often have limited product lines,
smaller markets or fewer financial resources. Because of the risks associated
with investing in the small companies that comprise the S&P SmallCap 600,
shareholders should consider an investment in the Small Cap Equity Index
Portfolio to be long-term. The Portfolio is not designed to provide investors
with a means to speculate on short-term movements in the stock market.
INTERNATIONAL EQUITY PORTFOLIO
In addition to common stock, the International Equity Portfolio may
invest in preferred stock and securities convertible into common stock. A
convertible security may be purchased for the Portfolio when, in the opinion of
the Adviser or Clay Finlay, Inc. ("Clay Finlay" or the "Sub-Adviser"), the price
and yield of the convertible security is favorable compared to the price and
yield of the common stock. The Portfolio may participate in rights offerings and
purchase warrants. The Portfolio will not invest more than 5% of its net assets,
taken at market value, in warrants. Warrants acquired by the Portfolio in units
or attached to other securities are not subject to this restriction.
-19-
<PAGE> 378
During temporary defensive periods, when deemed necessary by the
Adviser or Sub-Adviser, the Portfolio may invest up to 100% of its assets in
U.S. Government obligations, debt obligations of companies incorporated and
having their principal business activities in the United States, or cash and
short-term obligations (having remaining maturities of 13 months or less). (See
"Government & Corporate Bond Portfolio" above for a description of the types of
short-term obligations in which the Portfolio may invest.) The Portfolio does
not intend to invest in such securities for the purpose of meeting its
investment objective.
The Portfolio may also invest, without limitation, in foreign
securities through the purchase of ADRs and EDRs. For further information, see
"Special Risk Consideration -- Risks Associated with Foreign Securities and
Currencies" and "Other Investment Policies and Risk Considerations -- ADRs and
EDRs" below.
The Portfolio will not normally invest in securities of issuers having
a record, together with their predecessors, of less than three years of
continuous operations.
Although investing in any mutual fund has certain inherent risks, an
investment in the Portfolio may have even greater risks than investments in most
other types of mutual funds. The Portfolio is not a complete investment program,
and it may not be appropriate for investors who cannot financially bear the loss
of at least a significant portion of their investment. The Portfolio's net asset
value per Share is subject to rapid and substantial changes because greater risk
is assumed in seeking the Portfolio's objective. See "Special Risk
Considerations -- Risks Associated with Foreign Securities and Currencies"
below.
-20-
<PAGE> 379
SPECIAL RISK CONSIDERATIONS
MARKET RISK. The Equity Income, Equity Index, Growth & Income Equity,
Growth Equity, Small Cap Equity, Small Cap Equity Index and International Equity
Portfolios invest primarily, and the Balanced Portfolio invests to a significant
degree, in equity securities. As with other mutual funds that invest primarily
or to a significant degree in equity securities, these Portfolios are subject to
market risk. That is, the possibility exists that common stocks will decline
over short or even extended periods of time and both the U.S. and certain
foreign equity markets tend to be cyclical, experiencing both periods when stock
prices generally increase and periods when stock prices generally decrease.
INTEREST RATE RISK. Generally, the market value of fixed income
securities, including municipal securities, held by the Portfolios can be
expected to vary inversely to changes in prevailing interest rates. During
periods of declining interest rates, the market value of investment portfolios
comprised primarily of fixed income securities will tend to increase, and during
periods of rising interest rates, the market value will tend to decrease. Fixed
income securities with longer maturities, which tend to produce higher yields,
are subject to potentially greater capital appreciation and depreciation than
obligations with shorter maturities. Changes in the financial strength of an
issuer or changes in the ratings of any particular security may also offset the
value of these investments. Fluctuations in the market value of fixed income
securities subsequent to their acquisition will not offset cash income from such
securities but will be reflected in a Portfolio's net asset value.
RISKS ASSOCIATED WITH FOREIGN SECURITIES AND CURRENCIES. Investments in
securities of foreign issuers, whether made directly or indirectly, carry
certain risks not ordinarily associated with investments in securities of
domestic issuers. Such risks include future political and economic developments,
and the possible imposition of exchange controls or other foreign governmental
laws or restrictions. In addition, with respect to certain countries, there is
the possibility of expropriation of assets, confiscatory taxation, political or
social instability or diplomatic developments which could adversely affect
investments in those countries.
There may be less publicly available information about a foreign
company than about a U.S. company, and foreign companies may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to or as uniform as those of U.S.-based companies. Foreign securities
markets, while growing in volume, have, for the most part, substantially less
volume than U.S. markets, and securities of many foreign companies are less
liquid and their prices more volatile than securities of comparable U.S.-based
companies. There is generally less government supervision and regulation of
foreign exchanges, brokers and issuers than there is in the United States. In
the event of a default by the issuer of a foreign security, it may be more
difficult to obtain or enforce a judgment against such issuer than it would be
against a domestic issuer. In addition, foreign banks and foreign branches of
U.S. banks are subject to less stringent reserve requirements and to different
accounting, auditing, reporting, and recordkeeping standards than those
applicable to domestic branches of U.S. banks.
Certain of the risks associated with international investments are
heightened with respect to investments in developing countries. The risks of
expropriation, nationalization and
-21-
<PAGE> 380
social, political and economic instability are greater in those countries than
in more developed capital markets. In addition, developing countries may have
economies based on only a few industries and small securities markets with a low
volume of trading. Certain countries may also impose substantial restrictions on
investments in their capital markets by foreign entities, including restrictions
on investments in issuers of industries deemed sensitive to relevant national
interests. These factors may limit the investment opportunities available to the
International Equity Portfolio and result in a lack of liquidity and a high
price volatility with respect to securities of issuers from developing
countries.
Certain countries may also impose restrictions on the International
Equity Portfolio's ability to repatriate investment income or capital. Even when
there is no outright restriction on repatriation of investment income or
capital, the mechanics of repatriation may affect certain aspects of the
operations of the International Equity Portfolio.
Governments of many developing countries exercise substantial influence
over many aspects of the private sector. In some countries, the government may
own or control many companies, including the largest company or companies. As
such, government actions in the future could have a significant effect on
economic conditions in these countries, affecting private sector companies, the
International Equity Portfolio and the value of its portfolio securities.
Since the International Equity Portfolio will invest substantially in
securities denominated or quoted in currencies other than the U.S. dollar,
changes in foreign currency exchange rates will affect the value of securities
in the International Equity Portfolio and the unrealized appreciation or
depreciation of investments so far as U.S. investors are concerned. Foreign
currency exchange rates are determined by forces of supply and demand on the
foreign exchange markets and the regulatory control of the exchanges on which
the currencies trade. These forces are themselves affected by the international
balance of payments and other economic and financial conditions, government
intervention, speculation and other factors. Costs are incurred in connection
with conversions between various currencies.
The expense ratio of the International Equity Portfolio can be expected
to be higher than that of funds investing in domestic securities. The costs
attributable to investing abroad are usually higher for several reasons, such as
the higher cost of investment research, higher cost of custody of foreign
securities, higher commissions paid on comparable transactions on foreign
markets and additional costs arising from delays in settlements of transactions
involving foreign securities.
Interest and dividends payable on the International Equity Portfolio's
foreign portfolio securities may be subject to foreign withholding taxes. To the
extent such taxes are not offset by credits or deductions allowed to investors
under U.S. federal income tax provisions, they may reduce the net return to the
Portfolio's shareholders. For further information, see "Taxes."
In addition to the International Equity Portfolio, other Portfolios may
be subject to certain of the risks described above in connection with investment
in foreign securities.
-22-
<PAGE> 381
RISKS ASSOCIATED WITH MUNICIPAL SECURITIES. The ability of the
Tax-Exempt Money Market, Short-Intermediate Municipal, Missouri Tax-Exempt Bond
and National Municipal Bond Portfolios (collectively, the "Tax-Exempt
Portfolios") to achieve their respective investment objectives are dependent
upon the ability of issuers of municipal securities to meet their continuing
obligations for the payment of principal and interest. There are additional
risks associated with investment in the Missouri Tax-Exempt Bond Portfolio
because it invests its assets predominantly in Missouri municipal securities.
The Missouri Constitution imposes a limit on the amount of taxes that may be
imposed by the General Assembly during any fiscal year. No assurances can be
given that the amount of revenue derived from taxes will remain at its current
level or that the amount of federal grants previously provided to the State will
continue. The State of Missouri is barred by its constitution from issuing debt
instruments to fund government operations, although it is authorized to issue
bonds to finance or refinance the cost of capital projects upon approval by the
voters. In the past, the State has issued two types of bonds to raise
capital-general obligation bonds and revenue bonds. Payments on general
obligation bonds are made from the General Revenue Fund. Therefore, if the State
is unable to increase its tax revenues, the State's ability to make the payments
on the existing obligations may be adversely affected. The State also is
authorized to issue revenue bonds, which generally provide funds for a specific
project, and payments are generally limited to the revenue to that project. The
State may, however, enact a tax specifically to repay the State's revenue bonds.
Therefore, a reduction of revenues on a project financed by revenue bonds may
adversely affect the State's ability to make payments on such bonds. No
assurances can be given that the State will receive sufficient revenues from the
projects, or that the State will enact and collect tax to be used to make the
required payments on such bonds. See "Other Investment Policies and Risk
Considerations - Special Considerations Regarding Investment in Missouri
Municipal Securities" below.
ADDITIONAL RISKS AND OTHER CONSIDERATIONS. Although the Tax-Exempt
Money Market, Short-Intermediate Municipal and National Municipal Bond
Portfolios may invest 25% or more of their respective net assets in (i)
municipal securities whose issuers are in the same state, (ii) municipal
securities the interest on which is paid solely from revenues of similar
projects, and (iii) private activity bonds, no Portfolio presently intends to do
so unless in the opinion of the Adviser the investment is warranted. Although
the Missouri Tax-Exempt Bond Portfolio does not presently intend to do so on a
regular basis, it may invest more than 25% of its assets in industrial
development bonds issued before August 7, 1986, the interest on which is not
treated as a specific tax preference item under the federal alternative minimum
tax, and in municipal securities, the interest on which is paid solely from
revenues of similar projects, if such investments are deemed necessary or
appropriate by the Adviser. To the extent that a Portfolio's assets are invested
in municipal securities the issuers of which are in the same state or that are
payable from the revenues of similar projects or in private activity bonds, a
Portfolio will be subject to the peculiar risks presented by the laws and
economic conditions relating to such projects and bonds to a greater extent than
it would be if its assets were not so invested.
Each of the Tax-Exempt Money Market and Missouri Tax-Exempt Bond
Portfolios is classified as non-diversified under the 1940 Act. Investment
return on a non-diversified portfolio typically is dependent upon the
performance of a smaller number of securities relative to the number held in a
diversified portfolio. Consequently, the change in value of any one security may
affect the overall value of a non-diversified portfolio more than it would a
diversified portfolio. In
-23-
<PAGE> 382
addition, a non-diversified portfolio may be more susceptible to economic,
political, and regulatory developments than a diversified investment portfolio
with similar objectives.
Investors in the Missouri Tax-Exempt Bond Portfolio should consider the
risk inherent in such Portfolio's concentrations in Missouri municipal
securities versus the safety that comes with a less geographically concentrated
investment portfolio, and should compare the yields and tax-equivalent yields
available on portfolios of Missouri municipal securities with the yields and
tax-equivalent yields of more diversified portfolios with securities of
comparable quality, including non-Missouri municipal securities, before making
an investment decision.
Municipal securities purchased by the Tax-Exempt Portfolios may be
backed by letters of credit or guarantees issued by domestic or foreign banks
and other financial institutions which are not subject to federal deposit
insurance. Adverse developments affecting the banking industry generally or a
particular bank or financial institution that has provided its credit or a
guarantee with respect to a municipal security held by a Tax-Exempt Portfolio
could have an adverse effect on the Portfolio's investment portfolio and the
value of its Shares. Foreign letters of credit and guarantees involve certain
risks in addition to those of domestic obligations, including less stringent
reserve requirements and different accounting, auditing and recordkeeping
requirements.
Opinions relating to the validity of municipal securities and to the
exemption of interest thereon from federal income tax (and, with respect to
Missouri municipal securities, to the exemption from Missouri income tax) are
rendered by bond counsel to the respective issuers at the time of issuance, and
opinions relating to the validity and the tax-exempt status of payments received
by a Portfolio from tax-exempt derivative securities are rendered by counsel to
the respective sponsors of such securities. The Tax-Exempt Portfolios and their
Adviser will rely on such opinions and will not review independently the
underlying proceedings relating to the issuance of municipal securities, the
creation of any tax-exempt derivative security, or the bases for such opinions.
EUROPEAN CURRENCY UNIFICATION. Many European countries have adopted a
single European currency, the euro. On January 1, 1999, the euro became legal
tender for all countries participating in the Economic and Monetary Union
("EMU"). A new European Central Bank has been created to manage the monetary
policy of the new unified region. On the same date, the exchange rates were
irrevocably fixed between the EMU member countries. National currencies will
continue to circulate until they are replaced by euro coins and bank notes by
the middle of 2002.
This change is likely to significantly impact the European capital
markets in which the International Equity Portfolio invests and may result in
the Portfolio facing additional risks in pursuing its investment objective.
These risks, which include, but are not limited to, uncertainty as to the proper
tax treatment of the currency conversion, volatility of currency exchange rates
as a result of the conversion, uncertainty as to capital market reaction,
conversion costs that may affect issuer profitability and creditworthiness, and
lack of participation by some European countries, may increase the volatility of
the Portfolio's net asset value per share.
-24-
<PAGE> 383
OTHER INVESTMENT POLICIES AND RISK CONSIDERATIONS
The investment policies described in the Prospectuses and this
Statement of Additional Information are among those which one or more of the
Portfolios have the ability to utilize. Some of these policies may be employed
on a regular basis; others may not be used at all. Accordingly, reference to any
particular policy, method or technique carries no implication that it will be
utilized or, if it is, that it will be successful.
MUNICIPAL SECURITIES. As described in their Prospectuses and subject to
their respective investment limitations, the Tax-Exempt Portfolios may invest in
municipal securities. Municipal securities include debt obligations issued by
governmental entities which obtain funds for various public purposes, including
the construction of a wide range of public facilities, the refunding of
outstanding obligations, the payment of general operating expenses and the
extension of loans to public institutions and facilities.
The two principal classifications of municipal securities consist of
"general obligation" and "revenue" issues. General obligation securities are
secured by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. Revenues securities are payable only from
the revenues derived from a particular facility or class of facilities or, in
some cases, from the proceeds of a special excise tax or other specific revenue
source such as the user of the facility being financed. Revenue securities
include private activity bonds which are not payable from the unrestricted
revenues of the issuer. Consequently, the credit quality of private activity
bonds is usually directly related to the credit standing of the corporate user
of the facility involved. Municipal securities may also include "moral
obligation" bonds, which are normally issued by special purpose public
authorities. If the issuer of a moral obligation bond is unable to meet its debt
service obligations from current revenues, it may draw on a reserve fund, the
restoration of which is a moral commitment but not a legal obligation of the
state or municipality which created the issuer.
There are, of course, variations in the quality of municipal securities
both within a particular classification and between classifications, and the
yields on municipal securities depend upon a variety of factors, including
general conditions of the money market and/or the municipal bond market, the
financial condition of the issuer, the size of a particular offering, the
maturity of the obligation and the rating of the issue. The ratings of rating
agencies, such as Moody's and S&P, represent their opinions as to the quality of
municipal securities. It should be emphasized, however, that ratings are general
and are not absolute standards of quality, and municipal securities with the
same maturity, interest rate and rating may have different yields while
municipal securities of the same maturity and interest rate with different
ratings may have the same yield.
Each of the Tax-Exempt Portfolios may acquire zero coupon obligations,
which may have greater price volatility than coupon obligations and which will
not result in payment of interest until maturity. Each Tax-Exempt Portfolio may
also purchase general obligation notes, tax anticipation notes, bond
anticipation notes, revenue anticipation notes, tax-exempt commercial paper,
construction loan notes and other tax-exempt loans. Such instruments are issued
in anticipation of the receipt of tax funds, the proceeds of bond placements, or
other revenues. Also
-25-
<PAGE> 384
included within the general category of municipal securities are participation
certificates in leases, installment purchase contracts, or conditional sales
contracts ("lease obligations") entered into by state or political subdivisions
to finance the acquisition or construction of equipment, land, or facilities.
Although lease obligations do not constitute general obligations of the issuer
for which the lessee's unlimited taxing power is pledged, certain lease
obligations are backed by the lessee's covenant to appropriate money to make the
lease obligation payments. However, under certain lease obligations, the lessee
has no obligation to make these payments in future years unless money is
appropriated on a yearly basis. Although "non-appropriation" lease obligations
are secured by the leased property, disposition of the property in the event of
foreclosure might prove difficult. These securities represent a relatively new
type of financing and may not be as marketable as more conventional securities.
To the extent these securities are illiquid, they are subject to each
Portfolio's applicable limitation on illiquid securities described below.
Certificates of participation represent undivided interests in lease
payments by a governmental or nonprofit entity. A lease may provide that the
certificate trustee cannot accelerate lease obligations upon default. The
trustee would only be able to enforce lease payments as they become due. In the
event of a default or failure of appropriation, it is unlikely that the trustee
would be able to obtain an acceptable substitute source of payment. In addition,
certificates of participation are less liquid than other bonds because there is
a limited secondary trading market for such obligations. To alleviate potential
liquidity problems with respect to these investments, a Portfolio may enter into
remarketing agreements which may provide that the seller or a third party will
repurchase the obligation within seven days after demand by the Portfolio and
upon certain conditions such as the Portfolio's payment of a fee.
The payment of principal and interest on most securities purchased by a
Tax-Exempt Portfolio will depend upon the ability of the issuers to meet their
obligations. An issuer's obligations under its municipal securities are subject
to the provisions of bankruptcy, insolvency and other laws affecting the rights
and remedies of creditors, such as the federal bankruptcy code, and laws, if
any, which may be enacted by federal or state legislatures extending the time
for payment of principal or interest, or both, or imposing other constraints
upon enforcement of such obligations or upon the ability of municipalities to
levy taxes. The power or ability of an issuer to meet its obligations for the
payment of interest on and principal of its municipal securities may be
materially adversely affected by litigation or other conditions. The District of
Columbia, each state, each of their political subdivisions, agencies,
instrumentalities and authorities and each multi-state agency of which a state
is a member is a separate "issuer" as that term is used in the Prospectuses and
this Statement of Additional Information. The non-governmental user of
facilities financed by private activity bonds is also considered to be an
"issuer."
Private activity bonds issued by or on behalf of public authorities to
finance various privately operated facilities are considered to be municipal
securities. Private activity bonds have been or are issued to obtain funds to
provide, among other things, privately operated housing facilities, pollution
control facilities, convention or trade show facilities, mass transit, airport,
port or parking facilities and certain local facilities for water supply, gas,
electricity or sewage or solid waste disposal. Private activity bonds are also
issued to privately held or publicly owned corporations in the financing of
commercial or industrial facilities. State and
-26-
<PAGE> 385
local governments are authorized in most states to issue private activity bonds
for such purposes in order to encourage corporations to locate within their
communities. The principal and interest on these obligations may be payable from
the general revenues of the users of such facilities. Furthermore, payment of
principal and interest on municipal securities of certain projects may be
secured by mortgages or deeds of trust. In the event of a default, enforcement
of the mortgages or deeds of trust will be subject to statutory enforcement
procedures and limitations, including rights of redemption and limitations on
obtaining deficiency judgments. In the event of a foreclosure, collection of the
proceeds of the foreclosure may be delayed, and the amount of proceeds from the
foreclosure may not be sufficient to pay the principal of and accrued interest
on the defaulted municipal securities. Interest on private activity bonds,
although free from regular federal income taxation, may be an item of tax
preference for purposes of the federal alternative minimum tax.
From time to time, proposals have been introduced before Congress for
the purpose of restricting or eliminating the federal income tax exemption for
interest on municipal securities. For example, the Tax Reform Act of 1986 (the
"Act"), adopted in October 1986, substantially revised provisions of prior law
affecting the issuance and use of proceeds of certain tax-exempt obligations.
The Act made a new definition of private activity bonds applicable to many types
of bonds, including those which were industrial development bonds under prior
law. Interest on private activity bonds is exempt from regular federal income
tax only if the bonds fall within and meet the requirements of certain defined
categories of qualified private activity bonds. The Act also extended to all
municipal securities issued after August 16, 1986 (August 31, 1986 in the case
of certain bonds) certain rules formerly applicable only to industrial
development bonds. If the issuer fails to observe such rules, the interest on
the municipal securities may become taxable retroactive to the date of issue. In
addition, interest on certain private activity bonds must be included in an
investor's federal alternative minimum taxable income, and corporate investors
must include all tax-exempt interest in their federal alternative minimum
taxable income. (See "Additional Information Concerning Taxes" below.) Moreover,
with respect to Missouri municipal securities, the Fund cannot predict what
legislation, if any, may be proposed in the Missouri Legislature relating to the
status of the Missouri income tax on interest on such obligations, or which
proposals, if any, might be enacted. Such proposals, while pending or if
enacted, might adversely affect the availability of municipal securities
generally, or Missouri municipal securities specifically, for investment by a
Portfolio and the liquidity and value of a Portfolio's assets. In such an event,
each Portfolio would reevaluate its investment objective and policies and
consider possible changes in its structure or possible dissolution.
Subject to its investment policies, the Money Market Portfolio may also
invest in municipal securities. Dividends paid by the Money Market Portfolio
that are derived from interest on municipal securities would be taxable to its
shareholders for federal income tax purposes.
VARIABLE AND FLOATING RATE INSTRUMENTS. Subject to their respective
investment limitations, each Portfolio may purchase variable and floating rate
obligations. The Adviser will consider the earning power, cash flows and other
liquidity ratios of the issuers and guarantors of such obligations and, for
obligations subject to a demand feature, will monitor their financial status to
meet payment on demand. The Money Market Portfolios and the International Equity
-27-
<PAGE> 386
Portfolio will invest in such instruments only when the Adviser believes that
any risk of loss due to issuer default is minimal. In determining average
weighted portfolio maturity, a variable or floating rate instrument issued or
guaranteed by the U.S. Government, its agencies and instrumentalities, or a
variable or floating rate instrument scheduled on its face to be paid in 397
days or less, will be deemed to have a maturity equal to the period remaining
until the obligation's next interest rate adjustment. Other variable or floating
rate notes will be deemed to have a maturity equal to the longer of the period
remaining to the next interest rate adjustment or the time the Portfolio can
recover payment of principal as specified in the instrument.
Variable or floating rate obligations held by the Money Market
Portfolios may have maturities of more than 397 days provided that: (i) the
Portfolio is entitled to payment of principal at any time upon not more than 30
days' notice or at specified intervals not exceeding 397 days (upon not more
than 30 days' notice); (ii) the rate of interest on a variable rate instrument
is adjusted automatically on set dates not exceeding 397 days, and the
instrument, upon adjustment, can reasonably be expected to have a market value
that approximates its par value; and (iii) the rate of interest on a floating
rate instrument is adjusted automatically whenever a specified interest rate
changes and the instrument, at any time, can reasonably be expected to have a
market value that approximates its par value.
Municipal securities purchased by the Tax-Exempt Portfolios may include
rated or unrated variable and floating rate instruments, including variable rate
master demand notes that permit the indebtedness thereunder to vary in addition
to providing for periodic adjustments in the interest rate. Unrated instruments
purchased by a Portfolio will be determined by the Adviser to be of comparable
quality at the time of purchase to rated instruments that may be purchased. The
absence of an active secondary market for a particular variable or floating rate
instrument, however, could make it difficult for a Portfolio to dispose of an
instrument if the issuer were to default on its payment obligation. A Portfolio
could, for these or other reasons, suffer a loss with respect to such
instruments.
The variable and floating rate demand instruments that the Tax-Exempt
Portfolios may purchase include participations in municipal securities purchased
from and owned by financial institutions, primarily banks. Participation
interests provide a Portfolio with a specified undivided interest (up to 100%)
in the underlying obligation and the right to demand payment of the unpaid
principal balance plus accrued interest on the participation interest from the
institution upon a specified number of days' notice, not to exceed thirty days.
Each participation interest is backed by an irrevocable letter of credit or
guarantee of a bank that the Adviser has determined meets the prescribed quality
standards for the Portfolio. The bank typically retains fees out of the interest
paid on the obligation for servicing the obligation, providing the letter of
credit and issuing the repurchase commitment.
RESTRICTED AND ILLIQUID SECURITIES. A Portfolio will not invest more
than 15% (10% with respect to a Money Market Portfolio) of the value of its net
assets in illiquid securities. Repurchase agreements that do not provide for
settlement within seven days, time deposits maturing in more than seven days,
and securities that are not registered under the Securities Act of 1933, as
amended (the "1933 Act") but that may be purchased by institutional buyers
pursuant to SEC Rule 144A are subject to the applicable limit (unless the
Adviser or Sub-Adviser, pursuant to
-28-
<PAGE> 387
guidelines established by the Board of Directors, determines that a liquid
market exists). The SEC has adopted Rule 144A which allows for a broader
institutional trading market for securities otherwise subject to restrictions on
resale to the general public. Rule 144A establishes a "safe harbor" from the
registration requirements of the 1933 Act for the resale of certain securities
to qualified institutional buyers. The purchase of securities which can be sold
under Rule 144A could have the effect of increasing the level of illiquidity in
the Portfolios to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing these restricted securities. The International
Equity Portfolio will not invest more than 10% of its total assets in the
securities of issuers which are restricted as to disposition, other than
restricted securities eligible for resale pursuant to Rule 144A.
The Adviser or Sub-Adviser monitors the liquidity of restricted
securities in the Fund's Portfolios under the supervision of the Board of
Directors. In reaching liquidity decisions, the Adviser and Sub-Adviser may
consider the following factors, although such factors may not necessarily be
determinative: (1) the unregistered nature of a security; (2) the frequency of
trades and quotes for the security; (3) the number of dealers willing to
purchase or sell the security and the number of other potential purchasers; (4)
the trading markets for the security; (5) dealer undertakings to make a market
in the security; and (6) the nature of the security and the nature of the
marketplace trades (including the time needed to dispose of the security,
methods of soliciting offers, and mechanics of transfer).
CONVERTIBLE SECURITIES. Subject to their respective investment
limitations, the Equity and Bond Portfolios (other than the Short-Intermediate
Municipal, Missouri Tax-Exempt Bond and National Municipal Bond Portfolios) may
purchase convertible securities. Convertible securities entitle the holder to
receive interest paid or accrued on debt until the convertible securities mature
or are redeemed, converted or exchanged. Prior to conversion, convertible
securities have characteristics similar to ordinary debt securities in that they
normally provide a stable stream of income with generally higher yields than
those of common stock of the same or similar issuers. Convertible securities
rank senior to common stock in a corporation's capital structure and therefore
generally entail less risk than the corporation's common stock, although the
extent to which such risk is reduced depends in large measure upon the degree to
which the convertible security sells above its value as a fixed income security.
In selecting convertible securities for a Portfolio, the Adviser (or
Sub-Adviser) will consider, among other factors, its evaluation of the
creditworthiness of the issuers of the securities; the interest or dividend
income generated by the securities; the potential for capital appreciation of
the securities and the underlying stocks; the prices of the securities relative
to other comparable securities and to the benefits of sinking funds or other
protective conditions; diversification of the Portfolio as to issuers; and
whether the securities are rated by Ratings Agencies and, if so, the ratings
assigned. A Portfolio will exchange or convert the convertible securities held
in its portfolio into shares of the underlying common stock when, in the
Adviser's or Sub-Adviser's opinion, the investment characterization of the
underlying common stock will assist the Portfolio in achieving its investment
objective. Otherwise a Portfolio may hold or trade convertible securities.
-29-
<PAGE> 388
The value of convertible securities is a function of their investment
value (determined by yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and
their conversion value (their worth, at market value, if converted into the
underlying stock). The investment value of convertible securities is influenced
by changes in interest rates, with investment value declining as interest rates
increase and increasing as interest rates decline, and by the credit standing of
the issuer and other factors. The conversion value of convertible securities is
determined by the market price of the underlying stock. If the conversion value
is low relative to the investment value, the price of the convertible securities
is governed principally by their investment value. To the extent the market
price of the underlying stock approaches or exceeds the conversion price, the
price of the convertible securities will be increasingly influenced by their
conversion value. In addition, convertible securities generally sell at a
premium over their conversion value determined by the extent to which investors
place value on the right to acquire the underlying stock while holding fixed
income securities.
RIGHTS AND WARRANTS. The Equity Portfolios may participate in rights
offerings and purchase warrants, which are privileges issued by corporations
enabling the owners to subscribe to and purchase a specified number of shares of
the corporation at a specified price during a specified period of time.
Subscription rights normally have a short life span to expiration. The purchase
of rights or warrants involves the risk that the Portfolios could lose the
purchase value of a right or warrant if the right to subscribe to additional
shares is not exercised prior to the rights' or warrants' expiration. Also, the
purchase of rights or warrants involves the risk that the effective price paid
for the right or warrant added to the subscription price of the related security
may exceed the value of the subscribed security's market price such as when
there is no movement in the level of the underlying security. The Portfolios
will not invest more than 5% of their respective net assets, taken at market
value, in warrants, or more than 2% of their respective net assets, taken at
market value, in warrants not listed on the New York, American or Canadian Stock
Exchanges. Warrants acquired by the Portfolios in units or attached to other
securities are not subject to this restriction.
STAND-BY COMMITMENTS. Each of the Tax-Exempt Portfolios may acquire
"stand-by commitments" with respect to municipal securities held by it. Under a
stand-by commitment, a dealer or bank agrees to purchase from a Portfolio, at
the Portfolio's option, specified municipal securities at their amortized cost
value to the Portfolio plus accrued interest, if any. Standby commitments
acquired by a Portfolio must be rated in the two highest categories as
determined by a rating agency, or, if not rated, must be of comparable quality
as determined by the Adviser pursuant to guidelines approved by the Fund's Board
of Directors. Stand-by commitments are exercisable by a Portfolio at any time
before the maturity of the underlying municipal securities and may be sold,
transferred or assigned by the Portfolio only with the underlying instruments.
The Missouri Tax-Exempt Bond Portfolio expects that its investments in stand-by
commitments will not exceed 5% of the value of its total assets under normal
market conditions.
The Fund expects that stand-by commitments will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, a Tax-Exempt Portfolio may pay for a stand-by commitment
either separately in cash or by paying a
-30-
<PAGE> 389
higher price for portfolio securities which are acquired subject to the
commitment (thus reducing the yield to maturity otherwise available for the same
securities).
The Tax-Exempt Portfolios intend to enter into stand-by commitments
only with dealers, banks and broker-dealers which, in the Adviser's opinion,
present minimal credit risks. A Portfolio's reliance upon the credit of these
dealers, banks and broker-dealers will be secured by the value of the underlying
municipal securities that are subject to the commitment. In evaluating the
creditworthiness of the issuer of a stand-by commitment, the Adviser will review
periodically the issuer's assets, liabilities, contingent claims and other
relevant financial information.
Each Tax-Exempt Portfolio will acquire stand-by commitments solely to
facilitate portfolio liquidity and does not intend to exercise its rights
thereunder for trading purposes. Stand-by commitments acquired by a Portfolio
would be valued at zero in determining net asset value. The acquisition of a
"stand-by commitment" by the Tax-Exempt Money Market Portfolio would thus not
affect the valuation or assumed maturity of the underlying municipal securities,
which would continue to be valued in accordance with the amortized cost method.
Where a Portfolio paid any consideration directly or indirectly for a stand-by
commitment, its cost would be reflected as unrealized depreciation for the
period during which the commitment was held by the Portfolio. If a stand-by
commitment is exercised, its cost will reduce the amount realized on the sale of
the municipal securities for purposes of determining the amount of gain or loss.
If a stand-by commitment expires unexercised, its cost is added to the basis of
the security to which it relates in those instances where the stand-by
commitment was acquired on the same day as the bond, and in other cases will be
treated as a capital loss at the time of expiration. Stand-by commitments would
not affect the average weighted maturity of a Portfolio.
TAX-EXEMPT DERIVATIVES. Subject to their respective investment
limitations, the Tax-Exempt Portfolios may hold tax-exempt derivatives which may
be in the form of tender option bonds, participations, beneficial interests in a
trust, partnership interests or other forms. The Adviser expects that less than
5% of each Tax-Exempt Portfolio's assets will be invested in such securities
during the current year. A number of different structures have been used. For
example, interests in long-term fixed-rate municipal securities, held by a bank
as trustee or custodian, are coupled with tender option, demand and other
features when the tax-exempt derivatives are created. Together, these features
entitle the holder of the interest to tender (or put), the underlying municipal
securities to a third party at periodic intervals and to receive the principal
amount thereof. In some cases, municipal securities are represented by custodial
receipts evidencing rights to receive specific future interest payments,
principal payments, or both, on the underlying municipal securities held by the
custodian. Under such arrangements, the holder of the custodial receipt has the
option to tender the underlying municipal security at its face value to the
sponsor (usually a bank or broker dealer or other financial institution), which
is paid periodic fees equal to the difference between the bond's fixed coupon
rate and the rate that would cause the bond, coupled with the tender option, to
trade at par on the date of a rate adjustment. The Portfolios may hold
tax-exempt derivatives, such as participation interests and custodial receipts,
for municipal securities which give the holder the right to receive payment of
principal subject to the conditions described above. The Internal Revenue
Service has not ruled on whether the interest received on tax-exempt derivatives
in the form of participation interests
-31-
<PAGE> 390
or custodial receipts is tax-exempt, and accordingly, purchases of any such
interests or receipts are based on the opinion of counsel to the sponsors of
such derivative securities. Neither the Fund nor the Adviser will review the
proceedings related to the creation of any tax-exempt derivatives or the basis
for such opinions.
U.S. GOVERNMENT OBLIGATIONS. Examples of the types of U.S. Government
obligations that may be held by the Portfolios, subject to their respective
investment policies, include, in addition to U.S. Treasury bonds, notes and
bills, the obligations of Federal Home Loan Banks, Federal Farm Credit Banks,
Federal Land Banks, the Federal Housing Administration, Farmers Home
Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association ("GNMA"), Federal
National Mortgage Association ("FNMA"), General Services Administration, Central
Bank for Cooperatives, Federal Home Loan Mortgage Corporation ("FHLMC"), Federal
Intermediate Credit Banks, Maritime Administration, Resolution Trust
Corporation, and International Bank for Reconstruction and Development.
Obligations of certain agencies and instrumentalities of the U.S.
Government, such as GNMA, are supported by the full faith and credit of the U.S.
Treasury; others, such as those of the Export-Import Bank of the United States,
are supported by the right of the issuer to borrow from the Treasury; others,
such as those of the FNMA, are supported by the discretionary authority of the
U.S. Government to purchase the agency's obligations; still others, such as
those of the FHLMC, are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. Government would provide financial support
to U.S. Government-sponsored instrumentalities if it is not obligated to do so
by law.
Securities issued or guaranteed by the U.S. Government, its agencies
and instrumentalities have historically involved little risk of loss of
principal if held to maturity. However, due to fluctuations in interest rates,
the market value of such securities may vary during the period a shareholder
owns Shares of a Portfolio. Certain U.S. Government securities held by the Money
Market Portfolios may have remaining maturities exceeding thirteen months if
such securities provide for adjustments in their interest rates no less
frequently than every thirteen months.
STRIPPED GOVERNMENT SECURITIES. To the extent consistent with their
respective investment policies, each Portfolio may invest in bills, notes and
bonds (including zero coupon bonds) issued by the U.S. Treasury. In addition,
each Portfolio (except the Tax-Exempt Money Market, Short-Intermediate
Municipal, Missouri Tax-Exempt Bond, Growth Equity, Equity Index and Small Cap
Equity Index Portfolios) may also invest in "stripped" U.S. Treasury
obligations, including (1) coupons that have been stripped from U.S. Treasury
bonds, which are held through the Federal Reserve Bank's book-entry system
called the "Separate Trading of Registered Interest and Principal Securities"
("STRIPS") program or (2) through the Coupon Under Bank-Entry Safekeeping
("CUBES") program or other stripped securities issued directly by agencies or
instrumentalities of the U.S. Government (and, with respect to the Treasury
Money Market Portfolio only, that are also guaranteed as to principal and
interest by the U.S. Government). STRIPS and CUBES represent either future
interest or principal payments and are direct obligations of the U.S. Government
that clear through the Federal Reserve System. The Money
-32-
<PAGE> 391
Market, Intermediate Corporate Bond, Bond Index, Government & Corporate Bond,
Growth & Income Equity, Small Cap Equity and Balanced Portfolios may also
purchase U.S. Treasury and agency securities that are stripped by brokerage
firms and custodian banks and sold under proprietary names. Having separated the
interest coupons from the underlying principal of the U.S. Government
Obligations, the holder will resell the stripped securities in custodial receipt
programs with a number of different names including "Treasury Income Growth
Receipts" ("TIGRS") and "Certificates of Accrual on Treasury Securities"
("CATS"). Such securities may not be as liquid as STRIPS and CUBES and are not
viewed by the staff of the SEC as U.S. Government securities for purposes of the
1940 Act.
Stripped securities are issued at a discount to their "face value" and
may exhibit greater price volatility than ordinary debt securities because of
the manner in which their principal and interest are returned to investors. The
Adviser will consider the liquidity needs of a Portfolio when any investments in
zero coupon obligations or other principal-only obligations are made.
The stripped coupons are sold separately from the underlying principal,
which is sold at a deep discount because the buyer receives only the right to
receive a future fixed payment on the security and does not receive any rights
to periodic interest (cash) payments. Purchasers of stripped principal-only
securities acquire, in effect, discount obligations that are economically
identical to the zero coupon securities that the Treasury Department sells
itself. In the case of bearer securities (i.e., unregistered securities which
are owned ostensibly by the bearer or holder), the underlying U.S. Treasury
bonds and notes themselves are held in trust on behalf of the owners. Counsel to
the underwriters of these certificates or other evidences of ownership of the
U.S. Treasury securities have stated that, in their opinion, purchasers of the
stripped securities, such as the Portfolios, most likely will be deemed the
beneficial holders of the underlying U.S. Government obligations for federal tax
and security purposes.
The U.S. Government does not issue stripped Treasury securities
directly. The STRIPS program, which is ongoing, is designed to facilitate the
secondary market in the stripping of selected U.S. Treasury notes and bonds into
separate interest and principal components. Under the program, the U.S. Treasury
continues to sell its notes and bonds through its customary auction process. A
purchaser of those specified notes and bonds who has access to a book-entry
account at a Federal Reserve bank, however, may separate the Treasury notes and
bonds into interest and principal components. The selected Treasury securities
thereafter may be maintained in the book-entry system operated by the Federal
Reserve in a manner that permits the separate trading and ownership of the
interest and principal payments.
For custodial receipts, the underlying debt obligations are held
separate from the general assets of the custodian and nominal holder of such
securities, and are not subject to any right, charge, security interest, lien or
claim of any kind in favor of or against the custodian or any person claiming
through the custodian. The custodian is also responsible for applying all
payments received on those underlying debt obligations to the related receipts
or certificates without making any deductions other than applicable tax
withholding. The custodian is required to maintain insurance for the protection
of holders of receipts or certificates in customary amounts against losses
resulting from the custody arrangement due to dishonest or fraudulent action by
the custodian's employees. The holders of receipts or certificates, as the real
parties in
-33-
<PAGE> 392
interest, are entitled to the rights and privileges of the underlying debt
obligations, including the right, in the event of default in payment of
principal or interest, to proceed individually against the issuer without acting
in concert with other holders of those receipts or certificates or the
custodian.
SECURITIES LENDING. To increase return or offset expenses, each
Portfolio (except the Tax-Exempt Money Market and Missouri Tax-Exempt Bond
Portfolios) may lend its portfolio securities to broker-dealers, banks or
institutional borrowers pursuant to agreements requiring that the loans be
continuously secured by collateral equal at all times in value, marked to market
daily, to at least the market value of the securities loaned. Collateral for
such loans may include cash, securities of the U.S. Government, or its agencies
or instrumentalities, or an irrevocable letter of credit issued by a bank that
has at least $1.5 billion in total assets, or any combination thereof. The
collateral must be valued daily and, should the market value of the loaned
securities increase, the borrower must furnish additional collateral to the
lending Portfolio. By lending its securities, a Portfolio can increase its
income by continuing to receive interest on the loaned securities as well as by
either investing the cash collateral in short-term instruments or obtaining
yield in the form of interest paid by the borrower when U.S. Government
securities are used as collateral. In accordance with current SEC policies, each
Portfolio is currently limiting its securities lending to 33-1/3% of the value
of its total assets (including the value of the collateral for the loans) at the
time of the loan. Loans are subject to termination by a Portfolio or a borrower
at any time.
While these Portfolios would not have the right to vote securities on
loan, each Portfolio intends to terminate the loan and regain the right to vote
should this be considered important with respect to the investment. When the
Portfolios lend their securities, they continue to receive interest or dividends
on the securities loaned and may simultaneously earn interest on the investment
of the cash collateral which will be invested in readily marketable, high
quality, short-term obligations. Although voting rights, or rights to consent,
attendant to securities on loan pass to the borrower, such loans may be called
at any time and will be called so that the securities may be voted by a
Portfolio if a material event affecting the investment is to occur.
SECURITIES OF OTHER INVESTMENT COMPANIES. Under certain circumstances
and subject to their respective investment policies and limitations, each
Portfolio may invest in securities issued by other investment companies,
limited, except as described below, with respect to each Portfolio (other than
the Growth Equity Portfolio) to investment companies which determine their net
asset value per Share based on the amortized cost or penny-rounding method and
which invest in securities in which the Portfolio is permitted to invest. Each
Portfolio currently intends to limit its investments so that, as determined
immediately after a securities purchase is made: (a) not more than 5% of the
value of its total assets will be invested in the securities of any one
investment company; (b) not more than 10% of the value of its total assets will
be invested in the aggregate in securities of investment companies as a group;
(c) not more than 3% of the outstanding voting stock of any one investment
company will be owned by the Portfolio; and (d) not more than 10% of the
outstanding voting stock of any one investment company will be owned in the
aggregate by the Portfolios and other investment companies advised by the
Adviser.
-34-
<PAGE> 393
Investments in other investment companies will cause a Portfolio (and,
indirectly, the Portfolio's shareholders) to bear proportionately the cost
incurred in connection with the operations of such other investment companies.
In addition, investment companies in which a Portfolio may invest may impose a
sales or distribution charge in connection with the purchase or redemption of
their shares as well as other types of commissions or charges (no sales charge
will be paid by the Missouri Tax-Exempt Bond Portfolio in connection with such
investments). Such charges will be payable by a Portfolio and, therefore, will
be borne indirectly by its shareholders. The income on securities of other
investment companies may be taxable to investors at the state or local level.
See "Additional Information Concerning Taxes" below.
ASSET-BACKED SECURITIES. Subject to their respective investment
policies, the U.S. Government Securities, Intermediate Corporate Bond, Bond
Index, Government & Corporate Bond and Balanced Portfolios may purchase
asset-backed securities (i.e., securities backed by mortgages, installment sale
contracts, corporate receivables, credit card receivables or other assets) that
are issued by entities such as GNMA, FNMA and FHLMC and private issuers such as
commercial banks, financial companies, finance subsidiaries of industrial
companies, savings and loan associations, mortgage banks, and investment banks.
Asset-backed securities represent interests in "pools" of assets in which
payments of both interest and principal on the securities are made monthly, thus
in effect "passing through" monthly payments made by the individual borrowers on
the assets that underlie the securities, net of any fees paid to the issuer or
guarantor of the securities. The average life of asset-backed securities varies
with the maturities of the underlying instruments, and for this and other
reasons, an asset-backed security's stated maturity may be shortened, and the
security's total return may be difficult to predict precisely.
Presently there are several types of mortgage-backed securities,
including guaranteed mortgage pass-through certificates, which provide the
holder with a pro rata interest in the underlying mortgages, and collateralized
mortgage obligations ("CMOs"), which provide the holder with a specified
interest in the cash flow of a pool of underlying mortgages or other
mortgage-backed securities. CMOs are issued in multiple classes, each with a
specified fixed or floating interest rate and a final distribution date. The
relative payment rights of the various CMO classes may be subject to greater
volatility and interest-rate risk than other types of mortgage-backed
securities. The average life of asset-backed securities varies with the
underlying instruments or assets and market conditions, which in the case of
mortgages have maximum maturities of forty years. The average life of a
mortgage-backed instrument, in particular, is likely to be substantially less
than the original maturity of the mortgages underlying the securities as the
result of unscheduled principal payments and mortgage prepayments. The
relationship between mortgage prepayment and interest rates may give some
high-yielding mortgage-backed securities less potential for growth in value than
conventional bonds with comparable maturities. In addition, in periods of
falling interest rates, the rate of mortgage prepayments tends to increase.
During such periods, the reinvestment of prepayment proceeds by a Portfolio will
generally be at lower rates than the rates that were carried by the obligations
that have been prepaid. When interest rates rise, the value of an asset-backed
security generally will decline; however, when interest rates decline, the value
of an asset-backed security with prepayment features may not increase as much as
that of other fixed-income securities. Because of these and other reasons, an
asset-backed security's total return may be difficult to predict precisely.
-35-
<PAGE> 394
There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage-backed securities
and among the securities that they issue. Mortgage-backed securities guaranteed
by GNMA include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie
Maes") which are guaranteed as to the timely payment of principal and interest
by GNMA and such guarantee is backed by the full faith and credit of the United
States. GNMA is a wholly-owned U.S. Government corporation with the Department
of Housing and Urban Development. GNMA certificates also are supported by the
authority of GNMA to borrow funds from the U.S. Treasury to make payments under
its guarantee. Mortgage-backed securities issued by the FNMA include FNMA
Guaranteed Mortgage Pass-through Certificates (also known as "Fannie Maes")
which are solely the obligations of the FNMA and are not backed by or entitled
to the full faith and credit of the United States, but are supported by the
right of the issuer to borrow from the Treasury. FNMA is a government-sponsored
organization owned entirely by private stockholders. Fannie Maes are guaranteed
as to timely payment of the principal and interest by FNMA. Mortgage-backed
securities issued by the FHLMC include FHLMC Mortgage Participation Certificates
(also known as "Freddie Macs" or "PCs"). FHLMC is a corporate instrumentality of
the United States, created pursuant to an Act of Congress, which is owned
entirely by Federal Home Loan Banks. Freddie Macs are not guaranteed by the
United States or by any Federal Home Loan Bank. Freddie Macs entitle the holder
to timely payment of interest, which is guaranteed by the FHLMC. FHLMC
guarantees either ultimate collection or timely payment of all principal
payments on the underlying mortgage loans. When FHLMC does not guarantee timely
payment of principal, FHLMC may remit the amount due on account of its guarantee
of ultimate payment of principal at any time after default on an underlying
mortgage, but in no event later than one year after it becomes payable.
Non-mortgage asset-backed securities involve certain risks that are not
presented by mortgage-backed securities. The collateral supporting non-mortgage
asset-backed securities generally is of shorter maturity than mortgage loans and
is less likely to experience substantial prepayments. Primarily, these
securities do not have the benefit of the same security interest in the
underlying collateral (i.e., credit card and automobile loan receivables as
opposed to real estate mortgages). Credit card receivables are generally
unsecured, and the debtors are entitled to the protection of a number of state
and federal consumer credit laws, many of which have given debtors the right to
set off certain amounts owed on the credit cards, thereby reducing the balance
due. The repossession of automobiles and other personal property upon the
default of the debtor may be difficult or unpracticable in some cases. Most
issuers of automobile receivables permit the servicers to retain possession of
the underlying obligations. If the servicer were to sell these obligations to
another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the related automobile receivables. In
addition, because of the large number of vehicles involved in a typical issuance
and technical requirements under state laws, the trustee for the holders of the
automobile receivables may not have an effective security interest in all of the
obligations backing such receivables. Therefore, there is a possibility that
recoveries on repossessed collateral may not, in some cases, be able to support
payments on these securities.
WHEN-ISSUED PURCHASES, DELAYED SETTLEMENT TRANSACTIONS AND FORWARD
COMMITMENTS. Each Portfolio may purchase securities on a "when-issued" basis
and, except for
-36-
<PAGE> 395
the Growth Equity Portfolio, may purchase or sell securities on a "forward
commitment" basis. These transactions involve a commitment by a Portfolio to
purchase or sell securities at a stated price and yield with settlement beyond
the normal settlement date. Such transactions permit a Portfolio to lock-in a
price or yield on a security, regardless of future changes in interest rates.
Additionally, the Short-Intermediate Municipal, National Municipal Bond and
Growth Equity Portfolios may purchase or sell securities on a "delayed
settlement" basis. This refers to a transaction in the secondary market that
will settle some time in the future. When-issued purchases, forward commitments
and delayed settlement transactions involve a risk of loss if the value of the
security to be purchased declines prior to the settlement date, or if the value
of the security to be sold increases prior to the settlement date.
When a Portfolio agrees to purchase or sell securities on a
when-issued, delayed settlement or forward commitment basis, the Custodian (or
sub-custodian) will maintain in a segregated account cash, U.S. Government
securities, liquid portfolio securities or other high-grade debt obligations
having a value (determined daily) at least equal to the amount of the
Portfolio's commitments. In the case of a forward commitment to sell portfolio
securities, the Custodian (or sub-custodian) will hold the portfolio securities
themselves in a segregated account while the commitment is outstanding. These
procedures are designed to ensure that a Portfolio will maintain sufficient
assets at all times to cover is obligations under when-issued purchases and
delayed delivery and forward commitment transactions.
A Portfolio will make commitments to purchase securities on a
when-issued basis or to purchase or sell securities on a delayed delivery or
forward commitment basis only with the intention of completing the transaction
and actually purchasing or selling the securities. No Portfolio intends to
engage in such transactions for speculative purposes. If deemed advisable as a
matter of investment strategy, however, a Portfolio may dispose of or
renegotiate a commitment after it is entered into and may sell securities it has
committed to purchase before those securities are delivered to the Portfolio on
the settlement date. In these cases, the Portfolio may realize a capital gain or
loss.
When a Portfolio engages in when-issued, delayed delivery and forward
commitment transactions, it relies on the other party to consummate the trade.
Failure of such party to do so may result in the Portfolio's incurring a loss or
missing an opportunity to obtain a price considered to be advantageous.
The value of the securities underlying such commitments to purchase or
sell securities, and any subsequent fluctuations in their value, is taken into
account when determining a Portfolio's net asset value starting on the day the
Portfolio agrees to purchase the securities. The Portfolio does not earn
interest on the securities it has committed to purchase until they are paid for
and delivered on the settlement date. When a Portfolio makes a forward
commitment to sell securities it owns, the proceeds to be received upon
settlement are included in the Portfolio's assets, and fluctuations in the value
of the underlying securities are not reflected in the Portfolio's net asset
value as long as the commitment remains in effect.
Each Portfolio expects that these transactions will not exceed 25% of
the value of its total assets (at the time of purchase) under normal market
conditions. Because the Portfolios
-37-
<PAGE> 396
will each set aside cash or liquid assets to satisfy its purchase commitments in
the manner described, a Portfolio's liquidity and ability to manage its
portfolio might be affected in the event its commitments to purchase securities
on a when-issued or forward commitment basis ever exceeded 25% of the value of
its total assets. The National Municipal Bond Portfolio expects that commitments
to purchase when-issued securities will not exceed 5% of its total assets under
normal market conditions.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. Because the International
Equity Portfolio may buy and sell securities denominated in currencies other
than the U.S. dollar, and receive interest, dividends and sale proceeds in
currencies other than the U.S. dollar, the Portfolio may from time to time enter
into foreign currency exchange transactions to convert to and from different
foreign currencies and to convert foreign currencies to and from the U.S.
dollar. The Portfolio may enter into currency exchange transactions on a spot
(i.e., cash) basis at the spot rate prevailing in the foreign currency exchange
market, or use forward currency contracts to purchase or sell foreign
currencies.
A forward foreign currency contract involves an obligation by the
Portfolio to purchase or sell a specified currency at a future date at a price
set at the time of the contract. In this respect, forward currency contracts are
similar to foreign currency futures contracts described below; however, unlike
futures contracts, which are traded on recognized commodities exchanges, forward
currency contracts are traded in the interbank market conducted directly between
currency traders (usually large commercial banks) and their customers. Also,
forward currency contracts usually involve delivery of the currency involved
instead of cash payment as in the case of futures contracts. Forward currency
contracts do not eliminate fluctuations in the values of portfolio securities
but rather allow the Portfolio to establish a rate of exchange for a future
point in time. The Portfolio may enter into forward foreign currency exchange
contracts when deemed advisable by their investment adviser under two
circumstances.
When entering into a contract for the purchase or sale of a security,
the International Equity Portfolio may enter into a forward foreign currency
exchange contract for the amount of the purchase or sale price to protect
against variations in the value of the foreign currency relative to the U.S.
dollar or other foreign currency between the date the security is purchased or
sold and the date on which payment is made or received. For instance, the
Portfolio may use forward foreign currency exchange contracts in order to
protect against uncertainty in the level of future foreign exchange rates. The
use of such forward contracts is limited to hedging against movements in the
value of foreign currencies relative to the U.S. dollar in connection with
specific portfolio transactions or with respect to portfolio positions. The
purpose of transaction hedging is to "lock in" the U.S. dollar equivalent price
of such specific securities. Position hedging is the sale of foreign currency
with respect to portfolio security positions denominated or quoted in that
currency. The Portfolio will not speculate in foreign currency exchange
transactions. Transaction and position hedging will not be limited to an overall
percentage of the Portfolio's assets but will be employed as necessary to
correspond to particular transactions or positions. The Portfolio may not hedge
its currency positions to an extent greater than the aggregate market value (at
the time of entering into the forward contract) of the securities held in its
portfolio denominated in, quoted in, or currently convertible into that
particular currency. Neither spot transactions nor forward foreign currency
exchange contracts eliminate fluctuations in the prices of the Portfolio's
-38-
<PAGE> 397
portfolio securities or in foreign exchange rates, or prevent loss if the prices
of these securities decline, but forward foreign currency exchange contracts do
allow the Portfolio to establish a rate of exchange for a future point in time.
When the Sub-Adviser anticipates that a particular foreign currency may
decline substantially relative to the U.S. dollar or other leading currencies,
in order to reduce risk, the International Equity Portfolio may enter into a
forward contract to sell, for a fixed amount, the amount of foreign currency
approximating the value of some or all of the Portfolio's securities denominated
in such foreign currency. The Portfolio does not intend to enter into forward
contracts under this second circumstance on a regular or continuing basis. The
Portfolio will not enter into such forward contracts or maintain a net exposure
to such contracts where the consummation of the contracts would obligate the
Portfolio to deliver an amount of foreign currency in excess of the value of its
portfolio securities or other assets denominated in that currency. While forward
contracts may offer protection from losses resulting from declines in the value
of a particular foreign currency, they also limit potential gains which might
result from increases in the value of such currency. Furthermore, forward
foreign currency exchange contracts do not eliminate fluctuations in the
underlying prices of securities. In addition, the Portfolio will incur costs in
connection with forward foreign currency exchange contracts and conversions of
foreign currencies and U.S. dollars.
The Fund's Custodian will place in a separate account of the
International Equity Portfolio cash or liquid securities in an amount equal to
the value of the Portfolio's assets that could be required to consummate forward
contracts entered into under the second circumstance, as set forth above. For
the purpose of determining the adequacy of the securities in the account, the
deposited securities will be valued at market or fair value. If the market or
fair value of such securities declines, additional cash or securities will be
placed in the account daily so that the value of the account will equal the
amount of such commitments by the Portfolio.
At the maturity of a forward contract, the International Equity
Portfolio may either sell the portfolio security and make delivery of the
foreign currency, or it may retain the security and terminate its contractual
obligation to deliver the foreign currency by purchasing an "offsetting"
contract with the same currency trader obligating it to purchase, on the same
maturity date, the same amount of the foreign currency.
It is impossible to forecast with absolute precision the market value
of portfolio securities at the expiration of the contract. Accordingly, it may
be necessary for the International Equity Portfolio to purchase additional
foreign currency on the spot market (and bear the expense of such purchase) if
the market value of the security is less than the amount of foreign currency the
Portfolio is obligated to deliver and if a decision is made to sell the security
and make delivery of the foreign currency. Conversely, it may be necessary to
sell on the spot market some of the foreign currency received upon the sale of
the portfolio security if its market value exceeds the amount of foreign
currency the Portfolio is obligated to deliver.
If the International Equity Portfolio retains the portfolio security
and engages in an offsetting transaction, it will incur a gain or a loss (as
described below) to the extent that there has been movement in forward contract
prices. If the Portfolio engages in an offsetting
-39-
<PAGE> 398
transaction, it may subsequently enter into a new forward contract to sell the
foreign currency. Should forward prices decline between the date the Fund enters
into a forward contract for the sale of a foreign currency and the date it
enters into an offsetting contract for the purchase of the foreign currency, it
will realize a gain to the extent the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Portfolio will suffer a loss to the extent the price of the
currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell. For a discussion of the Federal tax treatment of forward
contracts, see "Additional Information Concerning Taxes -- Taxation of Certain
Financial Instruments."
OPTIONS TRADING. Each of the Equity and Bond Portfolios (except the
Short-Intermediate Municipal, Missouri Tax-Exempt Bond and National Municipal
Bond Portfolios) may purchase put options and each Portfolio (except the
Short-Intermediate Municipal, Missouri Tax-Exempt Bond, National Municipal Bond
and Growth Equity Portfolios) may purchase call options. Except as described
below with respect to the Growth Equity Portfolio, such options will be listed
on a national securities exchange and issued by the Options Clearing Corporation
and, with respect to each Portfolio other than the Growth Equity Portfolio, will
be in an amount not exceeding 10% of that Portfolio's net assets. The
International Equity Portfolio will not invest more than 5% of its total assets
in initial margin deposits and premiums (including without limitation, puts,
calls, straddles and spreads) and any combination thereof. Options trading is a
specialized activity which entails greater than ordinary investment risks.
Regardless of how much the market price of the underlying security or index
increases or decreases, the option buyer's risk is limited to the amount of the
original investment for the purchase of the option. However, options may be more
volatile than the underlying securities, and therefore, on a percentage basis,
an investment in options may be subject to greater fluctuation than an
investment in the underlying securities. A listed call option gives the
purchaser of the option the right to buy from a clearing corporation, and a
writer has the obligation to sell to the clearing corporation, the underlying
security at the stated exercise price at any time prior to the expiration of the
option, regardless of the market price of the security. The premium paid to the
writer is in consideration for undertaking the obligations under the option
contract. A listed put option gives the purchaser the right to sell to a
clearing corporation the underlying security at the stated exercise price at any
time prior to the expiration date of the option, regardless of the market price
of the security. In contrast to an option on a particular security, an option on
a stock or bond index provides the holder with the right to make or receive a
cash settlement upon the exercise of the option. The amount of this settlement
will be equal to the difference between the closing price of the index at the
time of exercise and the exercise price of the option expressed in dollars,
times a specified multiple. Such transactions will be entered into only as a
hedge against fluctuations in the value of securities which a Portfolio holds or
intends to purchase.
A Portfolio's obligation to sell a security subject to a covered call
option written by it may be terminated prior to the expiration date of the
option by the Portfolio's executing a closing purchase transaction, which is
effected by purchasing on an exchange an option of the same series (i.e., same
underlying security, exercise price and expiration date) as the option
previously written. Such a purchase does not result in the ownership of an
option. A closing purchase transaction will ordinarily be effected to realize a
profit on an outstanding option, to prevent an underlying security from being
called, to permit the sale of the underlying security or
-40-
<PAGE> 399
to permit the writing of a new option containing different terms on such
underlying security. The cost of such a liquidation purchase plus transaction
costs may be greater than the premium received upon the original option, in
which event the Portfolio will have incurred a loss in the transaction. An
option position may be closed out only on an exchange which provides a secondary
market for an option of the same series. There is no assurance that a liquid
secondary market on an exchange will exist for any particular option. A covered
call option writer, unable to effect a closing purchase transaction, would not
be able to sell the underlying security until the option expires or the
underlying security is delivered upon exercise with the result that the writer
in such circumstances will be subject to the risk of market decline in the
underlying security during such period. A Portfolio will write an option on a
particular security only if the Adviser or Sub-Adviser believes that a liquid
secondary market will exist on an exchange for options of the same series which
will permit the Portfolio to make a closing purchase transaction in order to
close out its position.
The Growth Equity Portfolio may purchase and write over-the-counter
options or portfolio securities in negotiated transactions with the buyers or
writers of the options for those options on portfolio securities held by the
Portfolio that are not traded on an exchange.
Each of the Equity and Bond Portfolios (except the Short-Intermediate
Municipal, Missouri Tax-Exempt Bond and National Municipal Bond Portfolios) may
also write covered call options. A covered call option is an option to acquire a
security that a Portfolio owns or has the right to acquire during the option
period. Except as described below with respect to the Growth Equity Portfolio,
such options will be listed on a national securities exchange and issued by the
Options Clearing Corporation. When a Portfolio writes a covered call option, an
amount equal to the net premium (the premium less the commission) received by
the Portfolio is included in the liability section of the Portfolio's statement
of assets and liabilities as a deferred credit. The amount of the deferred
credit is subsequently marked-to-market to reflect the current value of the
option written. The current value of the traded option is the last sale price
or, in the absence of a sale, the average of the closing bid and asked prices.
If an option expires on the stipulated expiration date or if the Portfolio
enters into a closing purchase transaction, it will realize a gain (or loss if
the cost of a closing purchase transaction exceeds the net premium received when
the option is sold) and the deferred credit related to such option will be
eliminated. Any gain on a covered call option may be offset by a decline in the
market price of the underlying security during the option period. If a covered
call option is exercised, the Portfolio may deliver the underlying security held
by it or purchase the underlying security in the open market. In either event,
the proceeds of the sale will be increased by the net premium originally
received, and the Portfolio will realize a gain or loss. Premiums from expired
options written by a Portfolio and net gains from closing purchase transactions
are treated as short-term capital gains for federal income tax purposes, and
losses on closing purchase transactions are short-term capital losses.
As noted previously, there are several risks associated with
transactions in options on securities and indices. For example, there are
significant differences between the securities and options markets that could
result in an imperfect correlation between these markets, causing a given
transaction not to achieve its objectives. In addition, a liquid secondary
market for particular options, even when traded on a national securities
exchange ("Exchange"), may be
-41-
<PAGE> 400
absent for reasons which include the following: there may be insufficient
trading interest in certain options; restrictions may be imposed by an Exchange
on opening transactions or closing transactions or both; trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options or underlying securities; unusual or unforeseen
circumstances may interrupt normal operations on an Exchange; the facilities of
an Exchange or the Options Clearing Corporation may not at all times be adequate
to handle current trading volume; or one or more Exchanges could, for economic
or other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that Exchange (or in that class or series of options)
would cease to exist, although outstanding options that had been issued by the
Options Clearing Corporation as a result of trades on that Exchange would
continue to be exercisable in accordance with their terms. Exchange-traded
options have a continuous liquid market while over-the-counter options may not.
The Growth Equity Portfolio may purchase and write over-the-counter
options on portfolio securities in negotiated transactions with the buyers or
writers of the options when options on the portfolio securities held by such
Portfolio are not traded on a national securities exchange. Over-the-counter
options are two-party contracts with price and terms negotiated between the
buyer and seller. In contrast, exchange-traded options are third party contracts
with standardized strike prices and expiration dates and are purchased from a
clearing corporation such as the Options Clearing Corporation. Exchange-traded
options have a continuous liquid market while over-the-counter options may not.
While each of the Portfolios authorized to engage in options transactions may
invest in options relating to various securities indexes as well as to
individual securities, the Growth Equity Portfolio may not engage in options
transactions relating to indexes.
The International Equity Portfolio may write covered call options, buy
put options, buy call options and write secured put options for hedging (or
cross-hedging) purposes or for the purpose of earning additional income. Such
options may relate to particular securities, foreign or domestic stock or bond
indices, financial instruments or foreign currencies; may or may not be listed
on a domestic or foreign securities exchange; and may or may not be issued by
the Options Clearing Corporation. The International Equity Portfolio will invest
and trade in unlisted over-the-counter options only with firms deemed
creditworthy by the Adviser or Sub-Adviser. However, unlisted options are not
subject to the protections afforded purchasers of listed options by the Options
Clearing Corporation, which performs the obligations of its members which fail
to perform them in connection with the purchase or sale of options. The
International Equity Portfolio will not purchase put and call options in an
amount that exceeds 10% of its net assets at the time of purchase.
The aggregate value of the securities subject to covered call options
written by a Portfolio will not exceed 25% of the value of its net assets. In
order to close out an option position, a Portfolio may enter into a "closing
purchase transaction" -- the purchase of a covered call option on the same
security with the same exercise price and expiration date as the option which
the Portfolio previously wrote. By writing a covered call option, a Portfolio
forgoes the opportunity to profit from an increase in the market price of the
underlying security above the exercise price except insofar as the premium
represents such a profit and it is not able to sell the underlying security
until the option expires, is exercised, or the Portfolio effects a closing
purchase transaction
-42-
<PAGE> 401
by purchasing an option of the same series. The use of covered call options will
not be a primary investment technique of any Portfolio.
A decision as to whether, when and how to use options involves the
exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events.
FOREIGN CURRENCY PUT AND CALL OPTIONS. The International Equity
Portfolio may purchase foreign currency put options on U.S. exchanges or U.S.
over-the-counter markets. (See "Options Trading" above for a discussion of
options trading). A put option gives the Portfolio, upon payment of a premium,
the right to sell a currency at the exercise price until the expiration of the
option and serves to insure against adverse currency price movements in the
underlying portfolio assets denominated in that currency. Exchange listed
options markets in the United States include seven major currencies, and trading
may be thin and illiquid. The seven major currencies are Australian dollars,
British pounds, Canadian dollars, German marks, French francs, Japanese yen and
Swiss francs.
UNLISTED CURRENCY OPTIONS. The International Equity Portfolio may
purchase unlisted currency options. A number of major investment firms trade
unlisted options which are more flexible than exchange listed options with
respect to strike price and maturity date. These unlisted options generally are
available on a wider range of currencies. Unlisted foreign currency options are
generally less liquid than listed options and involve the credit risk associated
with the individual issuer. They will be deemed to be illiquid for purposes of
the limitation on investments in illiquid securities.
WRITING FOREIGN CURRENCY CALL OPTIONS. A call option written by the
International Equity Portfolio gives the purchaser, upon payment of a premium,
the right to purchase from the International Equity Fund a currency at the
exercise price until the expiration of the option.
FUTURES CONTRACTS AND RELATED OPTIONS. The Equity Portfolios and the
U.S. Government Securities, Intermediate Corporate Bond, Bond Index and
Government & Corporate Bond Portfolios may invest in futures contracts to the
extent permitted by the Commodity Futures Trading Commission ("CFTC") and the
SEC. The International Equity Portfolio may invest in interest rate futures
contracts, options on futures contracts and other types of financial futures
contracts (such as foreign currency contracts), as well as any index or foreign
market futures (such as stock or bond index futures contracts or interest rate
futures or options) which are available in recognized exchanges or in other
established financial markets to the extent permitted by the CFTC and the SEC.
Such transactions, including stock or bond index futures contracts, or
options thereon, act as a hedge to protect a Portfolio from fluctuations in the
value of its securities caused by anticipated changes in interest rate or market
conditions without necessarily buying or selling the securities or, with respect
to the Equity Index and Small Cap Equity Index Portfolios, can be used to
simulate full investment in the S&P 500 or S&P SmallCap 600, respectively, while
retaining a cash balance for portfolio management purposes. Hedging is a
specialized investment
-43-
<PAGE> 402
technique that entails skills different from other investment management. The
Adviser (or Sub-Adviser) may also consider such transactions to be economically
appropriate for the reduction of risk inherent in the ongoing management of a
Portfolio. A stock or bond index futures contract is an agreement in which one
party agrees to take or make delivery of an amount of cash equal to a specified
dollar amount times the difference between the index value (which assigns
relative values to the common stock or bonds included in the index) at the close
of the last trading day of the contract and the price at which the agreement is
originally made. No physical delivery of the underlying stock or bond in the
index is contemplated. Similarly, it may be in the best interest of a Portfolio
to purchase or sell interest rate futures contracts, or options thereon, which
provide for the future delivery of specified fixed income securities.
To enter into a futures contract, an amount of cash and cash
equivalents, equal to the market value of the futures contracts, is deposited in
a segregated account with the Fund's Custodian and/or in a margin account with a
broker to collateralize the position and thereby insure that the use of such
futures is unleveraged. Positions in futures contracts may be closed out only on
an exchange which provides a secondary market for such futures. However, there
can be no assurance that a liquid secondary market will exist for any particular
futures contract at any specific time. Thus, it may not be possible to close a
futures position. In the event of adverse price movements, a Portfolio would
continue to be required to make daily cash payments to maintain its required
margin. In such situations, if a Portfolio had insufficient cash, it might have
to sell portfolio securities to meet daily margin requirements at a time when it
would be disadvantageous to do so. In addition, a Portfolio might be required to
make delivery of the instruments underlying futures contracts that it holds. The
inability to close options and futures positions also could have an adverse
impact on a Portfolio's ability to hedge effectively.
Successful use of futures by a Portfolio is also subject to the
Adviser's or Sub-Adviser's ability to predict movements correctly in the
direction of the market. There is an imperfect correlation between movements in
the price of futures and movements in the price of the securities which are the
subject of the hedge. In addition, the price of futures may not correlate
perfectly with movement in the cash market due to certain market distortions.
Due to the possibility of price distortion in the futures market and because of
the imperfect correlation between the movements in the cash market and movements
in the price of futures, a correct forecast of general market trends or interest
rate movements by the Adviser or Sub-Adviser may still not result in a
successful hedging transaction over a short time frame.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (or gain) to the investor. For example, if at the time of
purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit, before any deduction for the
transaction costs, if the contract were closed out. Thus, a purchase or sale of
a futures contract may result in losses in excess of the amount invested in the
contract.
-44-
<PAGE> 403
Utilization of futures transactions by a Portfolio involves the risk of
loss by the Portfolio of margin deposits in the event of bankruptcy of a broker
with whom the Fund has an open position in a futures contract or related option.
Most futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of a trading session.
Once the daily limit has been reached in a particular type of contract, no
trades may be made on that day at a price beyond the limit. The daily limit
governs only price movement during a particular trading day and therefore does
not limit potential losses, because the limit may prevent the liquidation of
unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses.
The trading of futures contracts is also subject to the risk of trading
halts, suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal trading activity, which could at times make it difficult
or impossible to liquidate existing positions or to recover excess variation
margin payments.
The purchase and sale of futures contracts or related options will not
be a primary investment technique of any Portfolio. None of the Portfolios will
purchase or sell futures contracts (or related options thereon) for hedging
purposes if, immediately after purchase, the aggregate initial margin deposits
and premiums paid by a Portfolio on its open futures and options positions
exceeds 5% of the liquidation value of the Portfolio, after taking into account
any unrealized profits and unrealized losses on any such futures or related
options contracts into which it has entered. For a more detailed description of
futures contracts and related options, see Appendix B to this Statement of
Additional Information.
ADRS AND EDRS. The Intermediate Corporate Bond, Government & Corporate
Bond, Equity Income, Growth & Income Equity, Growth Equity, Small Cap Equity,
International Equity and Balanced Portfolios may invest their assets in
securities such as ADRs and EDRs, which are receipts issued by a U.S. bank or
trust company evidencing ownership of underlying securities issued by a foreign
issuer. ADRs and EDRs may be listed on a national securities exchange or may
trade in the over-the-counter market. ADR and EDR prices are denominated in U.S.
dollars, even though the underlying security may be denominated in a foreign
currency. The underlying security may be subject to foreign government taxes
which would reduce the yield on such securities. Investments in such instruments
involve risks similar to those of investing directly in foreign securities. Such
risks include political or economic instability of the issuer or the country of
issue, the difficulty of predicting international trade patterns and the
possibility of imposition of exchange controls. Such securities may also be
subject to greater fluctuations in price than securities of domestic
corporations. In addition, there may be less publicly available information
about a foreign company than about a domestic company. Foreign companies
generally are not subject to uniform accounting, auditing and financial
reporting standards comparable to those applicable to domestic companies. With
-45-
<PAGE> 404
respect to certain foreign countries, there is a possibility of expropriation or
confiscatory taxation, or diplomatic developments which could affect investment
in those countries.
MONEY MARKET INSTRUMENTS. Subject to their respective investment
policies, the Equity and Bond Portfolios may invest in the following taxable
investments for temporary defensive or other purposes: commercial paper,
bankers' acceptances, certificates of deposit, time deposits and floating rate
notes. (See "Money Market Portfolio" above for a discussion of cash equivalents
and "Variable and Floating Rate Instruments" above for a discussion of variable
and floating rate instruments.)
The International Equity Portfolio may invest a portion of its assets
in the obligations of foreign banks and foreign branches of domestic banks. Such
obligations may include ECDs; ETDs; CTDs; Schedule Bs, which are obligations
issued by Canadian branches of foreign or domestic banks; Yankee CDs; and Yankee
BAs. (See "Money Market Portfolio" above for a description of certain of these
obligations.)
REPURCHASE AGREEMENTS. Subject to their respective investment policies,
each Portfolio (except the National Municipal Bond Portfolio) may agree to
purchase U.S. Government securities from financial institutions such as banks
and broker-dealers, subject to the seller's agreement to repurchase them at a
mutually agreed-upon date and price ("repurchase agreements"). Under the terms
of a repurchase agreement, a Portfolio purchases securities from financial
institutions such as banks and broker-dealers that are deemed to be creditworthy
by the Adviser under guidelines approved by the Board of Directors, subject to
the seller's agreement to repurchase them at a mutually agreed-upon date and
price. Securities subject to repurchase agreements are held by the Portfolios'
Custodian or in the Federal Reserve/Treasury book-entry system. During the term
of any repurchase agreement, the Adviser or Sub-Adviser will continue to monitor
the creditworthiness of the seller. The repurchase price generally equals 102%
of the price paid by the Portfolio plus interest negotiated on the basis of
current short-term rates (which may be more or less than the rate on the
underlying portfolio securities). Under a repurchase agreement, the seller is
required to maintain the value of the securities subject to the agreement at not
less than the repurchase price, and securities subject to repurchase agreements
are maintained by the Portfolios' Custodian in segregated accounts in accordance
with the 1940 Act. Default by the seller could, however, expose the Portfolio to
possible loss because of adverse market action or delay in connection with the
disposition of the underlying securities. Because of the seller's repurchase
obligations, the securities subject to repurchase agreements do not have
maturity limitations. Although no Portfolio presently intends to enter into
repurchase agreements providing for settlement in more than seven days, each
Portfolio does have the authority to do so subject to its limitation on the
purchase of illiquid securities described below. Repurchase agreements are
considered to be loans under the 1940 Act. The income on repurchase agreements
is taxable. See "Additional Information Concerning Taxes" below.
REVERSE REPURCHASE AGREEMENTS. Subject to their investment policies,
each Portfolio (except the Treasury Money Market Portfolio and the Tax-Exempt
Portfolios) may borrow funds for temporary purposes by entering into reverse
repurchase agreements in accordance with their respective investment limitations
below. Pursuant to such agreements, a Portfolio would sell portfolio securities
to financial institutions such as banks and broker-dealers
-46-
<PAGE> 405
and agree to repurchase them at an agreed upon date and price. At the time a
Portfolio enters into such an arrangement, it will place, in a segregated
custodial account, liquid assets having a value at least equal to the repurchase
price (including accrued interest) and will subsequently monitor the account to
ensure that such equivalent value is maintained.
Reverse repurchase agreements involve the risk that the market value of
the securities sold by the Portfolio may decline below the price of the
securities that it is obligated to repurchase. Reverse repurchase agreements are
considered to be borrowings under the 1940 Act. Each Portfolio intends to limit
its borrowings (including reverse repurchase agreements) during the current
fiscal year to not more than 5% of its net assets.
STANDARD AND POOR'S DEPOSITORY RECEIPTS, STANDARD & POOR'S MIDCAP 400
DEPOSITORY RECEIPTS AND THE DOW INDUSTRIALS DIAMONDS. The Equity Portfolios may
invest in Standard & Poor's Depository Receipts ("SPDRs"), Standard & Poor's
MidCap 400 Depository Receipts ("MidCap SPDRs") and The Dow Industrials DIAMONDS
("DIAMONDS"). SPDRs represent ownership in the SPDR Trust, a long-term unit
investment trust which holds a portfolio of common stocks that is intended to
track the performance and dividend yield of the Standard & Poor's 500 Composite
Stock Price Index. MidCap SPDRs represent ownership in the MidCap SPDR Trust, a
long-term unit investment trust which holds a portfolio of common stocks that is
intended to tract the performance and dividend yield of the Standard & Poor's
MidCap 400 Index. DIAMONDS represent ownership in the DIAMONDS Trust, a
long-term unit investment trust which holds a portfolio of common stocks that is
intended to track the performance and yield of the Dow Jones Industrial Average.
Because investments in SPDRs, MidCap SPDRs and DIAMONDS represent investments in
unit investment trusts, such investments are subject to the 1940 Act's
limitations on investments in other investment companies.
The Bond Index, Equity Index and Small Cap Equity Index Portfolios may
invest in any index-based depository receipts in lieu of investment in the
actual securities that are listed in their respective indexes.
THE INDEXING APPROACH. The Bond Index, Equity Index and Small Cap
Equity Index Portfolios seek to approximate the investment performance of their
respective market segments, as represented by their respective indexes, i.e. the
Lehman Aggregate in the case of the Bond Index Portfolio, the S&P 500 in the
case of the Equity Index Portfolio and the S&P SmallCap 600 in the case of the
Small Cap Equity Index Portfolio. While there can be no guarantee that a
Portfolio's investment results will precisely match the results of its
corresponding index, the Adviser believes that, before deduction of operating
expenses, there will be a very high correlation between the returns generated by
the Portfolios and their respective indexes. Each Portfolio will attempt to
achieve a correlation between its performance and its respective index of at
least 0.95 before deduction of operating expenses. A correlation of 1.00 would
indicate a perfect correlation, which would be achieved when a Portfolio's net
asset value, including the value of its dividend and capital gains
distributions, increases or decreases in exact proportion to changes in its
respective index. Each Portfolio's ability to correlate its performance with its
respective index, however, may be affected by, among other things, transaction
costs, changes in securities markets, the manner in which S&P or Lehman
Brothers, Inc. ("Lehman") calculate their respective indexes, and the timing
-47-
<PAGE> 406
of purchases and redemptions. The Adviser monitors the correlation of the
performance of the Portfolios in relation to their indexes under the supervision
of the Board of Directors. In the unlikely event that a high correlation is not
achieved, the Board of Directors will take appropriate steps to correct the
reason for the lower correlation.
THE INCLUSION OF A SECURITY IN ANY OF THE PORTFOLIOS' INDEXES IN NO WAY
IMPLIES AN OPINION BY S&P OR LEHMAN AS TO ITS ATTRACTIVENESS AS AN INVESTMENT.
S&P AND LEHMAN ARE NOT SPONSORS OF, OR IN ANY WAY AFFILIATED WITH, THE
PORTFOLIOS.
The Adviser believes that the indexing approach should involve less
portfolio turnover, and thus lower brokerage costs, transfer taxes and operating
expenses, than in more traditionally managed funds, although there is no
assurance that this will be the case. Ordinarily, a Portfolio will buy or sell
securities only to reflect changes in an index (including mergers or changes in
the composition of an index) or to accommodate cash flows into and out of the
Portfolio. The costs and other expenses incurred in securities transactions,
apart from any difference between the investment results of a Portfolio and that
of its respective index, may cause the return of a Portfolio to be lower than
the return of its respective index. The Portfolios may invest in less than all
of the securities included in their respective indexes, which may result in a
return that does not correspond with that of the indexes, after taking expenses
into account.
PORTFOLIO TURNOVER AND TRANSACTIONS
Subject to the general control of the Fund's Board of Directors, the
Adviser (and with respect to the International Equity Portfolio, the
Sub-Adviser) is responsible for, makes decisions with respect to, and places
orders for all purchases and sales of portfolio securities for the Portfolios.
In the case of the Equity and Bond Portfolios, portfolio turnover may
vary greatly from year to year as well as within a particular year. Portfolio
turnover may also be affected by cash requirements for redemptions of shares and
by requirements which enable a Portfolio to receive certain favorable tax
treatment. Portfolio turnover will not be a limiting factor in making investment
decisions.
The Fund did not acquire any securities of its "regular brokers or
dealers" or their parents during its most recent fiscal year.
Transactions on United States stock exchanges involve the payment of
negotiated brokerage commissions. On the exchanges on which commissions are
negotiated, the cost of the transactions may vary among different brokers.
During the fiscal years ended November 30, 1998, 1997 and 1996, the Growth &
Income Equity Portfolio paid $__________, $858,757, and $708,924, respectively,
in brokerage commissions. During the fiscal years ended November 30, 1998, 1997
and 1996, the Small Cap Equity Portfolio paid $__________, $428,191 and
$352,745, respectively, in brokerage commissions. During the fiscal years ended
November 30, 1998, 1997 and 1996, the International Equity Portfolio paid
$__________, $248,564 and $235,230, respectively, in brokerage commissions.
During the fiscal years ended November 30, 1998, 1997 and 1996, the Balanced
Portfolio paid $__________, $120,705 and $144,448,
-48-
<PAGE> 407
respectively, in brokerage commissions. For the fiscal year ended November 30,
1998, and during the period October 1, 1997 through November 30, 1997 and for
the fiscal years ended September 30, 1997 and 1996, the Growth Equity Portfolio
paid brokerage commissions of $__________, $95,470 and $71,770, respectively.
During the fiscal years ended November 30, 1998 and 1997, the Equity Income
Portfolio paid $__________ and $151,046 in brokerage commissions. During the
fiscal year ended November 30, 1998 and 1997, the Equity Index Portfolio paid
$__________ and $10,259 in brokerage commissions. No commissions were paid by
the Fund to any "affiliated" persons (as defined in the 1940 Act) of the Fund.
The Small Cap Equity Index Portfolio had not commenced operations as of November
30, 1998.
Securities purchased and sold by the Portfolios which are traded in the
over-the-counter market are generally done so on a net basis (i.e., without
commission) through dealers, or otherwise involve transactions directly with the
issuer of an instrument. There is generally no stated commission in the case of
securities traded in the over-the-counter markets, but the price of those
securities includes an undisclosed commission or mark-up. The cost of securities
purchased from underwriters includes an underwriter's commission or concession,
and the prices at which securities are purchased from and sold to dealers
include a dealer's mark-up or mark-down.
The Portfolios may participate, if and when practicable, in bidding for
the purchase of portfolio securities directly from an issuer in order to take
advantage of the lower purchase price available to members of a bidding group.
The Portfolios will engage in this practice, however, only when the Adviser (or
Sub-Adviser in the case of the International Equity Portfolio), in its sole
discretion, believes such practice to be otherwise in a Portfolio's interests.
While the Adviser (or Sub-Adviser in the case of the International
Equity Portfolio) generally seeks competitive spreads or commissions, it may not
necessarily allocate each transaction to the underwriter or dealer charging the
lowest spread or commission available on the transaction. Allocation of
transactions, including their frequency, to various dealers is determined by the
Adviser or Sub-Adviser in its best judgment and in a manner deemed fair and
reasonable to shareholders. The primary consideration is prompt execution of
orders in an effective manner at the most favorable price.
Subject to this consideration, dealers who provide supplemental
investment research to the Adviser (or Sub-Adviser) may receive orders for
transactions by a Portfolio. Information so received is in addition to and not
in lieu of services required to be performed by the Adviser (or Sub-Adviser) and
does not reduce the advisory fees payable to it by a Portfolio. Such information
may be useful to the Adviser (or Sub-Adviser) in serving both the Portfolios and
other clients, and conversely, supplemental information obtained by the
placement of business of other clients may be useful to the Adviser (or
Sub-Adviser) in carrying out its obligations to the Portfolios. Portfolio
securities will not be purchased from or sold to the Adviser, the Sub-Adviser,
the Fund's distributor, the Fund's administrator or any "affiliated person" (as
such term is defined under the 1940 Act) or any of them acting as principal,
except to the extent permitted by the SEC. In addition, the Portfolios will not
give preference to the Adviser's correspondents with respect to such
transactions, securities, savings deposits, repurchase agreements and reverse
repurchase agreements.
-49-
<PAGE> 408
Investment decisions for the Portfolios are made independently from
those for other investment companies and accounts advised or managed by the
Adviser (or Sub-Adviser). Such other investment companies and accounts may also
invest in the same securities as the Portfolios. When a purchase or sale of the
same security is made at substantially the same time on behalf of a Portfolio
and another investment company or account, the transaction will be averaged as
to price, and available investments allocated as to amount, in a manner which
the Adviser (or Sub-Adviser) believes to be equitable to the Portfolio and such
other investment company or account. In some instances, this investment
procedure may adversely affect the price paid or received by the Portfolio or
the size of the position obtained by the Portfolio. To the extent permitted by
law, the Adviser (or Sub-Adviser) may aggregate the securities to be sold or
purchased for the Portfolios with those to be sold or purchased for other
investment companies or accounts in order to obtain best execution.
Although the Equity and Bond Portfolios will not normally engage in
short-term trading, each Portfolio (except the Bond Index, Equity Index and
Small Cap Equity Index Portfolios) reserves the right to do so if the Adviser
(or Sub-Adviser) believes that selling a particular security is appropriate in
light of the Portfolio's investment objective. Investments may be sold for a
variety of reasons, such as a more favorable investment opportunity or other
circumstances bearing on the desirability of continuing to hold such
investments. A high rate of portfolio turnover involves correspondingly greater
brokerage commission expenses and other transaction costs, which must be borne
directly by the Portfolio involved and ultimately by its shareholders. High
portfolio turnover may result in the realization of substantial net capital
gains; distributions derived from such gains may be treated as ordinary income
for federal income tax purposes. See "Additional Information Concerning Taxes"
below.
Although the Small Cap Equity Index Portfolio cannot accurately predict
its annual portfolio turnover rate, such rate is not expected to exceed 100%.
To the extent permitted by the 1940 Act and guidelines adopted by the
Fund's Board of Directors, a Portfolio may utilize the Fund's distributor or one
or more of its affiliates as a broker in connection with the purchase or sale of
securities when the Adviser believes the charge for the transaction does not
exceed the usual and customary broker's commission.
SPECIAL CONSIDERATIONS REGARDING INVESTMENT IN MISSOURI MUNICIPAL SECURITIES
The following highlights some of the more important economic and
financial trends and considerations and is based on information from official
statements, prospectuses and other publicly available documents relating to
securities offerings of the State of Missouri, its agencies and
instrumentalities, as available on the date of this Statement of Additional
Information. The Fund has not independently verified any of the information
contained in such statements or other documents.
Missouri's population was approximately 5.4 million in 1996, which
represents a 4.7% increase from the 1990 decennial census of the U.S. Census
Bureau. Based on 1996 U.S. Census Bureau estimates, Missouri constituted the
16th most populous state and its two largest
-50-
<PAGE> 409
cities, St. Louis and Kansas City and their surrounding metropolitan areas,
constituted the 17th and 26th largest metropolitan areas in the nation,
respectively. St. Louis is a distribution center and an important site for
banking and manufacturing activity. Kansas City is a major agri-business center
for the United States and an important center for finance and industry. [Source:
U.S. Department of Commerce, Bureau of the Census.]
The major sectors of the State's economy include agriculture,
manufacturing, trade, government and services. Farming traditionally has played
a dominant role in the State's economy, although farming and agricultural
services contributed only approximately $1.25 billion to the State's economy in
1996, or approximately 1% of the State's revenues. With increasing urbanization,
significant income-generating activity has shifted from agriculture to the
manufacturing and services sectors. Earnings and employment are distributed
among the manufacturing, trade and service sectors in a close approximation of
the average national distribution, thus lessening the State's cyclical
sensitivity to impact by any single activity. Per capita income in Missouri grew
4.9% between 1995 and 1996 while per capita income nationally grew 4.6% during
that period. In 1996, services represented the single most important economic
activity, followed by wholesale and retail trade. Manufacturing, which accounts
for approximately 17% of employment, is concentrated in defense, transportation
and other durable goods. [Source: U.S. Census Bureau, Bureau of Economic
Analysis.]
Defense-related business plays an important role in Missouri's economy.
In addition to the large number of civilians in the State, aircraft production
and defense-related businesses receive sizable annual defense contract awards.
Over the past decade, Missouri has annually ranked among the top six states in
total military contract awards. Declining defense appropriations and federal
downsizing may continue to have an impact on the State. [Source: Missouri Dept.
of Economic Development.] The Boeing Company is the State's largest employer,
with 22,800 employees as of January 1998.
Revenue collections for the fiscal year ended June 30, 1998 ("Fiscal
Year 1998") increased 5.7% over those for fiscal year 1997. Sales and use tax
collections for Fiscal Year 1998 were $1.706 billion, and individual and
corporate income tax collections were $3.765 billion and $449 million,
respectively. A strong economy and low unemployment primarily were the cause of
the overall increase in state general revenue collections during Fiscal Year
1998. Sales and use tax collections decreased 0.4% from fiscal year 1997 due to
the Governor's initiative to reduce the sales tax on food. Corporate income tax
collections also decreased 4.9% for the fiscal year due to tax incentives to
promote economic growth and changes in business structures.
For the fiscal year ending June 30, 1999 ("Fiscal Year 1999") revenues
are projected to be $6,784 million or, assuming the Governor's recommended tax
reductions of $120 million are enacted, $6,664 million. The Fiscal Year 1999
revenue estimates by the Missouri Office of Administration, Division of Budget
and Planning (the "Division") project a 4.8% gross collection growth over Fiscal
Year 1998. The Division also predicts a revenues will not exceed the revenue
limits established by Article X of the Missouri Constitution for Fiscal Year
1999 if the Governor's recommended tax reductions are enacted. Expenditures for
Fiscal Year 1999 are
-51-
<PAGE> 410
projected at $4,449 million, including $250.6 million for the St. Louis and
Kansas City desegregation cases.
INVESTMENT LIMITATIONS
Except as otherwise noted in the Prospectuses or this Statement of
Additional Information, each Portfolio's investment policies are not fundamental
and may be changed by the Fund's Board of Directors without shareholder
approval. However, each Portfolio also has in place certain fundamental
investment limitations, which are set forth below, which may be changed only by
a vote of a majority of the outstanding Shares of a Portfolio.
THE TREASURY MONEY MARKET PORTFOLIO MAY NOT:
1. Acquire any other investment company or investment company security
except in connection with a merger, consolidation, reorganization or acquisition
of assets or where otherwise permitted by the 1940 Act.
2. Borrow money or issue senior securities, except from banks for
temporary purposes and then in an amount not exceeding 10% of the value of the
Portfolio's total assets at the time of such borrowing, or mortgage, pledge or
hypothecate its assets except in connection with any such borrowing and in
amounts not in excess of the lesser of the dollar amounts borrowed or 10% of the
value of the Portfolio's total assets at the time of such borrowing. The
Portfolio will not purchase securities while its borrowings are outstanding.
(This borrowing provision is not for investment leverage, but solely to
facilitate management of the Portfolio by enabling the Fund to meet redemption
requests where the liquidation of portfolio securities is deemed to be
inconvenient or disadvantageous).
3. Underwrite the securities of other issuers.
4. Make loans except that the Portfolio may purchase or hold debt
instruments in accordance with its investment objective and policies, lend
portfolio securities and enter into repurchase agreements for U.S. Treasury
securities (together with any cash collateral) that equal at all times at least
100% of the value of the repurchase price.
5. Purchase or sell real estate.
6. Purchase or sell commodities or commodity contracts or invest in
oil, gas, or other mineral exploration programs.
7. Purchase securities other than obligations of the U.S. Government,
its agencies and instrumentalities, some of which may be subject to repurchase
agreements, except that the Portfolio may purchase securities of other
investment companies that seek to maintain a constant net asset value per Share
and that are permitted themselves only to invest in securities which may be
acquired by the Portfolio.
-52-
<PAGE> 411
THE MONEY MARKET PORTFOLIO MAY NOT:
1. Acquire any other investment company or investment company security
except in connection with a merger, consolidation, reorganization or acquisition
of assets, or where otherwise permitted by the 1940 Act.
2. Purchase securities of any one issuer, other than obligations of the
U.S. Government, its agencies or instrumentalities, if immediately after such
purchase more than 5% of the value of the Portfolio's total assets would be
invested in such issuer, except that up to 25% of the value of a Portfolio's
total assets may be invested without regard to such 5% limitation.
3. Buy common stocks or voting securities, or state, municipal or
industrial revenue bonds.
4. Purchase or sell real estate (the Portfolio may purchase commercial
paper issued by companies which invest in real estate or interests therein).
5. Purchase securities on margin, make short sales of securities or
maintain a short position.
6. Underwrite the securities of other issuers.
7. Purchase or sell commodity contracts, or invest in oil, gas or
mineral exploration or development programs.
8. Write or purchase put or call options.
9. Make loans except that the Portfolio may purchase or hold debt
instruments in accordance with its investment objective and policies, lend
portfolio securities and enter into repurchase agreements for U.S. Treasury
securities (together with any cash collateral) that equal at all times at least
100% of the value of the repurchase price.
10. Borrow money or issue senior securities, except that the Portfolio
may borrow from banks and enter into reverse repurchase agreements, for
temporary purposes in amounts up to 10% of the value of its total assets at the
time of such borrowing; or mortgage, pledge or hypothecate any assets, except in
connection with any such borrowing and in amounts not in excess of the lesser of
the dollar amounts borrowed or 10% of the value of a Portfolio's total assets at
the time of such borrowing. The Portfolio will not purchase securities while its
borrowings (including reverse repurchase agreements) are outstanding.
11. Purchase any securities which would cause 25% or more of the value
of the Portfolio's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that (a) there is no limitation with respect to
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, domestic bank certificates of deposit, bankers' acceptances
and repurchase agreements secured by domestic bank instruments or obligations of
the U.S. Government, its agencies or instrumentalities; (b) wholly-owned finance
companies will be
-53-
<PAGE> 412
considered to be in the industries of their parents if their activities are
primarily related to financing the activities of the parents; and (c) utilities
will be divided according to their services, for example, gas, gas transmission,
electric and gas, electric and telephone will each be considered a separate
industry.
In accordance with Rule 2a-7 of the 1940 Act and current regulations of
the SEC, the Money Market Portfolio intends to invest no more than five percent
of its total assets in the securities of any one issuer (other than securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities);
provided, however, that the Portfolio may invest up to 25% of its total assets
in the First Tier Eligible Securities of a single issuer for a period of up to
three business days after the purchase thereof, provided, further that the
Portfolio would not make more than one investment in accordance with the
foregoing provision at any time. This intention is not, however, a fundamental
policy of the Portfolio and may change in the event Rule 2a-7 is amended in the
future.
THE TAX-EXEMPT MONEY MARKET PORTFOLIO MAY NOT:
1. Make loans, except that the Portfolio may purchase or hold debt
instruments in accordance with its investment objective and policies.
2. Purchase securities of other investment companies except in
connection with a merger, consolidation, acquisition or reorganization or where
otherwise permitted by the 1940 Act.
3. Purchase securities on margin, make short sales of securities, or
maintain a short position.
4. Act as an underwriter of securities within the meaning of the
Securities Act of 1933, except insofar as the Portfolio might be deemed to be an
underwriter upon purchase of certain portfolio securities acquired subject to
the investment limitation pertaining to purchases of restricted securities.
5. Purchase or sell real estate, except that the Portfolio may invest
in Municipal Obligations which are secured by real estate or interests therein.
6. Purchase or sell commodities or commodity contracts or invest in
oil, gas, or other mineral exploration or development programs.
7. Invest in or sell put options (except as described above under
"Other Investment Policies and Risk Considerations -- Stand-by Commitments"),
call options, straddles, spreads, or any combination thereof.
8. Purchase foreign securities.
9. Invest in industrial development bonds where the payment of
principal and interest are the responsibility of a company (including its
predecessors) with less than three years of continuous operation, or buy common
stock or voting securities.
-54-
<PAGE> 413
10. Purchase any securities, except securities issued or guaranteed by
the United States, any state, territory or possession of the United States, the
District of Columbia or any of their authorities, agencies, instrumentalities or
political subdivisions, which would cause 25% or more of the Portfolio's net
assets at the time of purchase to be invested in the securities of issuers
conducting their principal business activities in the same industry.
11. Purchase securities of any one issuer if, immediately after and as
a result of such purchase, more than 5% of the Portfolio's total assets would be
invested in the securities of such issuer, except that (a) up to 50% of the
Portfolio's total assets may be invested without regard to this 5% limitation
provided that no more than 25% of the Portfolio's total assets are invested in
the securities of any one issuer and (b) this 5% limitation does not apply to
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. For purposes of this limitation, a security is considered to
be issued by the governmental entity (or entities) whose assets and revenues
back the security, or, with respect to an industrial development bond that is
backed only by the assets and revenues of a non-governmental user, a security is
considered to be issued by such non-governmental user. In certain circumstances,
the guarantor of a guaranteed security may also be considered to be an issuer in
connection with such guarantee, except that a guarantee of a security shall not
be deemed to be a security issued by the guarantor when the value of all
securities issued and guaranteed by the guarantor, and owned by the Portfolio,
does not exceed 10% of the Portfolio's total assets.
12. Borrow money or issue senior securities, except that the Portfolio
may borrow from banks for temporary defensive purposes in amounts not in excess
of 10% of its total assets at the time of such borrowing; or mortgage, pledge,
or hypothecate any assets except in connection with any such borrowing and in
amounts not in excess of the lesser of the dollar amounts borrowed or 10% of its
total assets at the time of such borrowing; or purchase securities while
borrowings exceed 5% of the Portfolio's net assets. Securities held in escrow or
separate accounts in connection with the Portfolio's investment practices
described herein are not subject to this limitation.
With respect to investment limitation No. 11, the Fund intends that
guarantees will only be treated as separate securities for diversification
purposes to the extent required by Rule 5b-2 under the 1940 Act. Letters of
credit will not be treated as separate securities with regard to diversification
as the Fund does not consider the latter instruments to be securities.
In addition, under normal market conditions or when the Adviser deems
that suitable tax-exempt obligations are available, at least 80% of the
Tax-Exempt Money Market Portfolio's assets must be invested in obligations the
interest on which is exempt from federal income tax and stand-by commitments
with respect to such obligations.
Notwithstanding the Investment Limitation in the preceding paragraph,
the Tax-Exempt Money Market Portfolio may invest in securities of other
investment companies that (a) invest in securities that are substantially
similar to those the Portfolio may acquire, and (b) distribute income that is
exempt from regular federal income tax.
In accordance with Rule 2a-7 of the 1940 Act and current regulations of
the SEC, the Tax-Exempt Money Market Portfolio intends to invest no more than
five percent of its total
-55-
<PAGE> 414
assets in the securities of any one issuer (other than securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities); provided,
however, that the Portfolio may invest up to 25% of its total assets in the
First Tier Eligible Securities of a single issuer for a period of up to three
business days after the purchase thereof, provided, further that the Portfolio
would not make more than one investment in accordance with the foregoing
provision at any time. This intention is not, however, a fundamental policy of
the Portfolio and may change in the event Rule 2a-7 is amended in the future.
THE U.S. GOVERNMENT SECURITIES, INTERMEDIATE CORPORATE BOND, BOND
INDEX, GOVERNMENT & CORPORATE BOND, NATIONAL MUNICIPAL BOND, EQUITY INCOME,
EQUITY INDEX, GROWTH & INCOME EQUITY, SMALL CAP EQUITY, SMALL CAP EQUITY INDEX
AND BALANCED PORTFOLIOS MAY NOT:
1. Make investments for the purpose of exercising control or
management.
2. Purchase or sell real estate, provided that each Portfolio may
invest in securities secured by real estate or interests therein or issued by
companies or investment trusts which invest in real estate or interests therein;
provided further that, as described in the Prospectuses, (a) the Government &
Corporate Bond Portfolio may invest in first mortgage loans, income
participation loans and participation certificates in pools of mortgages,
including mortgages issued or guaranteed by the U.S. Government, its agencies or
its instrumentalities and CMOs; (b) the U.S. Government Securities Portfolio may
invest in certain mortgage-backed securities, CMOs and certain other securities;
(c) the Intermediate Corporate Bond Portfolio may invest in first mortgage
loans, income participation loans and participation certificates in pools of
mortgages, including mortgages issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, mortgage-backed securities or CMOs; and (d) the
Bond Index Portfolio may invest in first mortgage loans, income participation
loans and participations in pools of mortgages, including mortgages issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, and
mortgage-backed securities.
3. Act as an underwriter of securities within the meaning of the
Securities Act of 1933 except insofar as a Portfolio might be deemed to be an
underwriter upon disposition of portfolio securities acquired within the
limitation on purchases of restricted securities and except to the extent that
the purchase of obligations directly from the issuer thereof in accordance with
a Portfolio's investment objective, policies and limitations may be deemed to be
underwriting.
4. Purchase or sell commodity contracts, or invest in oil, gas or
mineral exploration or development programs, except that the Intermediate
Corporate Bond, Bond Index, National Municipal Bond, Equity Income, Equity
Index, Small Cap Equity Index and Balanced Portfolios may, to the extent
appropriate to their respective investment objectives, purchase publicly traded
securities of companies engaging in whole or in part in such activities; and
provided further, that (a) the Bond Index, Equity Index and Balanced Portfolios
may enter into futures contracts and related options, and (b) the Intermediate
Corporate Bond, Equity Income and Small Cap Equity Index Portfolios may invest
in futures contracts and related options in accordance with their respective
investment obligations and policies.
-56-
<PAGE> 415
In addition, each such Portfolio, together with the SHORT-INTERMEDIATE
MUNICIPAL and INTERNATIONAL EQUITY PORTFOLIOS, may not:
5. Purchase securities on margin, make short sales of securities or
maintain a short position, except that (a), with the exception of the National
Municipal Bond Portfolio, this investment limitation shall not apply to a
Portfolio's transactions in options, and futures contracts and related options,
and (b) a Portfolio may obtain short-term credits as may be necessary for the
clearance of purchases and sales of portfolio securities.
6. Purchase securities of any one issuer (other than obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities) if,
immediately after and as a result of such investments, more than 5% of the
Portfolio's total assets would be invested in the securities of such issuer, or
more than 10% of the issuer's outstanding voting securities would be owned by
the Portfolio or the Fund, except that up to 25% of the Portfolio's total assets
may be invested without regard to such limitations.
7. Purchase any securities which would cause 25% or more of the
Portfolio's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided however, that (a) with respect to each Portfolio
except the Short-Intermediate Municipal and National Municipal Bond Portfolios,
(i) there is no limitation with respect to obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities, and repurchase
agreements secured by obligations of the U.S. Government or its agencies or
instrumentalities; (ii) wholly-owned finance companies will be considered to be
in the industries of their parents if their activities are primarily related to
financing the activities of their parents; and (iii) utilities will be divided
according to their services (for example, gas, gas transmission, electric and
gas, electric, and telephone will each be considered a separate industry); and
(b) with respect to the Short-Intermediate Municipal and National Municipal Bond
Portfolios, there is no limitation with respect to obligations issued or
guaranteed by the U.S. Government, any state, territory or possession of the
U.S. Government, the District of Columbia, or any of their authorities,
agencies, instrumentalities or political subdivisions.
8. Borrow money or issue senior securities, except that each Portfolio
may borrow from banks and each Portfolio other than the National Municipal Bond
Portfolio may enter into reverse repurchase agreements for temporary defensive
purposes in amounts not in excess of 10% of the Portfolio's total assets at the
time of such borrowing; or mortgage, pledge, or hypothecate any assets, except
in connection with any such borrowing and in amounts not in excess of the lesser
of the dollar amounts borrowed or 10% of the Portfolio's total assets at the
time of such borrowing; or purchase securities while its borrowings exceed 5% of
its total assets. A Portfolio's transactions in futures and related options
(including the margin posted by a Portfolio in connection with such
transactions), and securities held in escrow or separate accounts in connection
with a Portfolio's investment practices described in this Prospectus or the
Statement of Additional Information are not subject to this limitation.
9. Make loans, except that (a) each Portfolio may purchase or hold debt
instruments, lend portfolio securities and make other investments in accordance
with its
-57-
<PAGE> 416
investment objective and policies, and (b) each Portfolio except the National
Municipal Bond Portfolio may enter into repurchase agreements.
THE GROWTH EQUITY PORTFOLIO MAY NOT:
1. With respect to 75% of the value of its total assets, purchase
securities issued by any one issuer (other than cash, cash items or securities
issued or guaranteed by the U.S. Government or its agencies or instrumentalities
and repurchase agreements collateralized by such securities), if as a result
more than 5% of the value of its total assets would be invested in the
securities of that issuer. The Portfolio will not acquire more than 10% of the
outstanding voting securities of any one issuer.
2. Invest 25% or more of the value of its total assets in any one
industry, provided, however, that the Portfolio may invest more than 25% of the
value of its total assets in cash or certain money market instruments (including
instruments issued by a U.S. branch of a domestic bank or savings and loan
association having capital, surplus and undivided profits in excess of
$100,000,000 at the time of investment), securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities and repurchase agreements
collateralized by such securities. (For purposes of this Investment Limitation,
money market instruments shall include bankers' acceptances, negotiable
certificates of deposit and negotiable time deposits of U.S. or foreign banks
and savings and loan associations.)
3. Issue senior securities, except that the Portfolio may borrow money
directly or indirectly through reverse repurchase agreements in amounts up to
one-third the value of its total assets, including the amount borrowed, and
except to the extent that the Portfolio may enter into futures contracts. The
Portfolio will not borrow money or engage in reverse repurchase agreements for
investment leverage, but rather as a temporary, extraordinary, or emergency
measure to facilitate management of its portfolio by enabling the Portfolio to,
for example, meet redemption requests when the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous. The Portfolio will
not purchase any securities while any borrowings in excess of 5% of its total
assets are outstanding.
4. Sell any securities short or purchase any securities on margin, but
may obtain such short-term credits as are necessary for clearance of purchases
and sales of securities. The deposit or payment by the Portfolio of initial or
variation margin in connection with financial futures contracts or related
options transactions is not considered the purchase of a security on margin.
5. Purchase or sell commodities, commodity contracts, or commodity
futures contracts except to the extent that the Portfolio may engage in
transactions involving financial futures contracts or options on financial
futures contracts.
6. Purchase or sell real estate, including limited partnership
interests, although the Portfolio may invest in securities of issuers whose
business involves the purchase or sale of real estate or in securities which are
secured by real estate or which represent interests in real estate.
-58-
<PAGE> 417
7. Underwrite any issue of securities, except as the Portfolio may be
deemed to be an underwriter under the Securities Act of 1933, as amended, in
connection with the sale of securities in accordance with its investment
objective, policies, and limitations.
The following limitations may be changed by the Fund's Board of
Directors without shareholder approval, although shareholders will be notified
before any material change in these limitations becomes effective:
8. The Portfolio will not mortgage, pledge, or hypothecate any assets,
except to secure permitted borrowings. In these cases, the Portfolio may pledge
assets having a market value not exceeding the lesser of the dollar amounts
borrowed or 15% of the value of its total assets at the time of the pledge. The
purchase of securities on a when-issued basis will not be deemed to be a pledge
of the Portfolio's assets. For purposes of this limitation the following will
not be deemed to be pledges of the Portfolio's assets: (a) the deposit of assets
in escrow in connection with the writing of covered put or call options and, (b)
collateral arrangements with respect to (i) the purchase and sale of stock
options (and options on stock indexes) and (ii) initial or variation margin for
futures contracts.
9. The Portfolio will not invest more than 15% of the value of its net
assets in illiquid securities, including repurchase agreements providing for
settlement more than seven days after notice, over-the-counter options, certain
restricted securities not determined by the Fund's Board of Directors to be
liquid, and non-negotiable time deposits with maturities over seven days.
10. The Portfolio will limit its investment in other investment
companies to no more than 3% of the total outstanding voting stock of any
investment company, invest no more than 5% of its total assets in any one
investment company, and invest no more than 10% of its total assets in
investment companies in general. The Portfolio will purchase securities of
closed-end investment companies only in open market transactions involving only
customary broker's commissions. However, these limitations are not applicable if
the securities are acquired in a merger, consolidation, reorganization, or
acquisition of assets. It should be noted that investment companies incur
certain expenses such as management fees and, therefore, any investment by the
Portfolio in shares of another investment company would be subject to such
duplicate expenses.
11. The Portfolio will not purchase put options on securities, unless
the securities are held in its portfolio and not more than 5% of the value of
the Portfolio's total assets would be invested in premiums on open put option
positions.
12. The Portfolio will not write call options on securities unless the
securities are held in its portfolio or unless the Portfolio is entitled to them
in deliverable form without further payment or after segregating cash in the
amount of any further payment.
13. The Portfolio will not purchase securities of a company for the
purpose of exercising control or management.
-59-
<PAGE> 418
14. The Portfolio will not invest more than 5% of its net assets in
warrants. No more than 2% of the Portfolio's net assets, to be included within
the overall 5% limit on investments in warrants, may be warrants which are not
listed on the New York Stock Exchange or the American Stock Exchange. For
purposes of this investment restriction, warrants will be valued at the lower of
cost or market, except that warrants acquired by the Portfolio in units with or
attached to securities may be deemed to be without value.
THE INTERNATIONAL EQUITY PORTFOLIO MAY NOT:
1. Make investments for the purpose of exercising control or
management.
2. Purchase or sell real estate, provided that the Portfolio may invest
in securities secured by real estate or interests therein or issued by companies
or investment trusts which invest in real estate or interests therein.
3. Act as an underwriter of securities within the meaning of the
Securities Act of 1933 except insofar as the Portfolio might be deemed to be an
underwriter upon disposition of portfolio securities acquired within the
limitation on purchases of restricted securities and except to the extent that
the purchase of obligations directly from the issuer thereof in accordance with
the Portfolio's investment objective, policies and limitations may be deemed to
be underwriting.
4. Purchase or sell commodity contracts, or invest in oil, gas or
mineral exploration or development programs, except that: (a) it may, to the
extent appropriate to its investment objective, invest in securities issued by
companies which purchase or sell commodities or commodity contracts or which
invest in such programs; and (b) it may purchase and sell futures contracts and
options on futures contracts.
THE SHORT-INTERMEDIATE MUNICIPAL PORTFOLIO MAY NOT:
1. Make investments for the purpose of exercising control or
management.
2. Purchase or sell real estate, except that the Portfolio may invest
in Municipal Obligations which are secured by real estate or interests therein.
3. Act as an underwriter of securities within the meaning of the
Securities Act of 1933 except insofar as the Portfolio might be deemed to be an
underwriter upon disposition of portfolio securities acquired within the
limitation on purchases of restricted securities and except to the extent that
the purchase of obligations directly from the issuer thereof in accordance with
the Portfolio's investment objective, policies and limitations may be deemed to
be underwriting.
4. Purchase or sell commodity contracts, or invest in oil, gas or
mineral exploration or development programs.
-60-
<PAGE> 419
THE MISSOURI TAX-EXEMPT BOND PORTFOLIO MAY NOT:
1. Purchase or sell real estate, except that the Portfolio may purchase
securities of issuers which deal in real estate and may purchase securities
which are secured by interests in real estate.
2. Purchase securities of companies for the purpose of exercising
control.
3. Acquire any other investment company or investment company security
except in connection with a merger, consolidation, reorganization or acquisition
of assets or as otherwise permitted by the 1940 Act.
4. Act as an underwriter of securities within the meaning of the
Securities Act of 1933 except insofar as it might be deemed to be an underwriter
upon disposition of portfolio securities acquired within the limitation on
purchases of restricted securities and except to the extent that the purchase of
obligations directly from the issuer thereof in accordance with the Portfolio's
investment objective, policies and limitations may be deemed to be underwriting.
5. Purchase securities on margin, make short sales of securities or
maintain a short position, except that the Portfolio may obtain short-term
credit as may be necessary for the clearance of purchases and sales of portfolio
securities.
6. Purchase or sell commodity contracts, or invest in oil, gas or
mineral exploration or development programs, except that the Portfolio may, to
the extent appropriate to its investment objective, purchase publicly traded
securities of companies engaging in whole or in part in such activities.
7. Write or sell put options, call options, straddles, spreads, or any
combination thereof.
8. Purchase any securities, except securities issued (as defined in
Investment Limitation No. 11 above with respect to the Tax-Exempt Money Market
Portfolio) or guaranteed by the United States, any state, territory or
possession of the United States, the District of Columbia or any of their
authorities, agencies, instrumentalities or political subdivisions, which would
cause 25% or more of the Portfolio's net assets at the time of purchase to be
invested in the securities of issuers conducting their principal business
activities in the same industry.
9. Make loans except that the Portfolio may purchase and hold debt
instruments and enter into repurchase agreements in accordance with its
investment objective and policies.
The following additional investment policies with respect to the
TAX-EXEMPT MONEY MARKET and MISSOURI TAX-EXEMPT BOND PORTFOLIOS are not
fundamental and may be changed by the Board of Directors without shareholder
approval:
The Portfolios may not purchase securities which are not readily
marketable, enter into repurchase agreements providing for settlement in
more than seven days after notice, or
-61-
<PAGE> 420
purchase other illiquid securities if, as a result of such purchase,
illiquid securities would exceed 15% (10% with respect to the Tax-Exempt
Money Market Portfolio) of the Portfolios' respective net assets.
Except with respect to the Growth Equity Portfolio's policy on
borrowing money set forth above in its Investment Limitation No. 3, if a
percentage limitation is satisfied at the time of investment, a later increase
or decrease in such percentage resulting from a change in value in the
Portfolio's securities will not constitute a violation of such limitation.
PRICING OF SHARES
As stated in the applicable Prospectuses, the net asset value per share
of each class of shares of a Portfolio is calculated separately by adding the
value of all of the portfolio securities and other assets belonging to a
Portfolio that are attributable to such class, subtracting the liabilities of
the Fund that are attributable to such class, and dividing the result by the
number of outstanding shares of such class. Assets attributable to a particular
class of shares of a Portfolio are charged with any direct liabilities that the
Board of Directors has allocated to such class pursuant to the Fund's Plan for
Operation of a Multi-Class System adopted pursuant to Rule 18f-3 under the 1940
Act. The determinations by the Board of Directors as to the direct and allocable
liabilities, and the allocable portion of general assets, with respect to a
particular Portfolio or class are conclusive.
THE MONEY MARKET PORTFOLIOS
The assets in the Money Market Portfolios are valued according to the
amortized cost method of valuation. Pursuant to this method, an instrument is
valued at its cost initially and, thereafter, a constant amortization to
maturity of any discount or premium is assumed, regardless of the impact of
fluctuating interest rates on the market value of the instrument. This method
may result in periods during which value, as determined by amortized cost, is
higher or lower than the market price a Portfolio would receive if it sold the
instrument. The value of securities in the Portfolios can be expected to vary
inversely with changes in prevailing interest rates.
Each Portfolio invests only in instruments that present minimal credit
risks and meet the ratings criteria described in the Prospectuses. In addition,
each Portfolio maintains a dollar-weighted average portfolio maturity
appropriate to its objective of maintaining a stable net asset value per share,
provided that no Portfolio will purchase any security with a remaining maturity
of more than thirteen months (397 days) (securities subject to repurchase
agreements and certain other securities may bear longer maturities) nor maintain
a dollar-weighted average portfolio maturity that exceeds 90 days. The Fund's
Board of Directors has approved procedures that are intended to stabilize the
Portfolios' net asset value per share at $1.00 for purposes of pricing sales and
redemptions. These procedures include the determination, at such intervals as
the Board deems appropriate, of the extent, if any, to which the net asset value
per share of a Portfolio calculated by using available market quotations
deviates from $1.00 per share. In the event such deviation exceeds one-half of
one percent, the Board will promptly consider what
-62-
<PAGE> 421
action, if any, should be initiated. If the Board believes that the extent of
any deviation from a Portfolio's $1.00 amortized cost price per share may result
in material dilution or other unfair results to new or existing investors, it
will take such steps as it considers appropriate to eliminate or reduce to the
extent reasonably practicable any such dilution or unfair results. These steps
may include, but are not limited to, selling portfolio instruments prior to
maturity; shortening the average portfolio maturity; withholding or reducing
dividends; redeeming shares in kind; or utilizing a net asset value per share
determined by using available market quotations. Although each Portfolio seeks
to maintain its net asset value per share at $1.00, there can be no assurance
that the net asset value per share will not vary.
THE EQUITY AND BOND PORTFOLIOS
Securities which are traded on a recognized stock exchange are valued
at the last sale price on the securities exchange on which such securities are
primarily traded or at the last sale price on the national securities market.
Securities traded on only over-the-counter markets are valued on the basis of
market values when available. Securities for which there are no transactions are
valued at the average of the current bid and asked prices. Other securities,
including restricted and other securities for which market quotations are not
readily available, and other assets are valued at fair value by the Adviser (or
Sub-Adviser) under the supervision of the Fund's Board of Directors and in
accordance with guidelines approved by the Board of Directors. Investments in
debt securities with remaining maturities of 60 days or less may be valued based
upon the amortized cost method. In computing net asset value, the current value
of a Portfolio's open futures contracts and related options will be
"marked-to-market." Short-term securities are valued at amortized cost, which
approximates fair market value.
Among the factors that ordinarily will be considered in valuing
portfolio securities are the existence of restrictions upon the sale of the
security by the Portfolio, the existence and extent of a market for the
security, the extent of any discount in acquiring the security, the estimated
time during which the security will not be freely marketable, the expenses of
registering or otherwise qualifying the security for public sale, underwriting
commissions if underwriting would be required to effect a sale, the current
yields on comparable securities for debt obligations traded independently of any
equity equivalent, changes in the financial condition and prospects of the
issuer, and any other factors affecting fair value. In making valuations,
opinions of counsel to the issuer may be relied upon as to whether or not
securities are restricted securities and as to the legal requirements for public
sale.
The Fund's administrator may use a pricing service to value certain
portfolio securities where the prices provided are believed to reflect the fair
market value of such securities. The methods of valuation used by the pricing
service will be reviewed by the administrator under the general supervision of
the Fund's Board of Directors. Several pricing services are available, one or
more of which may be used by the administrator from time to time. In valuing a
Portfolio's securities, the pricing service would normally take into
consideration such factors as yield, risk, quality, maturity, type of issue,
trading characteristics, special circumstances, and other factors which are
deemed relevant in determining valuations for normal institutionalized trading
units of debt securities and would not rely exclusively on quoted prices.
-63-
<PAGE> 422
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares in each Portfolio are sold on a continuous basis by the Fund's
distributor. As described in the applicable Prospectuses, Trust Shares, Trust II
Shares and Institutional Shares of each Portfolio (Money Market Portfolios only,
with respect to Trust II Shares) are sold to certain qualified customers at
their net asset value without a sales charge. Investor A Shares of each
Portfolio (other than Investor A Shares of the Money Market Portfolios which are
sold at their net asset value without a sales charge) are sold to retail
customers at the public offering price based on a Portfolio's net asset value
plus a front-end load or sales charge as described in the applicable
Prospectuses. Investor B Shares of each Portfolio (other than the Treasury Money
Market, Tax-Exempt Money Market, Intermediate Corporate Bond, Bond Index,
Short-Intermediate Municipal, Equity Index and Small Cap Equity Index
Portfolios, which do not offer Investor B Shares) are sold to retail customers
at the net asset value next determined after a purchase order is received, but
are subject to a contingent deferred sales charge which is payable on redemption
of such shares as described in the applicable Prospectuses.
The Fund may redeem shares involuntarily if the net income with respect
to a Portfolio's shares is negative or such redemption otherwise appears
appropriate in light of the Fund's responsibilities under the 1940 Act.
PURCHASES OF INVESTOR A SHARES AND INVESTOR B SHARES
Investor A Shares of each Portfolio are sold subject to a front-end
sales charge, except for Investor A Shares of the Money Market Portfolios which
are sold without any sales charge. Investor B Shares of each Portfolio, except
for the Treasury Money Market, Tax-Exempt Money Market, Intermediate Corporate
Bond, Bond Index, Short-Intermediate Municipal, Equity Index and Small Cap
Equity Index Portfolios, which do not offer Investor B Shares, are sold subject
to a back-end sales charge (the "CDSC Portfolios). This back-end sales charge
declines over time and is known as a "contingent deferred sales charge." Before
choosing between Investor A Shares or Investor B Shares of a Portfolio,
investors should read "Characteristics of Investor A Shares and Investor B
Shares" and "Factors to Consider When Selecting Investor A Shares or Investor B
Shares" below.
All shareholders of record will receive confirmations of Share
purchases, exchanges, and redemptions in the mail. If Shares are held in the
name of an organization, such organization is responsible for transmitting
purchase, exchange, and redemption orders to the Fund on a timely basis,
recording all purchase, exchange, and redemption transactions, and providing
regular account statements which confirm such transactions to beneficial owners
(or arranging for such services).
REDUCED SALES CHARGES - INVESTOR A SHARES OF THE EQUITY AND BOND PORTFOLIOS
To qualify for a reduced sales load, an investor must so notify his or
her investment representative, who in turn will notify the Fund's distributor at
the time of purchase.
-64-
<PAGE> 423
EXISTING SHAREHOLDER ACCOUNTS. Additional purchases of Investor A
Shares by existing Investor A shareholder accounts at March 31, 1999 in the
Intermediate Corporate Bond, Government & Corporate Bond, Missouri Tax-Exempt
Bond, National Municipal Bond, Balanced, Equity Income, Growth & Income Equity,
Growth Equity, Small Cap Equity and Institutional Equity Portfolios are subject
to the following sales charges:
<TABLE>
<CAPTION>
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Amount of transaction Sales charges as a % of Sales charge as a % of net Dealers' reallowance as a
the offering price per asset value per share % of offering price
share
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C>
Less than $50,000 4.50% 4.71% 4.00%
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
$50,000 but less than $100,000 3.50% 3.63% 3.00%
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
$100,000 but less than
$250,000 2.50% 2.56% 2.00%
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
$250,000 but less than
$500,000 1.50% 1.52% 1.00%
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
$500,000 but less than $1
million 1.00% 1.01% 0.50%
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
$1 million or more 0.50% 0.50% 0.40%
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
</TABLE>
RIGHTS OF ACCUMULATION. An investor who has previously purchased
Investor A Shares of a Portfolio and has paid a sales charge ("load") may be
eligible for reduced sales charges when purchasing additional Investor A Shares
of a Portfolio with a sales charge. An investor's aggregate investment in Shares
of such load Portfolios is the total value (based on the higher of current net
asset value or the public offering price originally paid) of: (a) current
purchases, and (b) Shares that are already beneficially owned by the investor on
which a sales charge has already been paid. If, for example, an investor
beneficially owns Investor A Shares of Portfolio with a maximum 5.50% sales load
having an aggregate current value of $240,000 and subsequently purchases
additional Investor A Shares of a Portfolio with a maximum 5.50% sales load
having a current value of $10,000, the sales charge applicable to the subsequent
purchase would be reduced to 2.50% of the offering price.
QUANTITY DISCOUNTS. As described in the applicable Prospectuses, larger
purchases reduce the sales charge paid. The Fund will combine purchases made in
a load Portfolio on the same day by the investor and immediate family members
when calculating the applicable sales charge.
LETTER OF INTENT. By checking the Letter of Intent box on the account
application, a shareholder becomes eligible for reduced sales charges applicable
to the total amount invested in Investor A Shares in a load Portfolio over a
13-month period (beginning up to 90 days prior to the date indicated on the
account application). The Fund's transfer agent will hold in escrow 5% of the
amount indicated for payment of a higher sales load if a shareholder does not
purchase the full amount indicated on the account application. Upon completion
of the total minimum investment specified on the account application, the escrow
will be released, and an adjustment will be made to reflect any reduced sales
charge applicable to Shares purchased during the 90-day period prior to
submission of the account application. Additionally, if total
-65-
<PAGE> 424
purchases within the 13-month period exceed the amount specified, an adjustment
will be made to reflect further reduced sales charges applicable to such
purchases. All such adjustments will be made at the conclusion of the 13-month
period and in the form of additional Shares credited to the shareholder's
account at the then current public offering price applicable to a single
purchase of the total amount of the total purchases. If total purchases are less
than the amount specified, escrowed Shares may be involuntarily redeemed to pay
the additional sales charge. Checking a Letter of Intent box does not bind an
investor to purchase, or the Fund to sell, the full amount indicated at the
sales load in effect at the time of signing, but an investor must complete the
intended purchase to obtain the reduced sales load.
REINVESTMENT PRIVILEGE. Upon redemption of Investor A Shares on which a
sales charge was paid, a shareholder has a one-time right, to be exercised
within 60 days, to reinvest the redemption proceeds at the next determined net
asset value without paying any additional sales charge. The shareholder must
notify his or her investment representative or the Distributor in writing of the
reinvestment and provide a receipt or other evidence of the redemption in order
to eliminate a sales charge.
MISCELLANEOUS. Reduced sales charges may be modified or terminated at
any time and are subject to confirmation of an investor's holdings. For more
information about reduced sales charges, an investor should contact his or her
broker-dealer or other financial organization or the Fund's distributor.
An illustration of the computation of the public offering price per
share of Investor A Shares of the Equity and Bond Portfolios, based on the value
of each Portfolio's net assets and the number of outstanding Investor A Shares
on November 30, 1998 and the maximum front-end sales charge of 5.5% with respect
to the Equity Portfolios (other than the U.S. Government Securities, Equity
Index and Small Cap Equity Index Portfolios), 4.75% with respect to the Bond
Portfolios (other than the Bond Index and Short-Intermediate Municipal
Portfolios), and 2.5% with respect to the U.S. Government Securities, Bond
Index, Short-Intermediate Municipal, Equity Index and Small Cap Equity Index
Portfolios, currently applicable, is as follows:
-66-
<PAGE> 425
<TABLE>
<CAPTION>
Growth & Small Cap International
Balanced Equity Income Income Equity Growth Equity Equity Equity
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Assets $_______ $_______ $_______ $_______ $_______ $_______
Outstanding Shares _______ _______ _______ _______ _______ _______
Net Asset Value $_______ $_______ $_______ $_______ $_______ $_______
Per Share
Sales Charge, 5.50% $_______ $_______ $_______ $_______ _______ $_______
of offering price
(5.82% of net asset
value per share)
Offering Price to Public $_______ $_______ $_______ $_______ $_______ $_______
</TABLE>
<TABLE>
<CAPTION>
Intermediate Government & Missouri Tax-Exempt National Municipal
Corporate Bond Corporate Bond Bond Bond
Portfolio Portfolio Portfolio Portfolio
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net Assets $_______ $_______ $_______ $_______
Outstanding Shares _______ _______ _______ _______
Net Asset Value $_______ $_______ $_______ $_______
Per Share
Sales Charge, 4.75% $_______ $_______ $_______ $_______
Of offering price
(4.99% of net
asset value per share)
Offering Price to Public $_______ $_______ $_______ $_______
</TABLE>
<TABLE>
<CAPTION>
U.S. Government Short-Intermediate Equity Small Cap
Securities Bond Index Municipal Index Equity Index
Portfolio Portfolio Portfolio Portfolio Portfolio
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Assets $_______ $_______ $_______ $_______ $_______
Outstanding Shares _______ _______ _______ _______ _______
Net Asset Value $_______ $_______ $_______ $_______ $_______
Per Share
Sales Charge, 2.50% $_______ $_______ $_______ $_______ $_______
of offering price
(2.56% of net
asset value per share)
Offering Price to Public $_______ $_______ $_______ $_______ $_______
</TABLE>
-67-
<PAGE> 426
APPLICABLE SALES CHARGES - INVESTOR B SHARES OF THE CDSC PORTFOLIOS
Investor B Shares of the CDSC Portfolios are sold at their net asset
value next determined after a purchase order is received in good form by the
Fund's distributor. Although investors pay no front-end sales charge on
purchases of Investor B Shares, such Shares are subject to a deferred sales
charge at the rates set forth in the applicable Prospectuses if they are
redeemed within six years of purchase. Service organizations will receive
commissions from the distributor in connection with sales of Investor B Shares.
These commissions may be different than the reallowances or placement fees, if
any, paid to dealers in connection with sales of Investor A Shares.
The deferred sales charge on Investor B Shares is based on the lesser
of the net asset value of the Shares on the redemption date or the original cost
of the Shares being redeemed. As a result, no sales charge is charged on any
increase in the principal value of an investor's Shares. In addition, a
contingent deferred sales charge will not be assessed on Investor B Shares
purchased through reinvestment of dividends or capital gains distributions.
The amount of any contingent deferred sales charge an investor must pay
on Investor B Shares depends on the number of years that elapse between the
purchase date and the date such Investor B Shares are redeemed, as described in
the relevant Prospectuses. Solely for purposes of determining the number of
years from the time of payment for an investor's Share purchase, all payments
during a month will be aggregated and deemed to have been made on the first day
of the month.
When an investor redeems his or her Investor B Shares, the redemption
order is processed to minimize the amount of the contingent deferred sales
charge that will be charged. Investor B Shares are redeemed first from those
Investor B Shares that are not subject to the deferred sales load (i.e.,
Investor B Shares that were acquired through reinvestment of dividends or
capital gain distributions) and after that from the Investor B Shares that have
been held the longest.
For example, assume an investor purchased 100 Investor B Shares at $10
a Share (for a total cost of $1,000), three years later the Shares have a net
asset value of $12 per Share and during that time the investor acquired 10
additional Shares through dividend reinvestment. If the investor then makes one
redemption of 50 Shares (resulting in proceeds of $600, 50 Shares x $12 per
share), the first 10 Shares redeemed will not be subject to the contingent
deferred sales charge because they were acquired through reinvestment of
dividends. With respect to the remaining 40 Shares redeemed, the contingent
deferred sales charge is charged at $10 per Share (because the original purchase
price of $10 per Share is lower than the current net asset value of $12 per
share). Therefore, only $400 of the $600 such investor received from selling his
or her Shares will be subject to the contingent deferred sales charge, at a rate
of 3.0% (the applicable rate in the third year after purchase). The proceeds
from the contingent deferred sales charge that the investor may pay upon
redemption go to the distributor, which may use such amounts to defray the
expenses associated with the distribution-related services involved in selling
Investor B Shares. The contingent deferred sales charge, along with ongoing
distribution fees paid with
-68-
<PAGE> 427
respect to Investor B Shares, enables those Shares to be purchased without the
imposition of a front-end sales charge.
CHARACTERISTICS OF INVESTOR A SHARES AND INVESTOR B SHARES
The primary difference between Investor A Shares and Investor B Shares
lies in their sales charge structures and distribution arrangements as described
in the applicable Prospectuses. An investor should understand that the purpose
and function of the sales charge structures and distribution arrangements for
both Investor A Shares and Investor B Shares are the same.
Investor A Shares are sold at their net asset value plus, in the case
of the Equity and Bond Portfolios, a front-end sales charge. Investor A Shares
are subject to ongoing distribution and service fees at an annual rate of up to
0.30% (0.25% with respect to the Money Market Portfolios) of a Portfolio's
average daily net assets attributable to its Investor A Shares.
Investor B Shares are sold at net asset value without an initial sales
charge. Normally, however, a deferred sales charge is paid if the Shares are
redeemed within six years of investment. Investor B Shares are subject to
ongoing distribution and service fees at an annual rate of up to 1.00% of a
Portfolio's average daily net assets attributable to its Investor B Shares.
These ongoing fees, which are higher than those charged on Investor A Shares,
will cause Investor B Shares to have a higher expense ratio and pay lower
dividends than Investor A Shares.
Eight years after purchase, Investor B Shares will convert
automatically to Investor A Shares. The purpose of the conversion is to relieve
a holder of Investor B Shares of the higher ongoing expenses charged to those
Shares, after enough time has passed to allow the distributor to recover
approximately the amount it would have received if a front-end sales charge had
been charged. The conversion from Investor B Shares to Investor A Shares takes
place at net asset value, as a result of which an investor receives
dollar-for-dollar the same value of Investor A Shares as he or she had of
Investor B Shares. The conversion occurs eight years after the beginning of the
calendar month in which the Shares are purchased. As a result of the conversion,
the converted Shares are relieved of the distribution and service fees borne by
Investor B Shares, although they are subject to the distribution and service
fees borne by Investor A Shares.
Investor B Shares acquired through a reinvestment of dividends or
distributions are also converted at the earlier of two dates - eight years after
the beginning of the calendar month in which the reinvestment occurred or the
date of conversion of the most recently purchased Investor B Shares that were
not acquired through reinvestment of dividends or distributions. For example, if
an investor makes a one-time purchase of Investor B Shares of a particular
Portfolio, and subsequently acquires additional Investor B Shares of that
Portfolio only through reinvestment of dividends and/or distributions, all of
such investor's Investor B Shares in that Portfolio, including those acquired
through reinvestment, will convert to Investor A Shares of that Portfolio on the
same date.
-69-
<PAGE> 428
FACTORS TO CONSIDER WHEN SELECTING INVESTOR A SHARES OR INVESTOR B SHARES
Before purchasing Shares of a Portfolio which offers both Investor A
Shares and Investor B Shares, investors should consider whether, during the
anticipated life of their investment in the Portfolio, the accumulated
distribution fees and potential contingent deferred sales charges on Investor B
Shares prior to conversion would be less than the initial sales charge and
accumulated distribution fees on Investor A Shares purchased at the same time
(note that Investor A Shares of the Money Market Portfolio are sold without a
sales charge), and to what extent such differential would be offset by the
higher yield of Investor A Shares. In this regard, to the extent that there is
no sales charge for Investor A Shares, in the case of the Money Market
Portfolio, or the sales charge for Investor A Shares is waived or reduced by one
of the methods described above, in the case of the Equity and Bond Portfolios,
investments in Investor A Shares become more desirable. The Fund reserves the
right to refuse all purchase orders for Investor B Shares of over $100,000.
Although Investor A Shares are subject to a distribution and service
fee, they are not subject to the higher distribution and service fee applicable
to Investor B Shares. For this reason, Investor A Shares can be expected to pay
correspondingly higher dividends per Share. However, because initial sales
charges are deducted at the time of purchase, purchasers of Investor A Shares of
the Equity and Bond Portfolios that do not qualify for waivers of or reductions
in the initial sales charge would have less of their purchase price initially
invested in a Portfolio than purchasers of Investor B Shares of the same
Portfolio.
As described above, purchasers of Investor B Shares of the Equity and
Bond Portfolios will have more of their initial purchase price invested. Any
positive investment return on this additional invested amount would partially or
wholly offset the expected higher annual expenses borne by Investor B Shares of
those Portfolios. Because the Portfolios' future returns cannot be predicted,
there can be no assurance that this will be the case. Holders of Investor B
Shares would, however, own Shares that are subject to higher annual expenses
and, for a six-year period, such Shares would be subject to a contingent
deferred sales charge of up to 5.00% upon redemption, depending upon the year of
redemption. Investors expecting to redeem during this six-year period should
compare the cost of the contingent deferred sales charge plus the aggregate
annual Investor B Shares' distribution and service fees to the cost of the
initial sales charge and distribution and service fees on the Investor A Shares
(note that Investor A Shares of the Money Market Portfolio are sold without a
sales charge). Over time, the expense of the annual distribution and service
fees on the Investor B Shares may equal or exceed the initial sales charge, if
any, and annual distribution and service fees applicable to Investor A Shares.
For example, if net asset value remains constant, the aggregate distribution and
service fees with respect to Investor B Shares of the Equity and Bond Portfolios
would equal or exceed the initial sales charge and aggregate distribution fees
of Investor A Shares of those Portfolios approximately eight years after the
purchase. In order to reduce such fees of investors that hold Investor B Shares
for more than eight years, Investor B Shares will be automatically converted to
Investor A Shares as described above at the end of such eight-year period.
EXCHANGES - INVESTOR A SHARES. Shareholders who have purchased Investor
A Shares of a Portfolio and who have paid any applicable sales charge ("load")
(including Shares
-70-
<PAGE> 429
acquired through reinvestment of dividends or distributions on such Shares) may
exchange those Shares for Investor A Shares of another load Portfolio without
paying an additional sales load. Shareholders who have purchased Investor A
Shares of a Portfolio (other than through a previous exchange from another load
Portfolio on which any applicable sales load has been paid) with a lower sales
load may be charged an additional sales load on exchanges of Shares of such
Portfolio for Shares of a Portfolio with a higher sales load. Shareholders may
also exchange Investor A Shares of a no-load Portfolio for Investor A Shares of
another no-load Portfolio without paying a sales load. When Investor A Shares of
a no-load Portfolio are exchanged for Investor A Shares of a load Portfolio, the
applicable sales load (if any) will be assessed. However, shareholders
exchanging Investor A Shares of a no-load Portfolio that were acquired through a
previous exchange involving Shares on which a load was paid will not be required
to pay an additional sales load upon the reinvestment of the equivalent
investment into a load Portfolio within a twelve month period. Under such
circumstances, the shareholder must notify the Distributor that a sales load was
originally paid and provide the Distributor with sufficient information to
permit confirmation of the shareholder's right not to pay a sales load.
In addition, shareholders who have a qualified trust, agency or
custodian account with the trust department of Mercantile Trust or any of its
affiliated or correspondent banks, and whose Shares are to be held in that
account, may also exchange Investor A Shares of a Portfolio for Trust Shares or
Institutional Shares in the same Portfolio, and vice versa, without payment of
any exchange or sales charge.
EXCHANGES - INVESTOR B SHARES. Shareholders who have purchased Investor
B Shares of a Portfolio (including Shares acquired through reinvestment of
dividends or distributions on such Shares) may exchange those Shares for
Investor B Shares of another Portfolio without the payment of any contingent
deferred sales charge at the time the exchange is made. In determining the
holding period for calculating the contingent deferred sales charge payable on
redemptions of Investor B Shares, the holding period of the Investor B Shares
originally held will be added to the holding period of the Investor B Shares
acquired through the exchange. No exchange fee is imposed by the Fund.
OTHER INFORMATION CONCERNING EXCHANGES. The Shares exchanged must have
a current value at least equal to the minimum initial or subsequent investment
required by the particular Portfolio into which the exchange is being made. An
investor may telephone an exchange request by calling his or her broker-dealer
or financial institution, which is responsible for transmitting such exchange
request to the Fund.
AUTOMATIC EXCHANGE PROGRAM. The Automatic Exchange Program enables
shareholders to make regular, automatic withdrawals from an Investor A Share or
Investor B Share account in a Portfolio and use those proceeds to benefit from
Dollar Cost Averaging by automatically making purchases of the same class of
Shares in another Portfolio. With shareholder authorization, the Fund's Transfer
Agent will withdraw the amount specified (subject to the applicable minimums)
from the shareholder's account and will automatically invest that amount in
Shares of the Portfolio designated by the shareholder on the date of such
deduction.
-71-
<PAGE> 430
In order to participate in the Automatic Exchange Program, shareholders
must make a minimum initial purchase of $5,000 and maintain a minimum account
balance of $1,000. Additionally, shareholders must complete the supplementary
authorization form which may be obtained from their broker-dealer or financial
institution or the Fund. To change instructions with respect to the Automatic
Exchange Program or to discontinue this feature, shareholders must send a
written request to their broker-dealer or financial institution or to the Fund.
The Automatic Exchange Program may be amended or terminated without notice at
any time by the Fund.
CHECKWRITING -- MONEY MARKET PORTFOLIOS
To establish the checkwriting service after opening an account in a
Money Market Portfolio, the shareholder must contact his or her broker-dealer or
financial institution by telephone or mail to obtain an account application. A
signature guarantee may be required. A SHAREHOLDER WILL RECEIVE THE DAILY
DIVIDENDS DECLARED ON THE SHARES TO BE REDEEMED UP TO THE DAY THAT A CHECK IS
PRESENTED TO THE CUSTODIAN FOR PAYMENT. The checkwriting privilege may be
disadvantageous for holders of Investor B Shares of the Money Market Portfolio
due to the effect of the contingent deferred sales charge.
AUTOMATIC WITHDRAWAL PLAN (AWP)
An Automatic Withdrawal Plan may be established by a new or existing
shareholder of any Portfolio if the value of his or her account (valued at the
net asset value at the time of the establishment of the AWP) equals $10,000 or
more. Shareholders who elect to establish an AWP may receive a monthly,
quarterly, semi-annual, or annual check in a stated amount of not less than $50
on or about the 25th day of the applicable month of withdrawal. Portfolio Shares
will be redeemed as necessary to meet withdrawal payments. Withdrawals may
reduce principal and eventually deplete the shareholder's account. A shareholder
who desires to establish an AWP after opening an account should complete the AWP
form in the back of the Prospectus or contact his or her investment
representative or the Fund for an AWP application. A signature guarantee will be
required. An AWP may be terminated by a shareholder on 30 days' written notice
to his or her investment representative or to the Fund or by the Fund at any
time. No contingent deferred sales charge will be assessed on redemptions of
Investor B Shares of a Portfolio made through an AWP that do not exceed 12% of
an account's net asset value on an annualized basis. For example, monthly,
quarterly, semi-annual and annual AWP redemptions of Investor B Shares will not
be subject to the contingent deferred sales charge if they do not exceed 1%, 3%,
6% and 12%, respectively, of an account's net asset value on the redemption
date. AWP redemptions of Investor B Shares in excess of this limit are still
subject to the applicable contingent deferred sales charge.
-72-
<PAGE> 431
PURCHASE OF INVESTOR A SHARES AT NET ASSET VALUE
From time to time the Fund's distributor may offer special concessions
to enable investors to purchase Investor A Shares of the Equity and Bond
Portfolios at net asset value without payment of a front-end sales charge. To
qualify for a net asset value purchase, the investor must pay for such purchase
with the proceeds from the redemption of shares of a non-affiliated mutual fund
on which a front-end sales charge was paid. A qualifying purchase of Investor A
Shares must occur within 30 days of the prior redemption and must be evidenced
by a confirmation of the redemption transaction. At the time of purchase, the
investment representative must notify the Fund that the purchase qualifies for a
purchase at net asset value. Proceeds from the redemption of Shares on which no
front-end sales charge was paid do not qualify for a purchase at net asset
value.
PURCHASE OF TRUST, TRUST II AND INSTITUTIONAL SHARES
All shareholders of record will receive confirmations of Share
purchases, exchanges, and redemptions in the mail. If Shares are held in the
name of banks or other financial institutions, such institution is responsible
for transmitting purchase, exchange, and redemption orders to the Fund on a
timely basis, recording all purchase, exchange, and redemption transactions, and
providing regular account statements which confirm such transactions to
beneficial owners.
EXCHANGES - TRUST, TRUST II AND INSTITUTIONAL SHARES
The exchange privilege enables shareholders to exchange Trust Shares of
a Portfolio for Trust Shares of another Portfolio offered by the Fund, Trust II
Shares for Trust II Shares of another such Portfolio and Institutional Shares
for Institutional Shares of another such Portfolio. Exchanges for Trust Shares,
Trust II Shares or Institutional Shares in another Portfolio are effected
without payment of any exchange or sales charges. In addition, Trust Shares of a
Portfolio may also be exchanged for Investor A Shares of the same Portfolio in
connection with the distribution of assets held in a qualified trust, agency or
custodian account with the trust department of Mercantile Trust Company National
Association or any of its affiliated or correspondent banks. Such exchanges will
also be effected without payment of any exchange or sales charges.
OTHER PURCHASE, EXCHANGE AND REDEMPTION INFORMATION - ALL CLASSES
On a Business Day when the Exchange closes early due to a partial
holiday or otherwise, the Fund reserves the right to advance the times at which
purchase and redemption orders must be received in order to be processed on that
Business Day.
WHEN REDEEMING SHARES IN A PORTFOLIO THAT OFFERS BOTH INVESTOR A SHARES
AND INVESTOR B SHARES, SHAREHOLDERS SHOULD INDICATE WHETHER THEY ARE REDEEMING
INVESTOR A SHARES OR INVESTOR B SHARES. In the event a redeeming shareholder
owns both Investor A Shares and Investor B Shares in a Portfolio, the Investor A
Shares will be redeemed first unless the shareholder indicates otherwise.
-73-
<PAGE> 432
During periods of substantial economic or market change or activity,
telephone redemptions or exchanges may be difficult to complete. In such event,
Shares may be redeemed or exchanged by mailing the request directly to the
organization through which the original Shares were purchased or directly to the
Fund at P.O. Box 78069, St. Louis, Missouri 63178.
Under the 1940 Act, a Portfolio may suspend the right of redemption or
postpone the date of payment for shares during any period when (a) trading on
the Exchange is restricted by applicable rules and regulations of the SEC; (b)
the Exchange is closed for other than customary weekend and holiday closing; (c)
the SEC has by order permitted such suspension; or (d) an emergency exists as
determined by the SEC. A Portfolio may also suspend or postpone the recordation
of the transfer of its shares upon the occurrence of any of the foregoing
conditions.
The Portfolios may redeem shares involuntarily to reimburse them for
any loss sustained by reason of the failure of a shareholder to make full
payment for shares purchased by the shareholder or to collect any charge
relating to a transaction effected for the benefit of a shareholder which is
applicable to Portfolio shares.
YIELD AND TOTAL RETURN INFORMATION
Yield and total return quotations are computed separately for Trust
Shares, Trust II Shares, Institutional Shares, Investor A Shares and Investor B
Shares of a Portfolio. TOTAL RETURN AND YIELD FIGURES WILL FLUCTUATE, ARE BASED
ON HISTORICAL EARNINGS, AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. The
methods used to compute each Portfolio's yields and total returns are described
below.
THE MONEY MARKET PORTFOLIOS
From time to time, performance information such as "yield," and
"effective yield" for the Money Market Portfolios' Trust Shares, Trust II
Shares, Institutional Shares, and Investor A Shares and/or Investor B Shares may
be quoted in advertisements or in communications to shareholders. The "yield"
quoted in advertisements refers to the income generated by an investment in a
particular class of Shares of a Portfolio over a specified period (such as a
seven-day period) identified in connection with the particular yield quotation.
This income is then "annualized." That is, the amount of income generated by the
investment during that period is assumed to be generated for each such period
over a 52-week or one-year period and is shown as a percentage of the
investment. The "effective yield" is calculated similarly but, when annualized,
the income earned by an investment in a particular class of Shares of a
Portfolio is assumed to be reinvested. The "effective yield" will be slightly
higher than the "yield" because of the compounding effect of this assumed
reinvestment.
In addition, the Treasury Money Market Portfolio's "state
tax-equivalent yield" may also be quoted. The "state tax-equivalent yield" shows
the level of taxable yield needed to produce an after-tax yield that is
equivalent to a particular state's tax-exempt yield achieved by the Portfolio.
The "state tax-equivalent yield" refers to the portion of income that is derived
from interest income on direct obligations of the U.S. Government, its agencies
or instrumentalities
-74-
<PAGE> 433
that qualifies for exemption from state income tax. The yield calculation
assumes that 100% of the interest income is exempt from state income tax. The
"state tax-equivalent yield" is computed by dividing the tax-exempt portion of
the Portfolio's yield by a denominator consisting of one minus a stated income
tax rate.
The Tax-Exempt Money Market Portfolio may also quote its
"tax-equivalent yield" and "tax-equivalent effective yield," which demonstrate
the level of taxable yield needed to produce an after-tax yield that is
equivalent to the Portfolio's yield and effective yield. Each are calculated by
increasing the Portfolio's yield and effective yield by the amount necessary to
reflect the payment of federal (and/or state) tax at a stated tax rate. The "tax
equivalent yield" and "tax-equivalent effective yield" will always be higher
than the Portfolio's yield and effective yield, respectively. The Tax-Exempt
Money Market Portfolio may also compute its "tax-equivalent yield" and
"tax-equivalent effective yield" with respect to certain states, which shows the
level of taxable yield and effective yield, respectively, needed to produce an
after-tax equivalent to the federal and state tax-exempt yield of the
Portfolio's particular class of Shares, assuming payment of federal income tax
and state personal income tax each at a stated rate and based upon a specified
percentage of the Portfolio's income which is exempt from state income tax as
well as federal income tax.
A Money Market Portfolio's "yield" and "effective yield" are calculated
separately for Trust Shares, Trust II Shares, Institutional Shares, Investor A
Shares and Investor B Shares of the Portfolios according to formulas prescribed
by the SEC. Standardized 7 day "yield" is computed by determining the net
change, exclusive of capital changes, in the value of a hypothetical
pre-existing account in a Portfolio having a balance of one share at the
beginning of the period, subtracting a hypothetical charge reflecting deductions
from shareholder accounts, dividing the difference by the value of the account
at the beginning of the base period to obtain the base period return, and then
multiplying the base period return by (365/7). The net change in the value of an
account includes the value of additional shares purchased with dividends from
the original share, and dividends declared on both the original share and any
such additional shares, net of all fees, other than nonrecurring account or
sales charges, that are charged by the Portfolio to all shareholder accounts in
proportion to the length of the base period and the Portfolio's mean (or median)
account size. The capital changes to be excluded from the calculation of the net
change in account value are realized gains and losses from the sale of
securities and unrealized appreciation and depreciation. "Effective yield" is
computed by compounding the unannualized base period return (calculated as
above) by adding one to the base period return, raising the sum to a power equal
to 365 divided by seven, and subtracting one from the result. Based upon the
same calculations, each Portfolio's 30 day yields and 30 day effective yields
may also be quoted. The Tax-Exempt Money Market Portfolio's "tax-equivalent
yield" is computed by dividing the tax-exempt portion of the yield (calculated
as above) by one minus a stated federal income tax rate and adding the product
to that portion, if any, of the yield that is not tax-exempt. In addition, a
"Missouri" tax-equivalent yield may be calculated by dividing the portion of the
Tax-Exempt Money Market Portfolio's yield (calculated as above) that is exempt
from federal tax and the portion that is exempt from Missouri personal income
tax by one minus a stated tax rate and adding such figure to that portion, if
any, of the Portfolio's yield that is not exempt from federal or state income
tax. Based on the foregoing calculations, for the year ended November 30, 1998,
the 7-day yields, 7-day effective yields and the 30-day yields were as follows:
-75-
<PAGE> 434
<TABLE>
<CAPTION>
7-DAY EFFECTIVE
PORTFOLIO* 7-DAY YIELD YIELD 30-DAY YIELD
---------- ----------- ----- ------------
<S> <C> <C> <C>
Treasury Money Market
Trust Shares _____% _____% _____%
Trust Shares II _____% _____% _____%
Institutional Shares _____% _____% _____%
Investor A Shares _____% _____% _____%
Money Market _____% _____% _____%
Trust Shares _____% _____% _____%
Trust II Shares _____% _____% _____%
Institutional Shares _____% _____% _____%
Investor A Shares _____% _____% _____%
Investor B Shares
Tax-Exempt Money Market _____% _____% _____%
Trust Shares _____% _____% _____%
Trust II Shares _____% _____% _____%
Investor A Shares
</TABLE>
- --------------------
* Trust II Shares of the Money Market Portfolios were initially offered on
November 2, 1998.
Based on the foregoing calculations, the tax-equivalent yields and
tax-equivalent effective yields of the Tax-Exempt Money Market Portfolio for the
same 7-day and 30-day periods were as follows (assuming payment of federal
income tax at a rate of 39.60%):
<TABLE>
<CAPTION>
7-DAY TAX-
7-DAY TAX-EQUIVALENT EQUIVALENT 30-DAY TAX-EQUIVALENT
PORTFOLIO* YIELD EFFECTIVE YIELD YIELD
---------- ----- --------------- -----
<S> <C> <C> <C>
Tax-Exempt Money Market _____% _____% _____%
Trust Shares _____% _____% _____%
Trust II Shares _____% _____% _____%
Investor A Shares
</TABLE>
- --------------------
* Trust II Shares of the Tax-Exempt Money Market Portfolio were initially
offered on November 2, 1998.
In addition, the Treasury Money Market Portfolio may calculate a 7 day
"state tax-exempt yield," which is computed by dividing the portion of the
Portfolio's yield (calculated as above) that is exempt from state income tax by
one minus a state income tax rate. Based upon the same calculations, the
Portfolio's 30 day state tax-exempt yield may also be quoted.
A Portfolio's quoted yield is not indicative of future yields and
depends upon factors such as portfolio maturity, the Portfolio's expenses, and
the types of instruments held by the Portfolio. Any account fees imposed by
financial institutions, Service Organizations, or broker-dealers would reduce a
Portfolio's effective yield.
-76-
<PAGE> 435
THE EQUITY AND BOND PORTFOLIOS
From time to time, performance information such as total return and
yield data for the Equity and Bond Portfolios' Trust Shares, Institutional
Shares, Investor A Shares and/or Investor B Shares may be quoted in
advertisements, sales literature or in communications to shareholders. The yield
is computed based on the net income of a particular class of Shares in the
particular Portfolio during a 30-day (or one-month) period identified in
connection with the particular yield quotation. More specifically, the yield is
computed by dividing the Portfolio's net income per Share during a 30-day (or
one-month) period by the maximum public offering price per Share on the last day
of the period and annualizing the result. The Short-Intermediate Municipal,
Missouri Tax-Exempt Bond and National Municipal Bond Portfolios' "tax
equivalent" yields, which show the level of taxable yield needed to produce an
after-tax equivalent to each Portfolio's tax-free yield, may also be quoted from
time to time. This is done by increasing a Portfolio's yield (calculated as
above) by the amount necessary to reflect the payment of federal income tax at a
stated tax rate. The Missouri Tax-Exempt Bond Portfolio may also compute its
"Missouri tax-equivalent" yield which shows the amount of taxable yield needed
to produce an after-tax equivalent to the federal and Missouri tax-exempt yield
of the Portfolio's Shares, assuming payment of federal income tax and Missouri
income tax each at a stated rate.
The Portfolios' total returns may be calculated on an average annual
total return basis, and may also be calculated on an aggregate total return
basis, for various periods. Average annual total returns with respect to a
particular class of Shares reflect the average annual percentage change in value
of an investment in such Shares of a Portfolio over the particular measuring
period. Aggregate total returns reflect the cumulative percentage change in
value over the measuring period. Both methods of calculating total returns
assume that dividends and capital gain distributions made by a Portfolio during
the period are reinvested in the same class of Shares of the Portfolio and that
the maximum sales load in effect during the period has been charged by the
Portfolio. The Portfolios' total return figures may also be calculated without
the deduction of the maximum sales charge in effect during the period. The
effect of not deducting the sales charge will be to increase the total return
reflected. When considering average annual total return figures for periods
longer than one year, it is important to note that a Portfolio's annual total
return for any one year in the period might have been more or less than the
average for the entire period.
An Equity and Bond Portfolio's 30 day "yield" is calculated separately
for Trust Shares, Institutional Shares, Investor A Shares and/or Investor B
Shares of a Portfolio by dividing the Portfolio's net investment income per
share earned during a 30-day period by the maximum offering price per share (the
"maximum offering price") with respect to Investor A Shares and the net asset
value per share with respect to Trust Shares, Institutional Shares and Investor
B Shares on the last day of the period and annualizing the result on a
semi-annual basis by adding one to the quotient, raising the sum to the power of
six, subtracting one from the result and then doubling the difference. A
Portfolio's net investment income per share (irrespective of series) earned
during the period is based on the average daily number of shares outstanding
during the period entitled to receive dividends and includes income dividends
and interest earned
-77-
<PAGE> 436
during the period minus expenses accrued for the period, net of reimbursements.
This calculation can be expressed as follows:
a-b
Yield = 2 [(-------)(6) - 1]
cd + 1
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding
that were entitled to receive dividends.
d = maximum offering price per share on the last day
of the period.
For the purpose of determining interest earned during the period
(variable "a" in the formula), dividend income on equity securities held by a
Portfolio is recognized by accruing 1/360 of the stated dividend rate of the
security each day that the security is in that Portfolio. A Portfolio calculates
interest earned on any debt obligation held in its portfolio by computing the
yield to maturity of each obligation held by it based on the market value of the
obligation (including actual accrued interest) at the close of business on the
last business day of each 30 day period, or, with respect to obligations
purchased during the 30 day period, the purchase price (plus actual accrued
interest) and dividing the result by 360 and multiplying the quotient by the
market value of the obligation (including actual accrued interest) in order to
determine the interest income on the obligation for each day of the subsequent
30 day period that the obligation is in the portfolio. The maturity of an
obligation with a call provision is the next call date on which the obligation
reasonably may be expected to be called or, if none, the maturity date. With
respect to debt obligations purchased at a discount or premium, the formula
generally calls for amortization of the discount or premium. The amortization
schedule will be adjusted monthly to reflect changes in the market values of
such debt obligations.
Interest earned on municipal securities of the Short-Intermediate
Municipal, Missouri Tax-Exempt Bond and National Municipal Bond Portfolios that
are issued without original issue discount and have a current market discount is
calculated by using the coupon rate of interest instead of the yield to
maturity. In the case of municipal securities that are issued with original
issue discount but which have discounts based on current market value that
exceed the then-remaining portion of the original issue discount (market
discount), the yield to maturity is the imputed rate based on the original issue
discount calculation. On the other hand, in the case of municipal securities
that are issued with original issue discount but which have discounts based on
current market value that are less than the then-remaining portion of the
original issue discount (market premium), the yield to maturity is based on the
market value.
Expenses accrued for the period (variable "b" in the formula) include
all recurring fees charged by a Portfolio to all shareholder accounts in
proportion to the length of the base period and the Portfolio's mean (or median)
account size. Investor A Shares, Investor B Shares,
-78-
<PAGE> 437
Institutional Shares and Trust Shares each bear separate fees applicable to the
particular class of shares. Undeclared earned income will not be subtracted from
the maximum offering price per share (variable "d" in the formula). Undeclared
earned income is net investment income which, at the end of the base period, has
not been declared and paid as a dividend, but is reasonably expected to be and
is declared and paid as a dividend shortly thereafter.
The Short-Intermediate Municipal, Missouri Tax-Exempt Bond and National
Municipal Bond Portfolios' "tax-equivalent" yield for each class of shares is
computed by dividing the portion of a Portfolio's yield (calculated as above)
that is exempt from federal income tax by one minus a stated federal income tax
rate and adding that figure to that portion, if any, of the Portfolio's yield
that is not exempt from federal income tax. Similarly, the Missouri Tax-Exempt
Bond Portfolio's "Missouri tax-equivalent" yields for each class of shares is
calculated by dividing the portion of a Portfolio's yield (calculated as above)
that is exempt from federal tax and the portion that is exempt from Missouri
personal income tax by one minus a stated tax rate and adding such figure to
that portion, if any, of the Portfolio's yield that is not exempt from federal
or state income tax.
The Fund currently calculates 30-day yields for its Bond Portfolios but
not for its Equity Portfolios. For the 30-day period ended November 30, 1998,
the yields on the Bond Portfolios were as follows:
<TABLE>
<CAPTION>
PORTFOLIO 30-DAY YIELD
--------- ------------
<S> <C>
U.S. Government Securities
Trust Shares _____%
Institutional Shares _____%
Investor A Shares _____%
Investor B Shares _____%
Intermediate Corporate Bond
Trust Shares _____%
Institutional Shares _____%
Investor A Shares _____%
Bond Index
Trust Shares _____%
Institutional Shares _____%
Investor A Shares _____%
Government & Corporate Bond
Trust Shares _____%
Institutional Shares _____%
Investor A Shares _____%
Investor B Shares _____%
Short-Intermediate Municipal
Trust Shares _____%
Investor A Shares _____%
</TABLE>
-79-
<PAGE> 438
<TABLE>
<CAPTION>
PORTFOLIO 30-DAY YIELD
--------- ------------
<S> <C>
Missouri Tax Exempt Bond
Trust Shares _____%
Investor A Shares _____%
Investor B Shares _____%
National Municipal Bond
Trust Shares _____%
Investor A Shares _____%
Investor B Shares _____%
Balanced
Trust Shares _____%
Institutional Shares _____%
Investor A Shares _____%
Investor B Shares _____%
</TABLE>
For the same 30-day period, the Short-Intermediate Municipal, Missouri
Tax-Exempt Bond and National Municipal Bond Portfolios' tax-equivalent yields
(assuming payment of federal income taxes at a rate of 39.60%) and the Missouri
Tax-Exempt Bond Portfolio's Missouri tax-equivalent yield (assuming Missouri
state income taxes at a rate of 43.20%) were as follows:
<TABLE>
<CAPTION>
30-DAY TAX- 30-DAY MISSOURI
PORTFOLIO EQUIVALENT YIELD TAX-EQUIVALENT YIELD
--------- ---------------- --------------------
<S> <C> <C>
Short-Intermediate Municipal
Trust Shares _____% _____%
Investor A Shares _____% _____%
Missouri Tax-Exempt Bond
Trust Shares _____% _____%
Investor A Shares _____% _____%
Investor B Shares _____% _____%
National Municipal Bond
Trust Shares _____% _____%
Investor A Shares _____% _____%
Investor B Shares _____% _____%
</TABLE>
A Portfolio computes its "average annual total return" for each series
of that Portfolio by determining the average annual compounded rate of return
during specified periods that would equate the initial amount invested in a
particular series to the ending redeemable value of such investment in the
series by dividing the ending redeemable value of a hypothetical $1,000 payment
by $1,000 (representing a hypothetical initial payment) and raising the quotient
to a power equal to one divided by the number of years (or fractional portion
thereof) covered by the computation and subtracting one from the result. This
calculation can be expressed as follows:
ERV 1/n
T = [(-------) - 1]
P
-80-
<PAGE> 439
Where: T = average annual total return
ERV = ending redeemable value of a
hypothetical $1,000 payment made at the
beginning of the 1, 5 or 10 year (or other)
periods at the end of the 1, 5 or 10 year (or
other) periods (or a fractional portion thereof)
P = hypothetical initial payment of $1,000
n = period covered by the computation, expressed in terms of
years
A Portfolio computes its aggregate total returns separately for each
series by determining the aggregate compounded rates of return during specified
periods that likewise equate the initial amount invested in a particular series
to the ending redeemable value of such investment in the series. The formula for
calculating aggregate total return is as follows:
ERV
Aggregate Total Return = [(------)- 1]
P
The calculations of average annual total return and aggregate total
return assume reinvestment of all income dividends and capital gain
distributions on the reinvestment dates during the period and include all
recurring fees charged to all shareholder accounts, assuming an account size
equal to a Portfolio's mean or median account size for any fees that vary with
the size of the account. The ending redeemable value (variable "ERV" in each
quotation) is determined by assuming complete redemption of the hypothetical
investment and the deduction of all non-recurring charges at the end of the
period covered by the computation. In addition, a non-money market Portfolio's
average annual total return and aggregate total return quotations reflect the
deduction of the maximum front-end sales charge in connection with the purchase
of Investor A Shares and the deduction of any applicable contingent deferred
sales charge with respect to Investor B Shares.
Based on the foregoing calculations, the average annual total returns
for the year/period ended November 30, 1998, the average annual total returns
for the 5-year and 10-year periods ended November 30, 1998 (where applicable)
and the average annual total returns for the periods from commencement of
operations were as follows:
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------
FOR THE 5 FOR THE 10 SINCE
FOR THE YEAR YEARS ENDED YEARS ENDED COMMENCEMENT
PORTFOLIO ENDED 11/30/98 11/30/98 11/30/98 OF OPERATIONS
--------- -------------- -------- -------- -------------
<S> <C> <C> <C> <C>
U.S. Government Securities
Trust Shares(1) ____% ____% N/A ____%
Institutional Shares(7) ____% ____% N/A ____%
Investor A Shares(1) ____% ____% ___% ____%
Investor B Shares(4) ____% ____% N/A ____%
</TABLE>
-81-
<PAGE> 440
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------
FOR THE 5 FOR THE 10 SINCE
FOR THE YEAR YEARS ENDED YEARS ENDED COMMENCEMENT
PORTFOLIO ENDED 11/30/98 11/30/98 11/30/98 OF OPERATIONS
--------- -------------- -------- -------- -------------
<S> <C> <C> <C> <C>
Intermediate Corporate Bond(23)
Trust Shares ____% N/A N/A ____%
Institutional Shares ____% N/A N/A ____%
Investor A Shares ____% N/A N/A ____%
Bond Index(23)
Trust Shares ____% N/A N/A ____%
Institutional Shares ____% N/A N/A ____%
Investor A Shares ____% N/A N/A ____%
Government & Corporate Bond
Trust Shares(5) ____% ____% N/A ____%
Institutional Shares(2) ____% ____% N/A ____%
Investor A Shares(5) ____% ____% ____% ____%
Investor B Shares(4) ____% ____% N/A ____%
Short-Intermediate Municipal
Trust Shares(17) ____% N/A N/A ____%
Investor A Shares(18) ____% N/A N/A ____%
Missouri Tax-Exempt Bond(19)
Trust Shares(20) ____% ____% N/A ____%
Investor A Shares(21) ____% ____% ____% ____%
Investor B Shares(4) ____% ____% N/A ____%
National Municipal Bond(22)
Trust Shares ____% N/A N/A ____%
Investor A Shares ____% N/A N/A ____%
Investor B Shares ____% N/A N/A ____%
Balanced
Trust Shares(12) ____% ____% N/A ____%
Institutional Shares(12) ____% ____% N/A ____%
Investor A Shares(12) ____% ____% N/A ____%
Investor B Shares(4) ____% ____% N/A ____%
Equity Income(24)
Trust Shares ____% N/A N/A ____%
Institutional Shares ____% N/A N/A ____%
Investor A Shares ____% N/A N/A ____%
Investor B Shares ____% N/A N/A ____%
Equity Index(25)
Trust Shares ____% N/A N/A ____%
Institutional Shares ____% N/A N/A ____%
Investor A Shares ____% N/A N/A ____%
Growth & Income Equity
Trust Shares(1) ____% ____% N/A ____%
Institutional Shares(2) ____% ____% ____% ____%
Investor A Shares(1) ____% ____% N/A ____%
Investor B Shares(4) ____% ____% N/A ____%
Growth Equity
Trust Shares(26) ____% N/A N/A ____%
Institutional Shares(26) ____% N/A N/A ____%
Investor A Shares(27) ____% ____% N/A ____%
Investor B Shares(26) ____% N/A N/A ____%
Small Cap Equity
Trust Shares(9) ____% ____% N/A ____%
Institutional Shares(2) ____% ____% N/A ____%
Investor A Shares(10) ____% ____% N/A ____%
Investor B Shares(4) ____% ____% N/A ____%
</TABLE>
-82-
<PAGE> 441
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------
FOR THE 5 FOR THE 10 SINCE
FOR THE YEAR YEARS ENDED YEARS ENDED COMMENCEMENT
PORTFOLIO ENDED 11/30/98 11/30/98 11/30/98 OF OPERATIONS
--------- -------------- -------- -------- -------------
<S> <C> <C> <C> <C>
Small Cap Equity Index(28)
Trust Shares N/A N/A N/A N/A
Institutional Shares N/A N/A N/A N/A
Investor A Shares N/A N/A N/A N/A
International Equity
Trust Shares(14) ____% N/A N/A ____%
Institutional Shares(14) ____% N/A N/A ____%
Investor A Shares(15) ____% N/A N/A ____%
Investor B Shares(4) ____% N/A N/A ____%
</TABLE>
- ----------
(1) Commenced operations on June 2, 1988.
(2) Initial public offering commenced on January 4, 1994.
(3) Reflects combined performance of Institutional Shares which were
initially offered to the public on January 4, 1994 and Investor A
Shares for the period prior to January 4, 1994.
(4) Investor B Shares were initially offered on March 1, 1995. The
performance figures for Investor B Shares for periods prior to such
date represent the performance for Investor A Shares of the Portfolio
which has been restated to reflect the contingent deferred sales
charges payable by holders of Investor B Shares that redeem within six
years of the date of purchase. Investor B Shares are also subject to
distribution and services fees at a maximum annual rate of 1.00%. Had
those distribution and services fees been reflected, performance would
have been reduced.
(5) Commenced operations on June 15, 1988.
(6) Reflects combined performance of Institutional Shares which were
initially offered to the public on January 4, 1994 and Investor A
Shares for the period prior to January 4, 1994.
(7) Commenced operations on June 7, 1994.
(8) Reflects combined performance of Institutional Shares which were
initially offered to the public on June 7, 1994 and Investor A Shares
for the period prior to January 4, 1994.
(9) Commenced operations on May 1, 1992.
(10) Initial public offering commenced on May 6, 1992.
(11) Reflects combined performance of Institutional Shares which were
initially offered to the public on January 4, 1994 and Investor A
Shares for the period May 1, 1992 through January 3, 1994.
(12) Commenced operations on April 1, 1993.
(13) Reflects combined performance of Institutional Shares which were
initially offered to the public on January 4, 1994 and Investor A
Shares for the period April 1, 1993 through January 3, 1994.
(14) Commenced operations on April 4, 1994.
(15) Initial public offering commenced on May 2, 1994.
(16) Reflects combined performance of Institutional Shares which were
initially offered to the public on April 24, 1994 and Investor A
Shares for the period April 4, 1994 through April 23, 1994.
(17) Commenced operations on July 10, 1995.
(18) Commenced operations on July 10, 1995.
(19) Commenced operations on July 15, 1988 as a portfolio of The ARCH
Tax-Exempt Trust. On October 2, 1995, the Portfolio was reorganized as
a new Portfolio of the Fund.
(20) Commenced operations on July 15, 1988.
(21) Initial public offering commenced on September 28, 1990.
(22) Commenced operations on November 18, 1996.
(23) Commenced operations on February 10, 1997.
(24) Commenced operations on March 7, 1997.
(25) Commenced operations on May 1, 1997.
(26) Commenced operations on November 21, 1997.
(27) Performance information includes that of Predecessor Growth Equity
Portfolio, which commenced operations on January 4, 1993.
(28) Portfolio had not commenced operations as of November 30, 1998.
Based on the foregoing calculations, the aggregate total returns for
the Equity and Bond Portfolios from their respective dates of commencement of
operations
-83-
<PAGE> 442
through November 30, 1998 (other than the Small Cap Equity Index Portfolios
which had not commenced operations as of November 30, 1998) were as follows:
<TABLE>
<CAPTION>
AGGREGATE TOTAL RETURN
PORTFOLIO SINCE COMMENCEMENT
--------- OF OPERATIONS
-------------
<S> <C>
U.S. Government Securities
Trust Shares ____%
Institutional Shares(1) ____%
Investor A Shares ____%
Investor B Shares(2) ____%
Intermediate Corporate Bond
Trust Shares ____%
Institutional Shares ____%
Investor A Shares ____%
Bond Index
Trust Shares ____%
Institutional Shares ____%
Investor A Shares ____%
Government & Corporate Bond
Trust Shares ____%
Institutional Shares(1) ____%
Investor A Shares ____%
Investor B Shares(2) ____%
Short-Intermediate Municipal
Trust Shares ____%
Investor A Shares ____%
Missouri Tax-Exempt Bond
Trust Shares ____%
Investor A Shares ____%
Investor B Shares(2) ____%
National Municipal Bond
Trust Shares ____%
Investor A Shares ____%
Investor B Shares ____%
Equity Income
Trust Shares ____%
Institutional Shares ____%
Investor A Shares ____%
Investor B Shares ____%
Balanced
Trust Shares ____%
Institutional Shares(1) ____%
Investor A Shares ____%
Investor B Shares(2) ____%
Equity Index
Trust Shares ____%
Institutional Shares ____%
Investor A Shares ____%
Growth & Income Equity
Trust Shares ____%
Institutional Shares(1) ____%
Investor A Shares ____%
Investor B Shares(2) ____%
</TABLE>
-84-
<PAGE> 443
<TABLE>
<CAPTION>
AGGREGATE TOTAL RETURN
PORTFOLIO SINCE COMMENCEMENT
--------- OF OPERATIONS
-------------
<S> <C>
Growth Equity
Trust Shares ____%
Institutional Shares ____%
Investor A Shares(3) ____%
Investor B Shares ____%
Small Cap Equity
Trust Shares ____%
Institutional Shares(1) ____%
Investor A Shares ____%
Investor B Shares(2) ____%
International Equity
Trust Shares ____%
Institutional Shares(1) ____%
Investor A Shares ____%
Investor B Shares(2) ____%
</TABLE>
- ----------
(1) Reflects combined performance of Institutional Shares which were
initially offered to the public on January 4, 1994 and Investor A
Shares for the period prior to January 4, 1994.
(2) Investor B Shares were initially offered on March 1, 1995. The
performance figures for Investor B Shares for periods prior to such
date represent the performance for Investor A Shares of the Portfolio
which has been restated to reflect the contingent deferred sales
charges payable by holders of Investor B Shares that redeem within six
years of the date of purchase. Investor B Shares are also subject to
distribution and services fees at a maximum annual rate of 1.00%. Had
those distribution and services fees been reflected, performance would
have been reduced.
(3) Total return information includes that of Predecessor Growth Equity
Portfolio, which commenced operations on January 4, 1993.
Investor A Shares and Investor B Shares of a Portfolio may also
calculate total return figures for that Portfolio without deducting the maximum
sales charge imposed on purchases or redemptions. The effect of not deducting
the sales charge will be to increase the total return reflected.
Investors may judge the performance of the Portfolios by comparing them
to the performance of other mutual funds or mutual fund portfolios with
comparable investment objectives and policies. Such comparisons may be made by
referring to market indices and data such as those prepared by Dow Jones & Co.,
Inc., Russell, Salomon Brothers, Inc., Lehman Brothers or Standard & Poor's
Ratings Group or any of their affiliates, the Consumer Price Index, the EAFE
Index, the NASDAQ Composite, or to rankings prepared by independent services or
other financial or industry publications that monitor the performance of mutual
funds. Such comparisons may also be made by referring to data prepared by Lipper
Analytical Services, Inc., (a widely recognized independent service which
monitors the performance of mutual funds) Indata, Frank Russell, CDA, and the
Bank Rate Monitor (which reports average yields for money market accounts
offered by the 50 leading banks and thrift institutions in the top five standard
metropolitan statistical areas). Other similar yield data, including comparisons
to the performance of Mercantile Trust repurchase agreements, or the average
yield data for similar asset classes including but not limited to Treasury
bills, notes and bonds, may also be used for comparison purposes. Comparisons
may also be made to indices or data published in the following national
financial publications: IBC's Money Fund Report(R), MorningStar,
-85-
<PAGE> 444
CDA/Wiesenberger, Money Magazine, Forbes, Barron's, The Wall Street Journal, The
New York Times, Business Week, American Banker, Fortune, Pension's and
Investments, Institutional Investor, U.S.A. Today and publications of Ibbotson
Associates, Inc. and other publications of a local or regional nature. In
addition to performance information, general information about the Portfolios
that appears in a publication such as those mentioned above may be included in
advertisements, supplemental sales literature and in reports to Shareholders.
From time to time, the Fund may include the following types of
information in advertisements, supplemental sales literature and reports to
Shareholders: (1) discussions of general economic or financial principles (such
as the effects of inflation, the power of compounding and the benefits of
dollar-cost averaging); (2) discussions of general economic trends; (3)
presentations of statistical data to supplement such discussions; (4)
descriptions of past or anticipated portfolio holdings for one or more of the
Portfolios within the Fund; (5) descriptions of investment strategies for one or
more of such Portfolios; (6) descriptions or comparisons of various investment
products, which may or may not include the Portfolios; (7) comparisons of
investment products (including the Portfolios) with relevant market or industry
indices or other appropriate benchmarks; and (8) discussions of rankings or
ratings by recognized rating organizations.
In addition, with respect to the Short-Intermediate Municipal, Missouri
Tax-Exempt Bond and National Municipal Bond Portfolios the benefits of tax-free
investments may be communicated in advertisements or communications to
shareholders. For example, the tables below present the approximate yield that a
taxable investment must earn at various income brackets to produce after-tax
yields equivalent to those of tax-exempt investments yielding from 4.50% to
7.00%. The yields below are for illustration purposes only and are not intended
to represent current or future yields for the Portfolios, which may be higher or
lower than those shown. The tax brackets shown below will be indexed for
inflation for years after 1999. Investors should consult their tax advisor with
specific reference to their own tax situation.
-86-
<PAGE> 445
APPROXIMATE YIELD TABLE: SHORT-INTERMEDIATE MUNICIPAL AND NATIONAL
MUNICIPAL BOND PORTFOLIOS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
SINGLE RETURN
Sample Taxable Federal
Income Marginal
(1999) Tax Rate --------Tax-Exempt Yields--------------
4.50% 5.00% 5.50% 6.50% 7.00%
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FROM 15.00% 5.29% 5.88% 6.47% 7.65% 8.24%
$0 TO
$24,000
FROM 28.00% 6.25% 6.64% 7.64% 9.03% 9.72%
$24,000 TO
$58,150
FROM 31.00% 6.52% 7.25% 7.97% 9.42% 10.41%
$58,150 TO
$121,300
FROM 36.00% 7.03% 7.81% 8.59% 10.16% 10.94%
$121,300 TO
$263,750
OVER 39.60% 7.45% 8.28% 9.11% 10.76% 11.59%
$263,750
- -----------------------------------------------------------------------------------------------
</TABLE>
APPROXIMATE YIELD TABLE: SHORT-INTERMEDIATE MUNICIPAL AND
NATIONAL MUNICIPAL BOND PORTFOLIOS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
MARRIED FILING
JOINTLY
Sample Taxable Federal
Income Marginal
(1999) Tax Rate --------Tax-Exempt Yields--------------
4.50% 5.00% 5.50% 6.50% 7.00%
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FROM 15.00% 5.29% 5.88% 6.47% 7.65% 8.24%
$0 TO
$40,000
FROM 28.00% 6.25% 6.94% 7.64% 9.03% 9.72%
$40,000 TO
$96,900
FROM 31.00% 6.52% 7.25% 7.97% 9.42% 10.14%
$96,900 TO
$147,700
FROM 36.00% 7.03% 7.81% 8.59% 10.16% 10.94%
$147,700 TO
$263,750
OVER 39.60% 7.45% 8.28% 9.11% 10.76% 11.59%
$263,750
- -----------------------------------------------------------------------------------------------
</TABLE>
-87-
<PAGE> 446
APPROXIMATE YIELD TABLE: MISSOURI TAX-EXEMPT BOND PORTFOLIO
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Combined
SINGLE RETURN Federal and
Sample Taxable Federal Missouri Missouri
Income Marginal Marginal Marginal Tax
(1999) Tax Rate Tax Rate Rate ----------------Tax-Exempt Yields---------------
4.50% 5.00% 5.50% 6.00% 6.50% 7.00%
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FROM 15.00% 6.00% 20.10% 5.63% 6.26% 6.88% 7.51% 8.14% 8.76%
$0 TO
$24,000
FROM 28.00% 6.00% 32.32% 6.65% 7.39% 8.13% 8.87% 9.60% 10.34%
$24,000 TO
$58,150
FROM 31.00% 6.00% 35.14% 6.94% 7.71% 8.48% 9.25% 10.02% 10.79%
$58,150 TO
$121,300
FROM 36.00% 6.00% 39.84% 7.48% 8.31% 9.14% 9.97% 10.80% 11.64%
$121,300 TO
$263,750
OVER 39.60% 6.00% 43.22% 7.93% 8.81% 9.69% 10.57% 11.45% 12.33%
$263,750
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
APPROXIMATE YIELD TABLE: MISSOURI TAX-EXEMPT BOND PORTFOLIO
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
MARRIED FILING Combined
JOINTLY Federal and
Sample Taxable Federal Missouri Missouri
Income Marginal Marginal Marginal Tax
(1998) Tax Rate Tax Rate Rate ----------------Tax-Exempt Yields---------------
4.50% 5.00% 5.50% 6.00% 6.50% 7.00%
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FROM 15.00% 6.00% 20.10% 5.63% 6.26% 6.88% 7.51% 8.14% 8.76%
$0 TO
$40,000
FROM 28.00% 6.00% 32.32% 6.65% 7.39% 8.13% 8.87% 9.60% 10.34%
$40,000 TO
$96,900
FROM 31.00% 6.00% 35.14% 6.94% 7.71% 8.48% 9.25% 10.02% 10.79%
$96,900 TO
$147,700
FROM 36.00% 6.00% 39.84% 7.48% 8.31% 9.14% 9.97% 10.80% 11.64%
$147,700 TO
$263,750
OVER 39.60% 6.00% 43.22% 7.93% 8.81% 9.69% 10.57% 11.45% 12.33%
$263,750
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Such data are for illustrative purposes only and are not intended to indicate
past or future performance results of a Portfolio. Actual performance of the
Portfolios' may be more or less than that noted in the hypothetical
illustrations.
Performance quotations of a class of Shares in a Portfolio represent
that Portfolio's past performance and should not be considered as representative
of future results.
-88-
<PAGE> 447
Any account fees charged by an investment representative will not be included in
the calculation of the Portfolios yield and total returns. Since performance
will fluctuate, performance data for the Portfolios cannot necessarily be used
to compare an investment in the Portfolios' shares with bank deposits, savings
accounts, and similar investment alternatives which often provide an agreed or
guaranteed fixed yield for a stated period of time. Shareholders should remember
that performance is generally a function of the kind and quality of the
instruments held in a portfolio, portfolio maturity, operating expenses, and
market conditions. The current yield and performance of the Portfolios may be
obtained by calling the Fund at: INVESTOR A OR INVESTOR B SHARES -
1-800-452-2724 OR TRUST, TRUST II OR INSTITUTIONAL SHARES - 1-800-452-4015.
ADDITIONAL INFORMATION CONCERNING TAXES
IN GENERAL
The following summarizes certain additional tax considerations
generally affecting the Portfolios and their shareholders that are not described
in the Prospectuses. No attempt is made to present a detailed explanation of the
tax treatment of the Portfolios or their shareholders, and the discussion here
and in the Prospectuses are not intended as a substitute for careful tax
planning. Potential investors should consult their tax advisors with specific
reference to their own tax situations.
Each Portfolio of the Fund is treated as a separate corporate entity
under the Code. Each Portfolio intends to qualify each year as a regulated
investment company. In order to so qualify for a taxable year under the Code,
each Portfolio must satisfy, in addition to the distribution requirement
described in the Prospectuses, certain other requirements set forth below.
At least 90% of the gross income for a taxable year of each Portfolio
must be derived from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of stock, securities or foreign
currencies, and other income (including, but not limited to, gains from options,
futures, or forward contracts) derived with respect to the Portfolio's business
of investing in such stock, securities or currencies (the "Gross Income
Requirement").
Also, at the close of each quarter of its taxable year, at least 50% of
the value of a Portfolio's assets must consist of cash and cash items, U.S.
Government securities, securities of other regulated investment companies, and
securities of other issuers (as to which a Portfolio has not invested more than
5% of the value of its total assets in securities of such issuer and as to which
that Portfolio does not hold more than 10% of the outstanding voting securities
of such issuer) and no more than 25% of the value of such Portfolio's total
assets may be invested in the securities of any one issuer (other than U.S.
government securities and securities of other regulated investment companies),
or in two or more issuers which the Portfolio controls and which are engaged in
the same or similar trades or businesses.
-89-
<PAGE> 448
Qualification as a regulated investment company under the Internal
Revenue Code of 1986, as amended (the "Code"), for a taxable year requires,
among other things, that each Portfolio distribute to its shareholders an amount
equal to at least the sum of 90% of its investment company taxable income and
90% of its net exempt-interest income (if any). In general, a Portfolio's
investment company taxable income will be its taxable income, including
dividends, interest and short-term capital gains (the excess of net short-term
capital gain over net long-term capital loss), subject to certain adjustments
and excluding the excess of any net long-term capital gain over net short-term
capital loss, if any, for such taxable year.
It is the policy of each Tax-Exempt Portfolio to distribute as
dividends substantially all of its net tax-exempt interest income and any
investment company taxable income each year. Dividends derived from interest on
Municipal Obligations (known as exempt-interest dividends) may be treated by
shareholders as items of interest excludable from their gross income under
Section 103(a) of the Code, unless under the circumstances applicable to the
particular shareholder the exclusion would be disallowed. Distributions of net
income may be taxable to investors under state or local law as dividend income
even though a substantial portion of such distributions may be derived from
interest on tax-exempt obligations which, if realized directly, would be exempt
from such income tax.
-90-
<PAGE> 449
Dividends declared by a Portfolio in October, November, or December of
any year payable to shareholders of record on a specified date in such months
will be deemed to have been received by shareholders and paid by the Fund on
December 31 of such year, if such dividends are actually paid during January of
the following year.
Each Portfolio may be required in certain cases to withhold and remit
to the U.S. Treasury 31% of taxable dividends or gross sale proceeds paid to
shareholders who have failed to provide a correct tax identification number in
the manner required, who are subject to backup withholding by the Internal
Revenue Service for prior failure properly to include on their return payments
of taxable interest or dividends, or who have failed to certify to the Portfolio
that they are not subject to backup withholding when required to do so or that
they are "exempt recipients."
-91-
<PAGE> 450
A 4% nondeductible excise tax is imposed on regulated investment
companies that fail to currently distribute specified percentages of their
ordinary taxable income and capital gain net income (excess of capital gains
over capital losses). Each Portfolio intends to make sufficient distributions or
deemed distributions of its ordinary taxable income and any capital gain net
income each year to avoid liability for this excise tax.
MISSOURI TAX CONSIDERATIONS. For each year in which a Portfolio
qualifies as a regulated investment company for federal income tax purposes,
shareholders of such Portfolio who are Missouri resident individuals, trusts or
estates resident in Missouri, or corporations subject to Missouri taxing
jurisdiction (collectively, "Missouri Taxpayers") will not be subject to
Missouri income taxation on dividends distributed to them to the extent that
such dividends (a) qualify as exempt-interest dividends of a regulated
investment company under Code section 852(b)(5), (b) are the subject of the
written notice to shareholders required by 12 C.S.R. section 10-2.155(2), (c)
are attributable to interest on (1) obligations issued by the State of Missouri
or any of its political subdivisions or authorities, or (2) certain obligations
of the United States, any territory or possession of the United States, or any
authority, commission, or instrumentality of the United Sates, to the extent
exempted from Missouri income tax under federal law, and (d) are properly
reported on the Missouri income tax returns of the shareholder in the respective
Portfolio. In connection with the obligations described in paragraph (c)(2)
above, the amount of State income tax-exempt interest dividends shall be reduced
by the amount of (a) the federal corporate dividend received deduction
attributable to such dividends, and (b) interest paid or expense incurred to
produce such dividends, to the extent that the interest paid or expense incurred
exceeds five hundred dollars.
-92-
<PAGE> 451
To the extent possible, the Missouri Tax-Exempt Bond Portfolio intends
to invest in obligations which will permit distributions attributable to
interest to be excludable by Missouri Taxpayers. Despite this intention,
Missouri Taxpayers generally will be subject to Missouri income tax on other
types of distributions received from the Missouri Tax-Exempt Bond Portfolio,
including distributions of interest on obligations of other issuers and all
long-term and short-term capital gains.
Except as noted above with respect to Missouri income taxation,
distributions from a Portfolio may be taxable to shareholders under other state
and local laws imposing taxes on or measured by net income, even though such
distributions were derived, in whole or in part, from interest on obligations
which, if realized directly by the shareholder, or by a shareholder of another
type, would be nontaxable.
The foregoing discussion of Missouri law does not apply to shareholders
that are subject to the Missouri bank tax or other comparable forms of
specialized Missouri taxation.
THE TAX-EXEMPT PORTFOLIOS
The policy of each Tax-Exempt Portfolio is to pay to its shareholders
each year as exempt-interest dividends substantially all of its municipal
security interest income net of certain deductions. In order for a Tax-Exempt
Portfolio to pay exempt-interest dividends for any taxable year, at the close of
each quarter of its taxable year at least 50% of the aggregate value of the
Portfolio's assets must consist of exempt-interest obligations. An investment in
a Tax-Exempt Portfolio is not intended to constitute a balanced investment
program. Shares of a Tax-Exempt Portfolio would not be suitable for retirement
plans qualified under Section 401 of the Code, H.R. 10 plans and individual
retirement accounts because such plans and accounts are generally tax-exempt
and, therefore, not only would the shareholder not gain any additional benefit
from the Tax-Exempt Portfolios dividends being tax-exempt, but such dividends
would be ultimately taxable to the beneficiaries when distributed.
Shareholders who might be treated as a "substantial user" or a "related
person" to such user with respect to facilities financed through any of the
tax-exempt obligations held by a Tax-Exempt Portfolio, are advised to consult
their tax advisors with respect to whether exempt-interest dividends retain the
exclusion under Section 103(a). A "substantial user" is defined under U.S.
Treasury Regulations to include a non-exempt person (i) who regularly uses a
part of such facilities in his trade or business and (ii)(A) whose gross
revenues derived with respect to the facilities financed by the issuance of
bonds are more than 5% of the total revenues derived by all users of such
facilities, (B) who occupies more than 5% of the usable area of such facilities
or (C) for whom such facilities or a part thereof were specifically constructed,
reconstructed or
-93-
<PAGE> 452
acquired. "Related persons" include certain related natural persons, affiliated
corporations, partnerships and its partners, and S corporations and their
shareholders.
STATE AND LOCAL TAXES
Shareholders should note that dividends paid by a Portfolio may be
taxable to investors under state or local law as dividend income even though all
or a portion of such dividends may be derived from interest on obligations that,
if realized directly, would be exempt from such income taxes.
The Treasury Money Market Portfolio is structured to provide investors,
to the extent permissible by federal and state law, with income that is exempt
or excluded from taxation at the state and local level. Shareholders should note
that many, but not all, states permit all or a portion of a regulated investment
company's dividends which are derived from interest on U.S. Treasury obligations
(and obligations of certain U.S. Government agencies)("Treasury Obligations") to
be exempt or excluded from state and local taxation. In addition, only certain
states allow dividends of a regulated investment company that are derived from
dividends of other regulated investment companies investing directly in Treasury
Obligations to be exempt or excluded from state and local taxation. Some states
reduce a shareholder's allowable deductions by interest on debt incurred to
carry obligations producing state tax-exempt interest and by other expenses
related to such obligations. Income earned by the Portfolio from repurchase
agreements generally is not exempt from state or local income tax.
TAXATION OF CERTAIN FINANCIAL INSTRUMENTS
Tax provisions regarding financial instruments, foreign currencies and
foreign corporations may from time to time cause a Portfolio to recognize income
in excess of cash received in a transaction. Moreover, a Portfolio's instrument
alternatives will to some extent be considered by tax requirements applicable to
regulated investment companies.
-94-
<PAGE> 453
CONCLUSIONS
The foregoing discussion is based on federal tax laws and regulations
which are in effect on the date of this Statement of Additional Information;
such laws and regulations may be changed by legislative or administrative
action. Shareholders are advised to consult their tax advisors concerning the
application of federal, state and local taxes and with specific reference to
their own tax situation.
-96-
<PAGE> 454
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The business and affairs of the Portfolios are managed under the
direction of Fund's Board of Directors in accordance with the laws of Maryland
and the Fund's Articles of Incorporation. The directors and executive officers
of the Fund, their addresses, ages, principal occupations during the past five
years, and other affiliations are as follows:
<TABLE>
<CAPTION>
Principal Occupations
Position with During Past 5 years
Name and Address the Fund and other affiliations
- ---------------- -------- ----------------------
<S> <C> <C>
Jerry V. Woodham* Chairman of Treasurer, St. Louis
St. Louis University The Board; University, August 1996
3500 Lindell President and to present; Treasurer,
Fitzgerald Hall Director Washington University,
St. Louis, MO 63131 1981 to 1995
Age: 55
Robert M. Cox, Jr. Director Senior Vice President and
Emerson Electric Co. Advisory Director, Emerson
8000 W. Florissant Ave. Electric Co. since November
P.O. Box 4100 1990.
St. Louis, MO 63136-8506
Age: 53
Joseph J. Hunt Director General Vice-President
Iron Workers District International Association of
Council Bridge, Structural and Orna
3544 Watson Road mental Iron Workers (Interna-
St. Louis, MO 63139 tional Labor Union), January
Age: 56 1994 to present.
James C. Jacobsen Director Director, Kellwood Company,
Kellwood Company (manufacturer of wearing
600 Kellwood Parkway apparel and camping softgoods)
Chesterfield, MO 63017 since 1975; Vice Chairman,
Age: 53 Kellwood Company since May 1989.
</TABLE>
- ------------------------
* Mr. Woodham is an "interested person" of the Fund as defined in the 1940 Act.
-97-
<PAGE> 455
<TABLE>
<CAPTION>
Principal Occupations
Position with During Past 5 years
Name and Address the Fund And other affiliations
- ---------------- ---------------- ----------------------
<S> <C> <C>
Donald E. Brandt Director Senior Vice President, Finance and
Union Electric Company Corporate Services, Union Electric
P.O. Box 66149 Company (electric utility company);
St. Louis, MO 63166 Director, Huntco, Inc. (intermediate
Age: 44 steel processors).
Patrick J. Moore Director Vice President & Chief Financial
Jefferson Smurfit Officer since 1996 and Vice
Corporation President & General Manager,
8182 Maryland Avenue 1994-1996, of Industrial Packaging
St. Louis, MO 63105 Division and Corporate Vice
Age: 44 President & Treasurer, 1993-1994,
Jefferson Smurfit Corporation (paper,
paperboard and packaging).
Ronald D. Winney* Director and Treasurer Treasurer, Ralston Purina Company
Ralston Purina Company Since 1985.
Checkerboard Square
St. Louis, MO 63164
Age: 56
W. Bruce McConnel, III* Secretary Partner of the law firm of Drinker
Suite 1100 Biddle & Reath LLP, Philadelphia,
1345 Chestnut Street Pennsylvania Since 1977.
Philadelphia, PA 19107
Age: 55
Walter B. Grimm* Vice President and Assistant Employee of BISYS Fund Services.
3435 Stelzer Road Treasurer
Columbus, OH 43219
Age: 53
David Bunstine Assistant Secretary Employee of BISYS Fund Services.
3435 Stelzer Road
Columbus, OH 43219
Age: 33
</TABLE>
- ------------------------
* Messrs. Grimm, Winney, McConnel and Bunstine are "interested persons" of the
Fund as defined in the 1940 Act.
Each director receives an annual fee of $10,000 plus reimbursement of
expenses incurred as a director. The Chairman of the Board and President of the
Fund receives an additional annual fee of $5,000 for his services in these
capacities. For the fiscal year ended November 30, 1998, the Fund paid or
accrued for the account of its directors as a group, for services in all
capacities, a total of $________. Drinker Biddle & Reath LLP, of which Mr.
McConnel is a partner, receives legal fees as counsel to the Fund. As of the
date of this
-98-
<PAGE> 456
Statement of Additional Information, the directors and officers of the Fund, as
a group, owned less than 1% of the outstanding shares of the Fund.
The following chart provides certain information about the fees
received by the Fund's directors for their services as members of the Board of
Directors and committees thereof for the fiscal year ended November 30, 1998:
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT TOTAL
AGGREGATE BENEFITS ACCRUED COMPENSATION
COMPENSATION AS PART OF FUND FROM THE FUND AND
NAME OF DIRECTOR FROM THE FUND EXPENSE FUND COMPLEX*
---------------- ------------- ------- -------------
<S> <C> <C> <C>
Jerry V. Woodham $_______ N/A $_______
Donald E. Brandt** $_______ N/A $_______
Robert M. Cox, Jr. $_______ N/A $_______
Joseph J. Hunt $_______ N/A $_______
James C. Jacobsen $_______ N/A $_______
Patrick J. Moore** $_______ N/A $_______
Ronald D. Winney $_______ N/A $_______
</TABLE>
* The "Fund Complex" consists solely of the Fund.
** Elected a director of the Fund on January 30, 1998.
INVESTMENT ADVISORY AND SUB-ADVISORY AGREEMENTS
Mississippi Valley Advisors, Inc. ("MVA") serves as investment adviser
to each Portfolio. MVA is an indirect wholly-owned non-banking subsidiary of
Mercantile Bancorporation Inc., a bank holding company ("Mercantile").
For the services provided and expenses assumed pursuant to its
investment advisory agreement with the Fund, MVA is entitled to receive fees,
computed daily and payable monthly, with respect to the Treasury Money Market
and Money Market Portfolios, at the annual rates of .40% of the first $1.5
billion of each such Portfolio's average daily net assets, .35% of the next $1.0
billion of net assets and .25% of net assets in excess of $2.5 billion, and with
respect to the Tax-Exempt Money Market, U.S. Government Securities, Intermediate
Corporate Bond, Bond Index, Government & Corporate Bond, Short-Intermediate
Municipal, Missouri Tax-Exempt Bond, National Municipal Bond, Equity Income,
Equity Index, Growth & Income Equity, Growth Equity, Small Cap Equity, Small Cap
Equity Index, International Equity and Balanced Portfolios, at the annual rates
of .40%, .45%, .55%, .30%, .45%, .55%, .45%, .55%, .75%, .30%, .55%, .75%, .75%,
.40%, 1.00% and .75%, respectively, of the average daily net assets of each
Portfolio, respectively. For the fiscal year or period ended November 30, 1998,
MVA received advisory fees (net of waivers) at the effective annual rates of
.__%, .__%, .__%,
-99-
<PAGE> 457
.__%, .__%, .__%, .__%, .__%, .__%, .__%, .__%, .__%, .__%, .__%, .__%, .__%,
.__% and .__% of the respective average daily net assets of the Treasury Money
Market, Money Market, Tax-Exempt Money Market, U.S. Government Securities,
Intermediate Corporate Bond, Bond Index, Government & Corporate Bond,
Short-Intermediate Municipal, Missouri Tax-Exempt Bond, National Municipal Bond,
Equity Income, Equity Index, Growth & Income Equity, Growth Equity, Small Cap
Equity, Small Cap Equity Index, International Equity and Balanced Portfolios.
MVA may from time to time voluntarily reduce all or a portion of its
advisory fee to increase the net income of one or more Portfolios available for
distributions as dividends. The voluntary fee reduction will cause the return of
any such Portfolio to be higher than it would otherwise be in the absence of
such reduction.
In addition, Clay Finlay serves as sub-adviser to the International
Equity Portfolio. For the services provided and expenses assumed pursuant to its
sub-advisory agreement with MVA, Clay Finlay receives from MVA a fee, computed
daily and payable monthly, at the annual rate of .75% of the first $50 million
of the International Equity Portfolio's average daily net assets, plus .50% of
the next $50 million of average daily net assets, plus .25% of average daily net
assets in excess of $100 million. For the fiscal year ended November 30, 1998,
Clay Finlay received sub-advisory fees at the effective annual rate of ____% of
the International Equity Portfolio's average daily net assets. Clay Finlay bears
all expenses incurred by it in connection with its services under the
sub-advisory agreement.
Pursuant to the advisory and sub-advisory agreements, MVA and Clay
Finlay have agreed to provide investment advisory and sub-investment advisory
services, respectively, as described in the Portfolios' Prospectuses. MVA and
Clay Finlay have agreed to pay all expenses incurred by them in connection with
their activities under their respective agreements other than the cost of
securities, including brokerage commissions, if any, purchased for the
Portfolios.
The investment advisory agreement (and sub-advisory agreement for the
International Equity Portfolio) provide that MVA and Clay Finlay, respectively,
shall not be liable for any error of judgment or mistake of law or for any loss
suffered in connection with the performance of their respective agreements,
except a loss resulting from a breach of fiduciary duty with respect to the
receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence in the performance of their duties or
from reckless disregard by them of their duties and obligations thereunder.
-100-
<PAGE> 458
For the fiscal year or period ended November 30, 1998, MVA was paid
advisory fees, after waivers, as follows:
<TABLE>
<CAPTION>
FEES PAID
PORTFOLIOS (AFTER WAIVERS) WAIVERS
---------- --------------- -------
<S> <C> <C>
Treasury Money Market Portfolio $_____ $_____
Money Market Portfolio $_____ $_____
Tax-Exempt Money Market Portfolio $_____ $_____
U.S. Government Securities Portfolio $_____ $_____
Intermediate Corporate Bond Portfolio $_____ $_____
Bond Index Portfolio $_____ $_____
Government & Corporate Bond Portfolio $_____ $_____
Short-Intermediate Municipal Portfolio $_____ $_____
Missouri Tax-Exempt Bond Portfolio $_____ $_____
National Municipal Bond Portfolio $_____ $_____
Balanced Portfolio $_____ $_____
Equity Income Portfolio $_____ $_____
Equity Index Portfolio $_____ $_____
Growth & Income Equity Portfolio $_____ $_____
Growth Equity Portfolio $_____ $_____
Small Cap Equity Portfolio $_____ $_____
International Equity Portfolio $_____ $_____
</TABLE>
-101-
<PAGE> 459
For the fiscal year or period ended November 30, 1997, MVA (and with
respect to the Growth Equity Portfolio, the predecessor adviser) was paid
advisory fees, after waivers, as follows:
<TABLE>
<CAPTION>
FEES PAID
PORTFOLIOS (AFTER WAIVERS) WAIVERS
---------- --------------- -------
<S> <C> <C>
Treasury Money Market Portfolio $544,658 $132,471
Money Market Portfolio $3,205,706 $734,416
Tax-Exempt Money Market Portfolio $518,456 $74,067
U.S. Government Securities Portfolio $357,824 $0
Intermediate Corporate Bond Portfolio(1) $0 $175,432
Bond Index Portfolio(1) $0 $312,722
Government & Corporate Bond Portfolio $743,332 $0
Short-Intermediate Municipal Portfolio $0 $160,035
Missouri Tax-Exempt Bond Portfolio $414,195 $0
National Municipal Bond Portfolio $0 $1,812,782
Balanced Portfolio $885,481 $0
Equity Income Portfolio(2) $0 $681,294
Equity Index Portfolio(3) $0 $51,115
Growth & Income Equity Portfolio $2,392,991 $0
Growth Equity Portfolio(4) $86,057 $0
Small Cap Equity Portfolio $1,783,322 $0
International Equity Portfolio $590,822 $50,950
</TABLE>
- ----------------------
1. For the period from commencement of operations (February 10, 1997) through
November 30, 1997.
2. For the period from commencement of operations (March 7, 1997) through
November 30, 1997.
3. For the period from commencement of operations (May 1, 1997) through
November 30, 1997.
4. For the period October 1, 1997 through November 30, 1997.
-102-
<PAGE> 460
For the fiscal year or period ended November 30, 1996, MVA was paid
advisory fees, after waivers, as follows:
<TABLE>
<CAPTION>
FEES PAID
PORTFOLIOS (AFTER WAIVERS) WAIVERS
---------- --------------- -------
<S> <C> <C>
Treasury Money Market Portfolio $882,177 $179,300
Money Market Portfolio $2,787,213 $628,005
Tax-Exempt Money Market Portfolio $334,446 $47,714
U.S. Government Securities Portfolio $280,649 $0
Government & Corporate Bond Portfolio $674,595 $0
Short-Intermediate Municipal Portfolio $0 $147,782
Missouri Tax-Exempt Bond Portfolio $327,773 $0
The National Municipal Bond Portfolio(1) $0 $70,262
Balanced Portfolio $950,916 $0
Growth & Income Equity Portfolio $2,231,228 $0
Small Cap Equity Portfolio $1,556,817 $62
International Equity Portfolio $393,668 $140,840
</TABLE>
- ----------------------
1. For period from commencement of operations (November 18, 1996) through
November 30, 1996.
For the fiscal year ended September 30, 1997, MVA (and the predecessor
adviser, Mark Twain Bank) earned advisory fees of $468,080 with respect to the
Predecessor Growth Equity Portfolio, of which $0 was waived. For the fiscal year
ended September 30, 1996, Mark Twain Bank earned advisory fees of $368,254 with
respect to the Predecessor Growth Equity Portfolio, of which $13,853 was waived.
ADMINISTRATOR
BISYS Fund Services Ohio, Inc., located at 3435 Stelzer Road, Columbus,
Ohio 43219, acts as the Portfolios' administrator (the "Administrator").
The Administrator generally assists in all aspects of each Portfolio's
administration and operation and also monitors and performs other services
pertaining to the Fund's arrangements under the Administrative Services Plan
described below. For its services, the Administrator is entitled to receive a
fee, computed daily and payable monthly, at the annual rate of .20% (.10% for
the Tax-Exempt Money Market Portfolio) of each Portfolio's average daily net
assets. For the fiscal year or period ended November 30, 1998, the Administrator
received administration fees (net of waivers) at the effective annual rates of
.__%, .__%, .__%,
-103-
<PAGE> 461
.__%, .__%, and .__% of the average daily net assets of the Treasury Money
Market, Money market, Intermediate Corporate Bond, National Municipal Bond,
Equity Income and International Equity Portfolios, respectively, and .10% of the
average daily net assets of each of the other Portfolios. From time to time, the
Administrator may voluntarily waive all or a portion of the administration fees
otherwise payable by a Portfolio in order to increase the net income available
for distribution to shareholders.
The Administrator has agreed to maintain office facilities for the
Portfolios, furnish the Portfolios with statistical and research data, clerical,
accounting, and certain bookkeeping services, stationery and office supplies,
and certain other services required by the Portfolios, and to compute the net
asset value and net income of the Portfolios. The Administrator prepares annual
and semi-annual reports to the SEC on Form N-SAR, compiles data for and prepares
federal and state tax returns and required tax filings other than those required
to be made by the Fund's custodian and transfer agent, prepares the Fund's
compliance filings with state securities commissions, maintains the registration
or qualification of shares for sale under the securities laws of any state in
which the Fund's shares shall be registered, assists in the preparation of
annual and semi-annual reports to shareholders of record, participates in the
periodic updating of the Fund's Registration Statement, prepares and assists in
the timely filing of notices to the SEC required pursuant to Rule 24f-2 under
the 1940 Act, arranges for and bears the cost of processing share purchase,
exchange and redemption orders, keeps and maintains the Portfolios' financial
accounts and records including calculation of daily expense accruals, monitors
compliance procedures for each of the classes of the Fund's Portfolios with each
Portfolio's investment objective, policies and limitations, tax matters, and
applicable laws and regulations, and generally assists in all aspects of the
Portfolios' operations. The Administrator bears all expenses in connection with
the performance of its services, except that a Portfolio bears any expenses
incurred in connection with any use of a pricing service to value portfolio
securities.
From time to time, the Administrator may voluntarily waive a portion or
all of its fees otherwise payable to it with respect to the Fund's Portfolios in
order to increase the net income available for distribution to shareholders.
For the fiscal year or period ended November 30, 1998, the
Administrator was paid administration fees, after waivers, as follows:
<TABLE>
<CAPTION>
FEES PAID
PORTFOLIOS (AFTER WAIVERS) WAIVERS
---------- --------------- -------
<S> <C> <C>
Treasury Money Market Portfolio $_____ $_____
Money Market Portfolio $_____ $_____
Tax-Exempt Money Market Portfolio $_____ $_____
U.S. Government Securities Portfolio $_____ $_____
Intermediate Corporate Bond Portfolio $_____ $_____
Bond Index Portfolio $_____ $_____
</TABLE>
-104-
<PAGE> 462
<TABLE>
<CAPTION>
FEES PAID
PORTFOLIOS (AFTER WAIVERS) WAIVERS
---------- --------------- -------
<S> <C> <C>
Government & Corporate Bond Portfolio $_____ $_____
Short-Intermediate Municipal Portfolio $_____ $_____
Missouri Tax-Exempt Bond Portfolio $_____ $_____
National Municipal Bond Portfolio $_____ $_____
Balanced Portfolio $_____ $_____
Equity Income Portfolio $_____ $_____
Equity Index Portfolio $_____ $_____
Growth & Income Equity Portfolio $_____ $_____
Growth Equity Portfolio $_____ $_____
Small Cap Equity Portfolio $_____ $_____
International Equity Portfolio $_____ $_____
</TABLE>
-105-
<PAGE> 463
For the fiscal year or period ended November 30, 1997, the
Administrator (and with respect to the Growth Equity Portfolio, the predecessor
administrator) was paid administration fees, after waivers, as follows:
<TABLE>
<CAPTION>
FEES PAID
PORTFOLIOS (AFTER WAIVERS) WAIVERS
---------- --------------- -------
<S> <C> <C>
Treasury Money Market Portfolio $217,115 $121,453
Money Market Portfolio $1,226,946 $743,132
Tax-Exempt Money Market Portfolio $148,129 $0
U.S. Government Securities Portfolio $79,519 $79,515
Intermediate Corporate Bond Portfolio(1) $17,544 $46,250
Bond Index Portfolio(1) $104,243 $104,239
Government & Corporate Bond Portfolio $165,196 $165,189
Short-Intermediate Municipal Portfolio $29,098 $29,097
Missouri Tax-Exempt Bond Portfolio $92,046 $92,042
National Municipal Bond Portfolio(1) $181,277 $478,060
Balanced Portfolio $_____ $_____
Equity Income Portfolio(2) $49,963 $131,717
Equity Index Portfolio(3) $17,039 $17,038
Growth & Income Equity Portfolio $435,186 $435,169
Growth Equity Portfolio(4) $16,610 $1,287
Small Cap Equity Portfolio $237,783 $237,775
International Equity Portfolio $75,322 $54,941
</TABLE>
- ----------------------
1. For the period from commencement of operations (February 10, 1997) through
November 30, 1997.
2. For the period from commencement of operations (March 7, 1997) through
November 30, 1997.
3. For the period from commencement of operations (May 1, 1997) through
November 30, 1997.
4. For the period October 1, 1997 through November 30, 1997.
-106-
<PAGE> 464
For the fiscal year or period ended November 30, 1996, the Administrator was
paid administration fees, after waivers, as follows:
<TABLE>
<CAPTION>
FEES PAID
PORTFOLIOS (AFTER WAIVERS) WAIVERS
---------- --------------- -------
<S> <C> <C>
Treasury Money Market Portfolio $304,595 $196,144
Money Market Portfolio $1,055,556 $652,053
Tax-Exempt Money Market Portfolio $95,540 $0
U.S. Government Securities Portfolio $62,335 $62,398
Government & Corporate Bond Portfolio $149,866 $149,916
Short-Intermediate Municipal Portfolio $26,854 $26,878
Missouri Tax-Exempt Bond Portfolio $72,831 $72,846
National Municipal Bond Portfolio(1) $7,016 $18,530
Balanced Portfolio $126,789 $126,784
Growth & Income Equity Portfolio $405,497 $405,859
Small Cap Equity Portfolio $207,502 $207,666
International Equity Portfolio $80,098 $26,804
</TABLE>
- ----------------------
1. For period from commencement of operations (November 18, 1996) through
November 30, 1996.
For the fiscal years ended September 30, 1997 and 1996, Federated
Administrative Services, the former administrator of the Predecessor Growth
Equity Portfolio, earned administrative fees of $90,965 and $71,420,
respectively.
The Small Cap Equity Index Portfolio had not commenced operations as of
November 30, 1998.
CUSTODIAN, SUB-CUSTODIAN AND TRANSFER AGENT
Mercantile Trust Company National Association ("Mercantile
Trust"), as assignee of Mercantile Bank National Association, an affiliate of
the Fund and a wholly-owned subsidiary of Mercantile Bancorporation Inc., with
principal offices located at One Mercantile Center, 8th and Locust Streets, St.
Louis, Missouri 63101, serves as Custodian of each Portfolio's assets pursuant
to a Custodian Agreement. In addition, Bankers Trust Company of New York, with
principal offices at 16 Wall Street, New York, New York 10005, serves as the
Sub-Custodian for the International Equity Portfolio. BISYS Fund Services Ohio,
Inc. serves as the Fund's transfer agent and dividend disbursing agent. Its
address is 3435 Stelzer Road, Columbus, Ohio 43219.
Pursuant to an agreement with BISYS Fund Services Ohio, Inc. and in
connection with the Institutional Shares offered to its customers, a financial
institution (which may include
-107-
<PAGE> 465
Mercantile or its affiliated or correspondent banks) serves as sub-transfer
agent with respect to the underlying beneficial owners of Institutional Shares.
For the account maintenance services provided, a sub-transfer agent is entitled
to receive an annual fee of $30 with respect to each beneficial owner's holdings
in Institutional Shares (irrespective of the number of Portfolios in which such
Institutional Shares are held).
Under a Custodian Agreement between the Fund and Mercantile Trust
Mercantile Trust has agreed to (i) maintain a separate account or accounts in
the name of each Portfolio; (ii) receive and disburse money on behalf of each
Portfolio; (iii) collect and receive all income and other payments and
distributions on account of each Portfolio's portfolio securities; (iv) respond
to correspondence relating to its duties; and (v) make periodic reports to the
Fund's Board of Directors concerning the operations of each Portfolio.
Mercantile Trust may, at its own expense, open and maintain a custody account or
accounts on behalf of each Portfolio with other banks or trust companies,
provided that Mercantile Trust shall remain liable for the performance of all of
its custodial duties under the Custodian Agreement, notwithstanding any
delegation. Mercantile Trust is authorized to select one or more banks or trust
companies to serve as sub-custodian on behalf of the Portfolios, provided that
Mercantile Trust shall remain responsible for the performance of all of its
duties under the Custodian Agreement and shall hold the Fund harmless from the
acts and omissions of any bank or trust company servicing as sub-custodian.
Pursuant to the terms of the Assignment and Delegation Agreement, Mercantile
Trust National Association remains liable for the acts and omissions of
Mercantile Trust under the Custodian Agreement.
In the opinion of the staff of the SEC, since the Custodian is an
affiliate of the investment adviser, the Fund and the Custodian are subject to
the requirements of Rule 17f-2 under the 1940 Act. Accordingly the Fund and the
Custodian intend to comply with the requirements of such rule.
Pursuant to the Custodian Agreement with the Fund, each Portfolio pays
Mercantile Trust an annual fee. For each Money Market Portfolio this fee is paid
monthly and calculated daily at the rate of $.125 for each $1,000 of each such
Portfolio's average daily net assets plus, in the case of the Tax-Exempt Money
Market Portfolio only, $50 for each interest collection or claim item. For the
Equity and Bond Portfolios (except the International Equity Portfolio), this
fee, which is paid monthly, is calculated as the greater of $6,000 or $.30. For
the International Equity Portfolio, this fee, which is calculated daily and paid
monthly, is .17% of the Portfolio's average daily net assets for the first $50
million; .155% of the Portfolio's average daily net assets for the next $50
million; .13% of the Portfolio's average daily net assets for the next $150
million; and .105% of the Portfolio's average daily net assets thereafter. Each
Equity and Bond Portfolio also pays $15.00 for each purchase, sale or delivery
of a security upon its maturity date, $50.00 for each interest collection or
claim item, $20.00 for each transaction involving GNMA, tax-free or other
non-depository registered items with monthly dividends or interest, $30.00 for
each purchase, sale or expiration of an option contract, $50.00 for each
purchase, sale or expiration of a futures contract, and $15.00 for each
repurchase trade with an institution other than Mercantile Trust. In addition,
each Portfolio pays Mercantile Trust's incremental costs in providing foreign
custody services for any foreign-denominated and foreign-
-108-
<PAGE> 466
held securities and reimburses Mercantile Trust for out-of-pocket expenses
related to such services.
BISYS Fund Services Ohio, Inc. also serves as the Fund's transfer agent
and dividend disbursing agent (in those capacities, the "Transfer Agent")
pursuant to a Transfer Agency Agreement. Under the Agreement, the Transfer Agent
has agreed to (i) process shareholder purchase and redemption orders; (ii)
maintain shareholder records for each of the Portfolios' shareholders; (iii)
process transfers and exchanges of shares of the Portfolios; (iv) issue periodic
statements for each of the Portfolios' shareholders; (v) process dividend
payments and reinvestments; (vi) assist in the mailing of shareholder reports
and proxy solicitation materials; and (vii) make periodic reports to the Fund's
Board of Directors concerning the operations of each Portfolio.
DISTRIBUTOR
BISYS Fund Services Limited Services (the "Distributor"), an affiliate
of the Administrator, serves as the Distributor of the Portfolios' shares
pursuant to a Distribution Agreement. Under the Distribution Agreement, the
Distributor, as agent, sells shares of the Portfolios on a continuous basis. The
Distributor has agreed to use appropriate efforts to solicit orders for the sale
of shares. The Distributor also monitors the Fund's arrangements under the
Distribution and Services Plans described below. The Distributor is a registered
broker-dealer with principal offices at 3435 Stelzer Road, Columbus, Ohio 43219.
The Distributor may, at its expense, provide compensation to dealers in
connection with sales of Shares of any of the Portfolios. Such compensation may
include financial assistance to dealers in connection with conferences, sales or
training programs for their employees, seminars for the public, advertising
campaigns regarding one or more of the Portfolios, and/or other dealer-sponsored
special events. In some instances, this compensation will be made available only
to certain dealers whose representatives have sold a significant amount of such
Shares. Compensation will include payment for travel expenses, including
lodging, incurred in connection with trips taken by invited registered
representatives and members of their families to locations within or outside of
the United States for meetings or seminars of a business nature. Compensation
will also include the following types of non-cash compensation offered through
sales contests: (1) business and vacation trips, including the provision of
travel arrangements and lodging at resorts, (2) tickets for entertainment events
(such as concerts, cruises and sporting events) and (3) merchandise (such as
clothing, trophies, clocks and pens). Dealers may not use sales of a Portfolio's
Shares to qualify for this compensation to the extent such may be prohibited by
the laws of any state or any self-regulatory agency, such as the National
Association of Securities Dealers, Inc. None of the aforementioned compensation
is paid for by the Portfolios or their shareholders.
With respect to each Portfolio's Trust Shares, Trust II Shares and
Institutional Shares, no compensation is payable by the Fund to the Distributor
for distribution services. The Distributor is entitled to the payment of a
front-end sales charge on the sale of Investor A Shares of the Equity and Bond
Portfolios as described in the Prospectus for such shares. For the fiscal years
ended November 30, 1998, 1997 and 1996, the Distributor received front-end sales
charges
-109-
<PAGE> 467
in connection with Investor A share purchases as follows: U.S. Government
Securities Portfolio -- $_______, $2,052 and $823, respectively; Government &
Corporate Bond Portfolio -- $_______, $9,635 and $4,655, respectively; Missouri
Tax-Exempt Bond Portfolio -- $_______, $46,690 and $23,210, respectively; Growth
& Income Equity Portfolio -- $_______, $167,110 and $74,288, respectively; Small
Cap Equity Portfolio -- $_______, $33,777 and $18,763, respectively; and
Balanced Portfolio -- $_______, $20,227 and $2,705, respectively. For the fiscal
years ended November 30, 1998, 1997 and 1996, the Distributor received front-end
sales charges in connection with Investor A share purchases of the International
Equity Portfolio of $_______, $18,258 and $11,417. For the fiscal years ended
November 30, 1998, 1997 and 1996, the Distributor received front-end sales
charges in connection with Investor A Share purchases of the Short-Intermediate
Municipal Portfolio of $_______, $0 and $0. For the fiscal years ended November
30, 1998 and 1997 and the period November 18, 1996 (commencement of operations)
through November 30, 1996, the Distributor received front-end sales charges in
connection with Investor A Share purchases of the National Municipal Bond
Portfolio of $_______, $4,340 and $0, respectively. For the fiscal year ended
November 30, 1998 and for the period February 10, 1997 (commencement of
operations) through November 30, 1997, the Distributor received front-end sales
charges in connection with Investor A Shares of the Bond Index Portfolio of
$____ and $13, respectively. For the fiscal year ended November 30, 1998 and for
the period February 10, 1997 (commencement of operations) through November 30,
1997, the Distributor received front-end sales charges in connection with
Investor A Shares of the Intermediate Corporate Bond Portfolio of $_______ and
$1,114, respectively. For the fiscal year ended November 30, 1998 and for the
period March 7, 1997 (commencement of operations) through November 30, 1997, the
Distributor received front-end sales charges in connection with Investor A
Shares of the Equity Income Portfolio of $_______ and $829. For the fiscal year
ended November 30, 1998 and for the period May 1, 1997 (commencement of
operations) through November 30, 1997, the Distributor received front-end sales
charges in connection with Investor A Shares of the Equity Index Portfolio of
$_______ and $3,003. For the fiscal year ended November 30, 1998 and for the
period November 21, 1997 (date Predecessor Growth Equity Portfolio reorganized
into the Growth Equity Portfolio) through November 30, 1997, the Distributor
received front-end sales charges in connection with Investor A Shares of the
Growth Equity Portfolio of $_______ and $0. Of these amounts, the Distributor
retained $_______, $0 and $126, respectively, and MVA and affiliates retained
$_______, $310 and $385, respectively, with respect to the U.S. Government
Securities Portfolio; the Distributor retained $_______ and $0, and MVA and
affiliates retained $_______ and $0 with respect to the Intermediate Corporate
Bond Portfolio; the Distributor retained $_______ and $0, and MVA and affiliates
retained $_______ and $0 with respect to the Bond Index Portfolio; the
Distributor retained $_______, $0 and $0, respectively, and MVA and affiliates
retained $_______, $6,721, and $3,535, respectively, with respect to the
Government & Corporate Bond Portfolio; the Distributor retained $_______, $23
and $416, respectively, and MVA and affiliates retained $_______, $4,700 and
$5,850, respectively, with respect to the Missouri Tax-Exempt Bond Portfolio;
the Distributor retained $_______ and $45, and MVA and affiliates retained
$_______ and $466 with respect to the Equity Income Portfolio; the Distributor
retained $_______ and $0, and MVA and affiliates retained $_______ and $25 with
respect to the Equity Index Portfolio; the Distributor retained $_______,$2,387,
and $1,850 respectively, and MVA and affiliates retained $_______, $56,664 and
$27,769, respectively, with respect to the Growth & Income Equity Portfolio; the
Distributor retained $_______ and $0, and MVA and affiliates retained $_______
and $0 with respect to the
-110-
<PAGE> 468
Growth Equity Portfolio; the Distributor retained $_______, $184 and $192,
respectively, and MVA and affiliates retained $_______, $9,915 and $10,277,
respectively, with respect to the Small Cap Equity Portfolio; the Distributor
retained $_______, $67 and $92, respectively, and MVA and affiliates retained
$_______, $9,419 and $1,311, respectively, with respect to the Balanced
Portfolio; the Distributor retained $_______, $0 and $1, respectively, and MVA
and affiliates retained $_______, $7,433 and $8,226, respectively, with respect
to the International Equity Portfolio; the Distributor retained $_______, $0 and
$0, respectively, and MVA and affiliates retained $_______, $0 and $0,
respectively, with respect to the Short-Intermediate Municipal Portfolio; and
the Distributor retained $_______, $0 and $0 and MVA and affiliates retained
$_______, $0 and $0 with respect to the National Municipal Bond Portfolio.
The Distributor is also entitled to the payment of contingent deferred
sales charges upon the redemption of Investor B Shares of the Portfolios. For
the fiscal years ended November 30, 1998, 1997 and 1996, the Distributor
received contingent deferred sales charges in connection with Investor B share
redemptions as follows: Money Market Portfolio -- $_______, $0 and $0; U.S.
Government Securities Portfolio -- $_______, $8,968 and $3,640; Government and
Corporate Bond Portfolio -- $_______, $4,075 and $4,258; Missouri Tax-Exempt
Bond Portfolio -- $_______, $61,906 and $1,763; Growth and Income Equity
Portfolio -- $_______, $121,999 and $30,345; Small Cap Equity Portfolio --
$_______, $12,870 and $7,267; International Equity Portfolio -- $_______, $8,191
and$5,763; and Balanced Portfolio -- $_______, $9,311 and $1,216. For the fiscal
years ended November 30, 1998 and 1997 and the period November 18, 1996
(commencement of operations) through November 30, 1996, the Distributor received
$_______, $34,256 and $0 in contingent deferred sales charges in connection with
Investor B Share redemptions of the National Municipal Bond Portfolio. For the
fiscal year ended November 30, 1998 and for the period March 7, 1997
(commencement of operations) through November 30, 1997, the Distributor received
$_______ and $10,382 in contingent deferred sales charges in connection with
Investor B Share redemptions of the Equity Income Portfolio. For the fiscal year
ended November 30, 1998 and for the period November 21, 1997 (date Predecessor
Growth Equity Portfolio reorganized into the Growth Equity Portfolio) through
November 30, 1997, the Distributor received $_______ and $0 in contingent
deferred sales charges in connection with Investor B Share redemptions of the
Growth Equity Portfolio. All such amounts were assigned to MVA pursuant to the
financing arrangement between the Distributor and MVA described below under "The
Plans -- Distribution and Services Plans."
The following table shows all sales charges, commissions and other
compensation received by the Distributor directly or indirectly from the Fund's
Portfolios during the fiscal year ended November 30, 1998:
-111-
<PAGE> 469
<TABLE>
<CAPTION>
Brokerage
Commissions in
Net Underwriting Compensation on Connection with
Discounts and Redemption and Portfolio Other
Portfolio(4) Commissions(1) Repurchase(2) Transactions Compensation(3)
------------ -------------- ------------- ------------ ---------------
<S> <C> <C> <C> <C>
Treasury Money Market $____ $____ $____ $____
Money Market $____ $____ $____ $____
Tax-Exempt Money Market $____ $____ $____ $____
U.S. Government Securities $____ $____ $____ $____
Intermediate Corporate Bond $____ $____ $____ $____
Bond Index $____ $____ $____ $____
Government & Corporate Bond $____ $____ $____ $____
Short-Intermediate Municipal $____ $____ $____ $____
Missouri Tax-Exempt Bond $____ $____ $____ $____
National Municipal Bond $____ $____ $____ $____
Balanced $____ $____ $____ $____
Equity Income $____ $____ $____ $____
Equity Index $____ $____ $____ $____
Growth & Income Equity $____ $____ $____ $____
Growth Equity $____ $____ $____ $____
Small Cap Equity $____ $____ $____ $____
International Equity $____ $____ $____ $____
</TABLE>
- ----------
(1) Represents amounts received from front-end sales charges on Investor A
Shares and commissions received in connection with sales of Investor B
Shares.
(2) Represents amounts received from contingent deferred sales charges on
Investor B Shares. The basis on which such sales charges are paid is
described in the Prospectus relating to Investor B Shares. All such
amounts were assigned to MVA pursuant to the financing arrangements
between the Distributor and MVA described below.
(3) Represents payments made under the Administrative Services Plans and
Distribution and Services Plans that have been adopted by the Fund (see
discussion below).
(4) The Small Cap Equity Index Portfolio had not commenced operations as of
November 30, 1998.
-112-
<PAGE> 470
THE PLANS
DISTRIBUTION AND SERVICES PLANS. The Fund has adopted separate
Distribution and Services Plans with respect to Investor A Shares and Investor B
Shares of the Portfolios pursuant to the 1940 Act and Rule 12b-1 thereunder. Any
material amendment to any of these Plans or arrangements with the Distributor or
Service Organizations (which may include affiliates of the Fund's Adviser) must
be approved by a majority of the Board of Directors, including a majority of the
directors who are not "interested persons" of the Fund as defined in the 1940
Act and have no direct or indirect financial interest in such arrangements (the
"Disinterested Directors") and by a majority of the Investor A Shares or
Investor B Shares, respectively, of the Portfolio. Pursuant to the Plans, the
Fund may enter into Servicing Agreements with broker-dealers and other
organizations ("Servicing Agreements") that purchase Investor A Shares or
Investor B Shares of a Portfolio. The Servicing Agreements provide that the
Servicing Organizations will render certain shareholder administrative support
services to their customers who are the record or beneficial owners of Investor
A Shares or Investor B Shares. Services provided pursuant to the Servicing
Agreements may include such services as providing information periodically to
customers showing their positions in Investor A Shares or Investor B Shares and
monitoring services for their customers who have invested in Investor A Shares
or Investor B Shares, including the operation of telephone lines for daily
quotations of return information.
Under the Distribution and Services Plans, the Fund may pay (i) the
Distributor or another person for distribution services provided and expenses
assumed and (ii) Service Organizations for shareholder administrative services
provided pursuant to servicing agreements in connection with Investor A Shares
or Investor B Shares of a Portfolio. Payments to the Distributor are to
compensate it for distribution assistance and expenses assumed and activities
primarily intended to result in the sale of Investor A Shares or Investor B
Shares, including compensating dealers and other sales personnel (which may
include affiliates of the Fund's Adviser), direct advertising and marketing
expenses and expenses incurred in connection with preparing, printing, mailing
and distributing or publishing advertisements and sales literature, for printing
and mailing Prospectuses and Statements of Additional Information (except those
used for regulatory purposes or for distribution to existing shareholders), and
costs associated with implementing and operating the Distribution and Services
Plan. In addition, payments under the Distribution and Services Plan for
Investor B Shares will be used to pay for or finance sales commissions and other
fees payable to Service Organizations and other broker-dealers who sell Investor
B Shares.
Service Organizations and other broker/dealers receive commissions from
the Distributor for selling Investor B Shares, which are paid at the time of the
sale. These commissions approximate the commissions payable with respect to
sales of Investor A Shares. The distribution fees payable under the Distribution
and Services Plan for Investor B Shares (at an annual rate of .75%) are intended
to cover the expense to the Distributor of paying such up-front commissions, and
the contingent deferred sales charge is calculated to charge the investor with
any shortfall that would occur if Investor B Shares are redeemed prior to the
expiration of the eight year period, after which Investor B Shares automatically
convert to Investor A Shares. To provide funds for the payment of up-front sales
commissions, the Distributor has entered into
-113-
<PAGE> 471
an agreement with MVA pursuant to which MVA provides funds for the payment of
commissions and other fees payable to Service Organizations and broker/dealers
who sell Investor B Shares. Under the terms of that agreement, the Distributor
has assigned to MVA the fees which may be payable from time to time to the
Distributor under the Distribution and Services Plan for Investor B Shares and
the contingent deferred sales charges payable to the Distributor with respect to
Investor B Shares.
Under the Distribution and Services Plan for Investor A Shares,
payments by the Fund for distribution expenses may not exceed .10% (annualized)
of the average daily net asset value of a Portfolio's outstanding Investor A
Shares and payments for shareholder administrative servicing expenses may not
exceed .20% (annualized) of the average daily net asset value of a Portfolio's
outstanding Investor A Shares.
Under the Distribution and Services Plan for Investor B Shares,
payments by the Fund for distribution expenses may not exceed .75% (annualized)
of the average daily net asset value of a Portfolio's outstanding Investor B
Shares and payments for shareholder administrative servicing expenses may not
exceed .25% (annualized) of the average daily net asset value of a Portfolio's
outstanding Investor B Shares.
Actual distribution expenses paid by the Distributor with respect to
Investor B Shares for any given year may exceed the distribution fees and
contingent deferred sales charges received with respect to those Shares. These
excess expenses may be reimbursed by Investor B shareholders out of contingent
deferred sales charges and distribution payments in future years as long as the
Distribution and Services Plan for Investor B Shares is in effect.
ADMINISTRATIVE SERVICES PLANS. Separate Administrative Services Plans
have been adopted with respect to Trust Shares and Institutional Shares of the
Portfolios. Pursuant to the Administrative Services Plan, Trust and
Institutional Shares are sold to banks and other financial institutions (which
may include Mercantile Trust or its affiliated or correspondent banks) acting on
behalf of their qualified accounts (such financial institutions collectively,
the "Service Organizations") which agree to provide certain shareholder
administrative services for their clients or account holders (collectively, the
"customers") who are the beneficial owners of such Shares. The holders of Trust
and Institutional Shares bear their pro rata portion of the fees which may be
paid to Service Organizations for such services at an annual rate of up to .25%
for the Money Market Portfolios and up to .30% for the Equity and Bond
Portfolios of the average daily net assets of a Portfolio's Trust and
Institutional Shares owned beneficially by a Service Organization's customers.
SERVICE ORGANIZATIONS
Pursuant to each Administrative Services Plan and each Distribution and
Services Plan described above, the Fund may enter into Servicing Agreements with
banks, trust departments, and other financial institutions ("Trust Servicing
Agreements") and with broker-dealers and other organizations ("Servicing
Agreements") that purchase Trust Shares, Institutional Shares, Investor A Shares
or Investor B Shares of a Portfolio, respectively. The Servicing Agreements
provide that the Service Organizations receiving such compensation,
-114-
<PAGE> 472
which may include Mercantile Trust and its affiliates, to perform certain
shareholder administrative support services to their customers who are the
record or beneficial owners of Trust Shares, Institutional Shares, Investor A
Shares or Investor B Shares, respectively. Services provided pursuant to the
Servicing Agreements may include some or all of the following services: (i)
processing dividend and distribution payments from the Portfolios on behalf of
customers; (ii) providing information periodically to customers showing their
positions in Trust, Institutional, Investor A Shares or Investor B Shares; (iii)
arranging for bank wires; (iv) responding to routine customer inquiries relating
to services performed by the particular Service Organization; (v) providing
sub-accounting with respect to shares owned of record or beneficially by
customers or the information necessary for sub-accounting; (vi) as required by
law, forwarding shareholder communications (such as proxies, shareholder
reports, annual and semi-annual financial statements and dividend, distribution
and tax notices) to customers; (vii) forwarding to customers proxy statements
and proxies containing any proposals regarding Servicing Agreements or the
related Plan; (viii) aggregating and processing purchase, redemption, and
exchange requests from customers and placing net purchase and redemption orders
with the Fund's Distributor; (ix) providing customers with a service that
invests the assets of their accounts in shares pursuant to specific or
pre-authorized instructions; (x) maintaining records relating to each customer's
share transactions; or (xi) other similar services if requested by the Fund and
permitted by law. In addition, Service Organizations may also provide dedicated
facilities and equipment in various local locations to serve the needs of
investors, including walk-in facilities, 800 numbers, and communication systems
to handle shareholder inquiries, and in connection with such facilities, provide
on-site management personnel and monitoring services for their customers who
have invested in Investor A or Investor B Shares, including the operation of
telephone lines for daily quotations of return information.
Under the Servicing Agreements and upon notice to the Fund, a Service
Organization may subcontract with one or more entities for the performance of
certain services provided under its Servicing Agreements with the Fund. Such
Service Organization shall be fully responsible to the Fund for the acts or
omissions of any sub-contractor as it would be for its own acts or omissions.
The fees payable to any sub-contractor are paid by the Service Organization out
of the fees it receives from the Fund.
The Fund understands that Service Organizations providing such
administrative services may also charge fees to their customers beneficially
owning such Shares. These fees would be in addition to any amounts which may be
received by such a Service Organization under its Servicing Agreement with the
Fund. The Fund's Servicing Agreements require a Service Organization to disclose
to its customers any compensation payable to the Service Organization by a
Portfolio and any other compensation payable by its customers in connection with
their investment in such Shares. Customers of such Service Organizations
receiving servicing fees should read this Statement of Additional Information in
light of the terms governing their accounts with their Service Organization.
-115-
<PAGE> 473
For the fiscal year or period ended November 30, 1998, pursuant to the
Distribution and Services Plan for Investor A Shares, the Portfolios (other than
the Small Cap Equity Index Portfolio, which had not commenced operations as of
November 30, 1998) were charged the following amounts:
DISTRIBUTION AND SERVICES PLAN - INVESTOR A SHARES
<TABLE>
<CAPTION>
AMOUNT PAID AMOUNT PAID
TO THE AMOUNT PAID TO AFFILIATES
PORTFOLIOS TOTAL CHARGED DISTRIBUTOR TO MVA OF MVA
- ---------- ------------- ----------- ------ ------
<S> <C> <C> <C> <C>
Treasury Money Market $____ $____ $____ $____
Money Market $____ $____ $____ $____
Tax-Exempt Money Market $____ $____ $____ $____
U.S. Government Securities $____ $____ $____ $____
Intermediate Corporate Bond $____ $____ $____ $____
Bond Index $____ $____ $____ $____
Government & Corporate Bond $____ $____ $____ $____
Short-Intermediate Municipal Bond $____ $____ $____ $____
Missouri Tax-Exempt Bond $____ $____ $____ $____
National Municipal Bond $____ $____ $____ $____
Balanced $____ $____ $____ $____
Equity Income $____ $____ $____ $____
Equity Index $____ $____ $____ $____
Growth & Income Equity $____ $____ $____ $____
Growth Equity $____ $____ $____ $____
Small Cap Equity $____ $____ $____ $____
International Equity $____ $____ $____ $____
</TABLE>
All amounts paid under the Distribution and Services Plan for Investor
A Shares for the fiscal year ended November 30, 1998 were attributable to
payments to broker-dealers. For the fiscal year ended November 30, 1998, no
brokers of record waived fees.
-116-
<PAGE> 474
For the fiscal year or period ended November 30, 1998, pursuant to the
Distribution and Services Plan for Investor B Shares of the CDSC Portfolios, the
CDSC Portfolios were charged the following amounts:
DISTRIBUTION AND SERVICES PLAN - INVESTOR B SHARES
<TABLE>
<CAPTION>
AMOUNT PAID AMOUNT PAID
TO THE AMOUNT PAID TO AFFILIATES
PORTFOLIOS TOTAL CHARGED DISTRIBUTOR TO MVA OF MVA
---------- ------------- ----------- ------ ------
<S> <C> <C> <C> <C>
Money Market $____ $____ $____ $____
U.S. Government Securities $____ $____ $____ $____
Government & Corporate Bond $____ $____ $____ $____
Missouri Tax-Exempt Bond $____ $____ $____ $____
National Municipal Bond $____ $____ $____ $____
Balanced $____ $____ $____ $____
Equity Income $____ $____ $____ $____
Growth & Income Equity $____ $____ $____ $____
Growth Equity $____ $____ $____ $____
Small Cap Equity $____ $____ $____ $____
International Equity $____ $____ $____ $____
</TABLE>
-117-
<PAGE> 475
For the fiscal year or period ended November 30, 1998, pursuant to the
Administrative Services Plan for Trust Shares, the Portfolios (other than the
Small Cap Equity Index Portfolio which had not commenced operations as of
November 30, 1998) were charged the following amounts:
ADMINISTRATIVE SERVICES PLAN - TRUST SHARES
<TABLE>
<CAPTION>
AMOUNT PAID AMOUNT PAID
TO THE AMOUNT PAID TO AFFILIATES
PORTFOLIOS TOTAL CHARGED ADMINISTRATOR TO MVA OF MVA
---------- ------------- ------------- ------- ------
<S> <C> <C> <C> <C>
Treasury Money Market $____ $____ $____ $____
Money Market $____ $____ $____ $____
Tax-Exempt Money Market $____ $____ $____ $____
U.S. Government Securities $____ $____ $____ $____
Intermediate Corporate Bond $____ $____ $____ $____
Bond Index $____ $____ $____ $____
Government & Corporate Bond $____ $____ $____ $____
Short-Intermediate Municipal $____ $____ $____ $____
Missouri Tax-Exempt Bond $____ $____ $____ $____
National Municipal Bond $____ $____ $____ $____
Balanced $____ $____ $____ $____
Equity Income $____ $____ $____ $____
Equity Index $____ $____ $____ $____
Growth and Income Equity $____ $____ $____ $____
Growth Equity $____ $____ $____ $____
Small Cap Equity $____ $____ $____ $____
International Equity $____ $____ $____ $____
</TABLE>
-118-
<PAGE> 476
For the fiscal year ended November 30, 1998, pursuant to the
Administrative Services Plan for Institutional shares, the Portfolios (other
than the Small Cap Equity Index Portfolio which had not commenced operations as
of November 30, 1998) paid the following amounts:
ADMINISTRATIVE SERVICES PLAN - INSTITUTIONAL SHARES
<TABLE>
<CAPTION>
AMOUNT PAID AMOUNT PAID
TO THE AMOUNT PAID TO AFFILIATES
PORTFOLIOS TOTAL CHARGED ADMINISTRATOR TO MVA OF MVA
---------- ------------- ------------- ------- ------
<S> <C> <C> <C> <C>
Treasury Money Market $____ $____ $____ $____
Money Market $____ $____ $____ $____
U.S. Government Securities $____ $____ $____ $____
Intermediate Corporate Bond $____ $____ $____ $____
Bond Index $____ $____ $____ $____
Government & Corporate Bond $____ $____ $____ $____
Balanced $____ $____ $____ $____
Equity Income $____ $____ $____ $____
Equity Index $____ $____ $____ $____
Growth and Income Equity $____ $____ $____ $____
Growth Equity $____ $____ $____ $____
Small Cap Equity $____ $____ $____ $____
International Equity $____ $____ $____ $____
</TABLE>
OTHER PLAN INFORMATION. The Board of Directors has approved each Plan
and its respective arrangements with the Distributor, Service Organizations and
broker-dealer based on information provided by the Fund's service contractors
that there is a reasonable likelihood that these Plans and arrangements will
benefit the Portfolios and their shareholders. Pursuant to each Plan, the Board
of Directors reviews, at least quarterly, a written report of the amounts of
distribution fees and servicing fees expended pursuant to each Plan and the
Service Organizations and the purposes for which the expenditures were made. So
long as the Fund has one or more of the above described Plans in effect, the
selection and nomination of the members of the Board of Directors who are not
"interested persons" (as defined in the 1940 Act) of the Fund will be committed
to the discretion of such Disinterested Directors.
Depending upon the terms governing the particular customer accounts,
Service Organizations and other institutions may also charge their customers
directly for cash management and other services provided in connection with the
accounts, including, for example, account maintenance fees, compensating balance
requirements, or fees based upon account transactions, assets, or income. An
investor should therefore read the Prospectuses and
-119-
<PAGE> 477
this Statement of Additional Information in light of the terms of his or her
account with a Service Organization, or other institution before purchasing
shares of a Portfolio.
REGULATORY MATTERS. Banking laws and regulations currently prohibit a
bank holding company registered under the Federal Bank Holding Company Act of
1956 or any affiliate thereof from sponsoring, organizing, or controlling the
shares of a registered, open-end investment company continuously engaged in the
issuance of its shares, and prohibit banks generally from issuing, underwriting,
selling, or distributing securities such as Shares of the Portfolios. Such
banking laws and regulations do not prohibit such a holding company or
affiliate, or banks, from acting as investment adviser, transfer agent, or
custodian to such an investment company, or from purchasing shares of such a
company as agent for and upon the order of customers. Mercantile Trust, MVA,
Service Organizations that are banks or bank affiliates, and broker-dealers that
are bank affiliates are subject to such laws and regulations, but believe they
may perform the services for the Portfolios contemplated by their respective
agreements and Prospectuses and this Statement of Additional Information without
violating applicable banking laws and regulations. In addition, state securities
laws on this issue may differ from the interpretation of federal law expressed
herein and banks and financial institutions may be required to register as
dealers pursuant to state law.
Should future legislative, judicial or administrative action prohibit
or restrict the activities of such companies in connection with the provision of
services on behalf of the Portfolios and their shareholders, the Fund might be
required to alter materially or discontinue its arrangements with such companies
and change its method of operation. It is not expected that investors would
suffer any adverse financial consequences as a result of any of these
occurrences.
If current restrictions preventing a bank from legally sponsoring,
organizing, controlling or distributing Shares of an investment company were
relaxed, Mercantile Trust or an affiliate of Mercantile Trust, would consider
the possibility of offering to perform additional services for the Portfolios.
It is not possible, of course, to predict whether or in what form such
legislation might be enacted or the terms upon which Mercantile Trust, or such
an affiliate, might offer to provide such services.
Conflict of interest restrictions may apply to the receipt of
compensation paid pursuant to a Servicing Agreement by a Portfolio to a
financial intermediary in connection with the investment of fiduciary funds in a
Portfolio's Shares. Institutions, including banks regulated by the Comptroller
of the Currency and investment advisers and other money managers subject to the
jurisdiction of the SEC, the Department of Labor or state securities
commissions, should consult legal counsel before entering into Servicing
Agreements.
EXPENSES. Except as noted above, the Fund's service contractors bear
all expenses in connection with the performance of their services, except that
the Distributor is compensated pursuant to the Distribution and Services Plans
as described above. Expenses are deducted from the total income of each
Portfolio before dividends and distributions are paid. These expenses include,
but are not limited to, fees paid to the Adviser and Administrator, transfer
agency fees, fees and expenses of officers and directors who are not affiliated
with the
-120-
<PAGE> 478
Adviser or the Distributor, taxes, interest, legal fees, custodian fees,
auditing fees, 12b-1 fees, servicing fees, certain fees and expenses in
registering and qualifying a Portfolio and its Shares for distribution under
Federal and state securities laws, costs of preparing and printing prospectuses
and statements of additional information for regulatory purposes and for
distribution to existing shareholders, the expense of reports to shareholders,
shareholders' meetings and proxy solicitations, fidelity bond and directors and
officers liability insurance premiums, the expense of using independent pricing
services and other expenses which are not expressly assumed by the Adviser,
Distributor or Administrator under their respective agreements with the Fund.
The Fund also pays for brokerage fees, commissions and other transaction
charges, if any, in connection with the purchase and sale of portfolio
securities. Any general expenses of the Fund that are not readily identifiable
as belonging to a particular Portfolio will be allocated among all Portfolios by
or under the direction of the Board of Directors in a manner the Board
determines to be fair and equitable. Any expenses relating only to a particular
class of Shares within a Portfolio will be borne solely by such class.
INDEPENDENT AUDITORS
For the fiscal year or period ended November 30, 1998, [___________],
certified public accountants, with offices at [________________________], served
as independent auditors for the Fund. [__________] performs an annual audit of
the Fund's financial statements. Reports of its activities are provided to the
Fund's Board of Directors. The financial statements dated November 30, 1998,
which are[__________] into this Statement of Additional Information, have been
audited by [__________], whose report thereon is [__________].
COUNSEL
Drinker Biddle & Reath LLP (of which W. Bruce McConnel, III, Secretary
of the Fund, is a partner), Suite 1100, 1345 Chestnut Street, Philadelphia,
Pennsylvania 19107-3496, is counsel to the Fund and will pass upon certain legal
matters on its behalf.
MISCELLANEOUS
As of __________, 1999, Mercantile held of record ______% and ______%
of the outstanding Institutional and Trust Shares, respectively, in the Treasury
Money Market Portfolio; _____% and _____% of the outstanding Institutional and
Trust Shares, respectively, in the Money Market Portfolio; ______% of the
outstanding Trust Shares in the Tax-Exempt Money Market Portfolio; ______% and
______% of the outstanding Institutional and Trust Shares, respectively, in the
U.S. Government Securities Portfolio; ______% and ______% of the outstanding
Institutional and Trust Shares, respectively, in the Intermediate Corporate Bond
Portfolio; ______% and ______% of the outstanding Institutional and Trust
Shares, respectively, in the Government & Corporate Bond Portfolio; ______% and
______% of the outstanding Institutional and Trust Shares, respectively, in the
Bond Index Portfolio; ______% of the outstanding Trust Shares in the
Short-Intermediate Municipal Portfolio; ______% of the
-121-
<PAGE> 479
outstanding Trust Shares in the Missouri Tax-Exempt Bond Portfolio; ______% of
the outstanding Trust Shares in the National Municipal Bond Portfolio; ______%
and ______% of the outstanding Institutional and Trust Shares, respectively, in
the Growth & Income Equity Portfolio; ______% and ______% of the outstanding
Institutional and Trust Shares, respectively, in the Small Cap Equity Portfolio;
______% and ______% of the outstanding Institutional and Trust Shares,
respectively, in the International Equity Portfolio; ______% of the outstanding
Trust Shares in the Equity Income Portfolio; ______% and ______%, of the
outstanding Institutional and Trust Shares, respectively, in the Equity Index
Portfolio; ______% and ______% of the outstanding Institutional and Trust
Shares, respectively, in the Balanced Portfolio, and ______% and ______% of the
outstanding Institutional and Trust Shares, respectively, in the Growth Equity
Portfolio, as fiduciary or agent on behalf of its customers. Mercantile is a
wholly owned subsidiary of Mercantile Bancorporation Inc., a Missouri
corporation. Under the 1940 Act, Mercantile may be deemed to be a controlling
person of the Fund.
As of the same date, the following institutions also owned of record 5%
or more of the Treasury Money Market Portfolio's outstanding shares as fiduciary
or agent on behalf of their customers: Trust Shares - BISYS Fund Services, FBO
Mercantile EOD Sweep, Attn: Mike Bryan, 3435 Stelzer Road, Columbus, OH 43219
40.86% Hare & Company, Stif/Master Note, the Bank of New York/Attn: Paul Madden,
One Wall Street, 2nd floor, New York, NY 10286; Trust II shares - Pacific
Century Trust, 741 Mutual Fund Accounting, P.O. Box 3170, Honolulu, HI
96802-3170 (5.88%); Pacific Century Trust, 741 Mutual Fund Accounting, P.O. Box
3170, Honolulu, HI 96802-3170 (8.44%); Mercantile Bank, N.A. Trust, Trust
Securities Unit 17-1, Attn: Dede Clark, P.O. Box 387 Main Post Office, St.
Louis, MO 63166-0000 (85.66%); Investor A Shares - National Financial Services
Corp., For the Benefit of Our Customers, 1 World Financial Center, 200 Liberty
Street, 5th Floor, New York, NY 10281 (54.38%); Institutional Shares Mercantile
Bank of St. Louis, N.A., Attn: Trust Securities Unit 17-1, P.O. Box 387, St.
Louis, MO 63166-0000, (99.99%).
As of the same date, the following institutions also owned of record 5%
or more of the Money Market Portfolio's outstanding shares as fiduciary or agent
on behalf of their customers: Trust Shares - BISYS Fund Services, FBO Mercantile
EOD Sweep, Attn: Mike Bryan, 3435 Stelzer Road, Columbus, OH 43219 (98.14%);
Trust II shares - Pacific Century Trust, 741 Mutual Fund Accounting, P.O. Box
3170, Honolulu, HI 96802-3170 (7.83%); Pacific Century Trust, 741 Mutual Fund
Accounting, P.O. Box 3170, Honolulu, HI 96802-3170 (15.23%); Mercantile Bank,
N.A. Trust, Trust Securities Unit 17-1, Attn: Dede Clark, P.O. Box 387 Main Post
Office, St. Louis, MO 63166-0000 (74.86%); Investor A Shares - National
Financial Services Corp., For the Benefit of Our Customers, 1 World Financial
Center, 200 Liberty Street, 5th Floor, New York, NY 10281 (94.15%); Investor B
Shares - Mercantile Bank of St. Louis, NA Custodian Pheba A. Steinmeyer, IRA,
28413 Polk Dr., Rocky Mt., MO 65072-9042 (5.52%); Alberta Buenemann and Ernie W.
Buenemann Trust, Alberta Buenemann Revocable Living Trust DTD 08-30-91, 1649
Sand Run Road, Troy, MO 63379 (7.45%); Homer R. Turner and Edna M. Turner Trust,
Edna M. Turner Trust DTD 04-17-90, 33409 E. Pink Hill Rd., Grain Valley, MO
64029 (12.49%); John E. Hill, IRA, 806 Bitterfield Dr., Ballwin, MO 63011
(5.63%); Sandra L. Hill, IRA, 806 Bitterfield Dr., Ballwin, MO 63011 (5.63%);
Lori L. Mercer, IRA, 11393 Lakeside Dr., Burlington, IA 52601; Institutional
Shares - Mercantile Bank of St. Louis, N.A., Attn: Trust Securities Unit 17-1,
P.O. Box 387, St. Louis, MO 63166-0000 (93.9%).
As of the same date, the following institutions also owned of record 5%
or more of the Tax-Exempt Money Market Portfolio's outstanding shares as
fiduciary or agent on behalf
-122-
<PAGE> 480
of their customers: Trust Shares - BISYS Fund Services, FBO Mercantile EOD
Sweep, Attn: Mike Bryan, 3435 Stelzer Road, Columbus, OH 43219 (99.99%); Trust
II Shares- Mercantile Bank N.A. Trust, Trust Securities Unit 17-1, Attn: Dede
Clark, P.O.Box 387 Main Post Office, St. Louis, MO 63166-0000 (97.02%).
As of the same date, the following institutions also owned of
record 5% or more of the U.S. Government Securities Portfolio's outstanding
shares as fiduciary or agent on behalf of their customers: Trust Shares - Locust
& Company, Mercantile Bank, St. Louis, N.A., Trust Securities Unit 17-1, P.O.
Box 387, St. Louis, MO 63166-0387 (35.12%); Olive & Company, Mercantile Bank of
St. Louis, N.A., Trust Securities Unit 17-1, P.O. Box 387, St. Louis, MO
63166-0387 (61.12%); Investor A Shares - Mercantile Bank of St. Louis, NA
Custodian Edmund C. Albrecht, Jr., IRA, 236 Carlyle Lake Dr., St. Louis, MO
63141 (6.79%); Investor B Shares - NFSC FEBO M22-038563, NFSC FMTC IRA, FBO
Betty J. Kolseth, 300 N 4th St. Apt. 2009, St. Louis, MO 63102 (5.49%); Evelyn
Joan Sutton, IRA, 510 N Main Cross, Bowling Green, MO 63334 (5.93%); NFSC FEBO
M22-038326, NFSC FMTC IRA, FBO Lynette A. Broeg, 60 Frontenac Dr., St. Louis, MO
63131 (6.56%); Richard Dell Woods, SEP IRA, 3114 Pickett Rd., St. Joseph, MO
64503 (9.08%); NSFC FEBO M26-044865, June M. Swift, TOD William D. Smith, Robert
M. Swift, Gwynneth A. Mejia, 2823 Seneca, St. Joseph, MO 64507 (9.35%); NFSC
FEBO M22-805556, Mary L. Allen, 5514 Newport, St. Louis, MO 63116 (17.07%); NFSC
FEBO M26-945293, NFSC FPITC IRA ROLLOVER, FBO Charlene V. Brunk, 17825 Hwy. 21,
St. Joseph, MO 64505 (17.95%); Institutional Shares - Locust & Company,
Mercantile Bank of St. Louis, N.A., Attn: Trust Securities Unit 17-1, P.O. Box
387, St. Louis, MO 63166-0000 (95.20%).
As of the same date, the following institutions also owned of
record 5% or more of the Intermediate Corporate Bond Portfolio's outstanding
shares as fiduciary or agent on behalf of their customers: Trust Shares - Locust
& Company, Mercantile Bank, St. Louis, N.A., Trust Securities Unit 17-1, P.O.
Box 387, St. Louis, MO 63166-0387 (7.73%); Olive & Company, Mercantile Bank, St.
Louis, N.A., Trust Securities Unit 17-1, P.O. Box 387, St. Louis, MO 63166-0387
(90.58%); Investor A Shares - Jill Larson, 10835 Autillo Way, San Diego, CA
92127 (5.32%); George Gregory Timmons, 1332 E. Desert Cv., Phoenix, AZ 85020
(5.32%); Lynn C. Prescott, Lynn C. Prescott Trust, UAD 8-30-90, 4180 Rincon
Circle, Palo Alto, CA 94306-3138 (10.84%); NFSC FEBO M24-007498, Dena M. Ver
Steeg, 713 Jefferson St., Pella, IA 50219 (6.12%); Alice Ann Jones, 213 S. Clay
/# 2-S, Kirkwood, MO 63122 (8.30%); Robert J. Barclay, IRA, 1612 Tamarack Drive
St. Charles, MO 63301 (12.52%); James A. Lynch, IRA, 915 Highmont Drive,
Ferguson, MO 63135 (16.64%); David L. Otten Sr., IRA, 300 Derhake Road,
Florissant MO 63031 (19.35%); Institutional Shares - Locust & Company,
Mercantile Bank, St. Louis, N.A., Trust Securities Unit 17-1, P.O. Box 387, St.
Louis, MO 63166-0387 (99.89%).
As of the same date, the following institutions also owned of
record 5% or more of the Bond Index Portfolio's outstanding shares as fiduciary
or agent on behalf of their customers: Trust Shares - Olive & Company,
Mercantile Bank of St. Louis, N.A., Trust Securities Unit 17-1, P.O. Box 387,
St. Louis, MO 63166-0387 (96.97%); Investor A Shares - David Borneman and Janet
L. Borneman, JTWROS, 27 Lincord Drive, St Louis, MO 63128
-123-
<PAGE> 481
(5.61%); NFSC FEBO M27-901393, Judith T. Betz, John N. Betz, 6539 Pernod, St.
Louis, MO 63139 (7.51%); Gertrude Louise Eschbacher, 11901 Wornall Road, Kansas
City, MO 64145-1698 (7.70%); Mary Therese Eschbacher, 1262 Moorlands Drive, St.
Louis, MO 63117-1527 (7.70%); James A. Lynch, IRA, 915 Highmont Drive, Ferguson,
MO 63135 (12.79%); David L. Otten Sr., IRA, 300 Derhake Road, Florissant MO
63031 (14.78%); Institutional Shares - Locust & Company, Mercantile Bank of St.
Louis, N.A., Trust Securities Units 17-1, P.O. Box 387, St. Louis, MO 63166-0387
(99.99%).
As of the same date, the following institutions also owned of
record 5% or more of the Government & Corporate Bond Portfolio's outstanding
shares as fiduciary or agent on behalf of their customers: Trust Shares - Locust
& Company, Mercantile Bank of St. Louis, N.A., Trust Securities Unit 17-1, P.O.
Box 387, St. Louis, MO 63166-0387 (42.48%); Olive & Company, Mercantile Bank of
St. Louis, N.A., Trust Securities Unit 17-1, P.O. Box 387, St. Louis, MO
63166-0387 (56.41%); Investor A Shares - Shirley R. Schuepbach and Janet
Gillespie Trust, Shirley R. Schuepbach Revocable Living Trust U A DTD 08-22-94,
13738 Michael Road, Highland, IL 62249 (5.11%); Mercantile Bank of St. Louis, NA
Custodian Eugene F. Tucker, IRA Rollover, 70 Berkshire, St. Louis, MO 63117
(6.62%); Investor B Shares - Mercantile Bank of St. Louis, NA Custodian Gerald
C. Pasch, IRA, 2817 Duncan, St. Joseph, MO 64507 (5.06%); NFSC FEBO M22-050563,
Carl S. Jackson, Steven J. Jackson, 6418 South King's Highway, St. Louis, MO
63109 (5.76%); Homer R. Turner and Edna M. Turner, Edna M. Turner Trust DTD
04-17-90, 33409 E. Pink Hill Road, Grain Valley, MO 64029 (7.35%); NFSC FEBO
M25-025500, NFSC FMTC IRA, FBO Jackie L. Stricklin, 10 Willowood Dr., North
Little Rock, AR 72117 (10.00%); Institutional Shares - Corelink Financial, Inc.,
P.O. Box 4054, Concord, CA 94524 (12.04%); Locust & Company, Mercantile Bank of
St. Louis, N.A., Attn: Trust Securities Unit 17-1, P.O. Box 387, St. Louis, MO
63166-0000 (67.91%); Mercantile Bank, Expediter Daily Valuation Account, Attn:
Institutional Retirement Tram 16-2, P.O. Box 387, St. Louis, MO 63166 (20.03%).
As of the same date, the following institutions also owned of
record 5% or more of the Short-Intermediate Municipal Bond Portfolio's
outstanding shares as fiduciary or agent on behalf of their customers: Trust
Shares - Olive & Company, Attn: Trust Securities Unit 17-1, P.O. Box 387, St.
Louis, MO 63166-0387 (97.29%); Investor A Shares - NFSC FEBO M22-846333, Bettina
H. Clouse Trustee, The Bettina H. Clouse Revocable Trust U A 11-4-92, 1245 Nancy
Jo Pl., St. Louis, MO 63122 (40.07%); Barbara Martin Smith and Timothy Van
Gorder Smith, Barbara Martin Smith Trust DTD 3-18-98, 136 Jefferson Rd., St.
Louis, MO 63119 (56.31%).
As of the same date, the following institutions also owned of
record 5% or more of the Missouri Tax-Exempt Bond Portfolio's outstanding shares
as fiduciary or agent on behalf of their customers: Trust Shares - Locust &
Company, Mercantile Bank of St. Louis, N.A., Trust Securities Unit 17-1, P.O.
Box 387, St. Louis, MO 63166-0387 (5.89%); Olive & Company, Mercantile Bank of
St. Louis, N.A., Trust Securities Unit 17-1, P.O. Box 387, St. Louis, MO
63166-0387 (92.03%); Investor B Shares - NFSC FEBO M22-901580, Alban C.
Hurlebaus, Catherine L. Bruketa, 6144 S. Grand, St. Louis, MO 63111 (5.95%);
NFSC FEBO M22-402761, Kenneth Russell, Helen Russell, Trustee, Helen Russell
Revocable Trust, 320 Lake Apollo, Hannibal, MO 63401 (5.62%).
-124-
<PAGE> 482
As of the same date, the following institutions also owned of
record 5% or more of the National Municipal Bond Portfolio's outstanding shares
as fiduciary or agent on behalf of their customers: Trust Shares - Olive &
Company, Mercantile Bank of St. Louis, N.A., Trust Securities Unit 17-1, P.O.
Box 387, St. Louis, MO 63166-0387 (99.26%); Investor A Shares - Gail P. Ruga,
Bin 7137-2175, 207 Aintree Road, Rolla, MO 65401-3760 (9.50%); Kim P. Wheeler,
1003 S. 19th, Rogers, AR 72758 (9.50%); NFSC FEBO M22-406252 Thomas G. Smith,
Frances T. Smith, Nichole T. Smith, 10214 Hobkirk Dr. St. Louis, MO 63137
(8.87%); NFSC FEBO M22-947725, Elisabeth M. Goelz, Trustee Elisabeth M. Goelz,
Self Declaration of Trust U A 8-29-97, 5 Gerold Lane, Belleville, IL 62223
(7.28%); NFSC FEBO M22-896209. Grace Bommarito, 1546 Doris Dr., St. Louis, MO
63138 (8.92%); Investor B Shares - NFSC FEBO M22-988642, Ronald E. Ryan, Marian
H. Ryan, 875 Glen Elm Drive, St. Louis, MO 63122 (6.54%); NFSC FEBO M22-841897,
Beatrice J. Teter, 5201 Asbury Ave. Apt. 232, Godfrey, IL 62035 (5.97%); NFSC
FEBO M22-961817, Gladine Coleman, Andrew B. Coleman, 5945 Loughborough, St.
Louis, MO 63109 (6.48%); NFSC FEBO M22-423394, Nancy M. Prewitt, TOD, 16
Toussaint, O'Fallon, MO 63366 (5.50%); NFSC FEBO M22-479039, Constance M.
McManus, TOD, 4271 Wyoming, St. Louis, MO 63116 (11.14%); NFSC M22-841900 Leona
B. Teter 5201 Asbury Ave. Apt. 232, Godfrey, IL 62035 (5.97%); NFSC FEBO
M22-848700, Jessica Schumacher, Newell D. Timmermeier, 3204 Edwards St., Alton,
IL 62002 (6.03%).
As of the same date, the following institutions also owned of
record 5% or more of the Equity Income Portfolio's outstanding shares as
fiduciary or agent on behalf of their customers: Trust Shares - Olive & Company,
Mercantile Bank of St. Louis, N.A., Trust Securities Unit 17-1, P.O. Box 387,
St. Louis, MO 63166-0387 (63.12%); Locust & Company, Mercantile Bank, St. Louis
NA, Trust Securities Unit 17-1, P.O. Box 387, St. Louis, MO 63166-0387 (5.56%);
Washington & Company, Mercantile Bank, St. Louis, NA, Trust Securities Unit
17-1, P.O. Box 387, St. Louis, MO 63166-0387 (31.20%); Institutional Shares -
CoreLink Financial Inc., P.O. Box 4054, Concord, CA 94524 (98.56%); Investor A
Shares - David Bornemann and Janet L. Bornemann, JTWROS, 27 Lincord Drive, St
Louis, MO 63128 (5.35%); NFSC FEBO M22-406252 Thomas G. Smith, Frances T. Smith,
Nichole T. Smith, 10214 Hobkirk Dr. St. Louis, MO 63137 (6.19%); NFSC FEBO
M22-898880 William Oliver Shillington, II, Kim M. Shillington 2917 N. Kristopher
Bend, ST. Charles, MO 63303 (7.48%); Sandra Kungle, Sandra Kungle Trust, 139
Arrowhead Court, Boone, NC 28607 (8.44%); Investor B Shares - NFSC FEBO
M26-852155, Thelma P. Rhodes, TOD Ruby G. North, TOD Gladys Law, 1919 Mimosa,
Springfield, MO 65804 (5.89%); NFSC FEBO M24-914932, NFSC FMTC IRA Rollover FBO
Daniel L. Bodensteiner, 515 2nd St., Evansdale, IA 50707 (6.03%); NFSC FEBO
M26-820369, Kenneth D. Johnston, 2504 S. McCann Ave., Springfield, MO 65804
(7.68%); NFSC FEBO M23-031925, Anne Lloyd DuPont, 3500 NE Kingwood Ct., Lees
Summit, MO 64064 (9.16%); NFSC FEBO M22-821691, Arlene T. Kleimeier Trustee,
Arlene T. Kleimeier Revocable Living Trust, U A 10-16-98, 3033 Apt. G Country
Green, Florissant, MO 63033 (9.91%); Sharon L. Kall, Sharon L. Kall Trust, DTD
7-27-97, 2 Chapleton Ct., Ferguson, MO 63135 (5.36%).
As of the same date, the following institutions also owned of
record 5% or more of the Equity Index Portfolio's outstanding shares as
fiduciary or agent on behalf of their
-125-
<PAGE> 483
customers: Trust Shares - Olive & Company, Mercantile Bank of St. Louis, N.A.,
Trust Securities Unit 17-1, P.O. Box 387, St. Louis, MO 63166-0387 (14.75%);
Locust & Company, Mercantile Bank of St. Louis, N.A., Trust Securities Unit
17-1, P.O. Box 387, St. Louis, MO 63166-0387 (84.47%); Institutional Shares -
Locust & Company, Mercantile Bank of St. Louis, N.A., Trust Securities Unit
17-1, P.O. Box 387, St. Louis, MO, 63166-0387 (99.72%).
As of the same date, the following institutions also owned of
record 5% or more of the Small Cap Equity Portfolio's outstanding shares as
fiduciary or agent on behalf of their customers: Trust Shares - American Bar
Endowment, 750 N. Lake Shore Dr., Chicago, IL 60611 (11.61%); Olive & Company,
Mercantile Bank of St. Louis, N.A., Trust Securities Unit 17-1, P.O. Box 387,
St. Louis, MO 63166-0387 (14.62%); Locust & Company, Mercantile Bank of St.
Louis, N.A., Trust Securities Unit 17-1, P.O. Box 387, St. Louis, MO 63166-0387
(42.62%); Bankers' Trust Co., FBO Sheet Metal Local 36, Miss Val Arch FD 191719,
Attn: Mike Bloebaum, 648 Grassmere Park Road, Nashville, TN 37211 (9.08%); State
Street Bank & Trust Company, Pioneer Hi-Bred International Retirement Plan
Trust, Attn: Chris Murphy, One Enterprise Dr., North Quincy, MA 02171 (7.22%);
Institutional Shares - Locust & Company, Mercantile Bank of St. Louis, N.A.,
Attn: Trust Securities Unit 17-1, P.O. Box 387, St. Louis, MO 63166-0000
(81.78%); Mercantile Bank, Expediter Daily Valuation Account, Attn:
Institutional Retirement Tram 16-2, P.O. Box 387, St. Louis, MO 63166 (13.11%);
Corelink Financial, Inc. P.O. Box 4054, Concord, CA 94524 (5.09%).
As of the same date, the following institutions also owned of
record 5% or more of the International Equity Portfolio's outstanding shares as
fiduciary or agent on behalf of their customers: Trust Shares - Locust and
Company, Attn: Trust Securities Unit 17-1, P.O. Box 387, St. Louis, MO
63166-0000 (44.84%); Olive & Company, Attn: Trust Securities Unit 17-1, P. O.
Box 387, St. Louis, MO 63166-0387 (46.84%); Investor A Shares - Frances Dakers,
200 E. 89th St. 28D, New York, NY 10128 (13.09%); Institutional Shares - Locust
& Company, Attn: Trust Securities Unit 17-1, P.O. Box 387, St. Louis, MO
63166-0000 (95.52%).
As of the same date, the following institutions also owned of
record 5% or more of the Balanced Portfolio's outstanding share as fiduciary or
agent on behalf of their customers: Trust Shares - Locust & Company, Mercantile
Bank of St. Louis, N.A., Trust Securities Unit 17-1, P.O. Box 387, St. Louis, MO
63166-0387 (93.67%); Olive & Company, Mercantile Bank of St. Louis, N.A., Attn:
Trust Securities Unit 17-1, P.O. Box 387, St. Louis, MO 63166-0387 (6.31%);
Investor A Shares - Mercantile Bank of St. Louis, NA Custodian Robert W. Davis,
Rollover IRA, 818 Broadway, Elsberry, MO 63343-1109 (5.91%); Investor B Shares -
NFSC FEBO M22-033073, NFSC FMTC IRA, FBO Charles R. Oldham, 5227 Westminster
Pl., St. Louis, MO 63108 (6.27%); NFSC FEBO M26-044423, NFSC FMTC IRA, FBO Wayne
Brunk, 17825 Highway 71, St. Joseph, MO 64505 (10.21%); Institutional Shares -
Locust & Company, Mercantile Bank of St. Louis, N.A., Attn: Trust Securities
Unit 17-1, P.O. Box 387, St. Louis, MO 63166-0000 (81.06%); Mercantile Bank,
Expediter Daily Valuation Account, Attn: Institutional Retirement Tram 16-2,
P.O. Box 387, St. Louis, MO 63166 (10.02%); Corelink Financial, Inc., P.O. Box
4054, Concord, CA 94524 (8.91%).
As of the same date, the following institutions also owned of
record 5% or more of the Growth Equity Portfolio's outstanding shares as
fiduciary or agent on behalf of their
-126-
<PAGE> 484
customers: Trust Shares - Olive & Company, Mercantile Bank of St. Louis, N.A.,
Trust Securities Unit 17-1, P.O. Box 387, St. Louis, MO 63166-0387 (64.65%);
Locust & Company, Mercantile Bank of St. Louis, N.A., Trust Securities Unit
17-1, P.O. Box 387, St. Louis, MO 63166-0387 (12.74%); Washington & Company,
Mercantile Bank of St. Louis, N.A., Trust Securities Unit 17-1, P.O. Box 387,
St. Louis, MO 63166-0387 (20.82%); Investor A Shares - NFSC FEBO M22-540196,
Tiger Limited Partnership, 903 Claymark, ST. Louis, MO 63131 (8.63%); NFSC FEBO
M22-968030, NFSC FMTC IRA Rollover, FBO Carl R. Stock, 4000 D Brittany Circle,
Bridgeton MO 63044 (9.35%); Investor B Shares - NFSC FEBO M22-861596, Estle S.
Smith III, Patti Bruce Smith, 2335 Fairview Dr., Alton, IL 62002 (5.49%); NFSC
FEBO M24-914932, NFSC FMTC IRA Rollover, FBO Daniel L. Bodensteiner, 515 2nd
St., Evansdale, IA 50707 (8.93%); Institutional Shares - Locust & Company,
Mercantile Bank of St. Louis, N.A., Trust Securities Unit 17-1, P.O. Box 387,
St. Louis, MO 63166-0387 (99.98%).
As of the same date, the following Institutions also owned of
record 5% or more of the Growth & Income Equity Portfolio's outstanding shares
as fiduciary or agent on behalf of their customers: Trust Shares - Locust &
Company, Mercantile Bank of St. Louis, N.A., Trust Securities Unit 17-1, P.O.
387, St. Louis, MO 63166-0387 (47.30%); Olive & Company, Mercantile Bank of St.
Louis, N.A., Trust Securities Unit 17-1, P.O. Box 387, St. Louis, MO 63166-0387
(39.76%); Washington & Company, Mercantile Bank of St. Louis, N.A., Trust
Securities Unit 17-1, P.O. Box 387, St. Louis, MO 63166-0387 (8.59%);
Institutional Shares - Locust & Company, Mercantile Bank of St. Louis, N.A.,
Attn: Trust Securities Unit 17-1, P.O. Box 387, St. Louis, MO 63166-0387
(90.15%); Mercantile Bank, Expediter Daily Valuation Account, Attn:
Institutional Retirement Tram 16-2, P.O. Box 387, St. Louis, MO 63166 (6.00%).
As of the same date, the following Institutions also owned of
record 5% or more of the Small Cap Equity Index Portfolio's outstanding shares
as fiduciary or agent on behalf of their customers: Trust Shares- Locust &
Company, Mercantile Bank of St. Louis, N.A., Trust Securities Unit 17-1, P.O.
Box 387, St. Louis, MO 63166-0387 (96.1300%); Institutional Shares- Locust &
Company, Mercantile Bank of St. Louis, N.A., Trust Securities Unit 17-1, P.O.
Box 387, St. Louis, MO 63166-0387 (99.99%); Investor A Shares- NFSC FEBO
M27-822221, NFSC FMTC IRA Rollover, FBO Janice Matthews, 7736 Attingham Lane,
St. Louis, MO 63119 (99.90%).
On the basis of information received from these institutions,
the Fund believes that substantially all of the shares owned of record were also
beneficially owned by these institutions because they possessed or shared voting
or investment power with respect to such shares on behalf of their underlying
accounts.
As of ____________, 1999, Mercantile Bank National Association
and its affiliates possessed, of record on behalf of their underlying customer
accounts, voting or investment power with respect to more than 25% of the Fund's
outstanding Shares. Therefore, Mercantile Bank National Association may be
deemed to be a controlling person of the Fund within the meaning of the 1940
Act.
-127-
<PAGE> 485
FINANCIAL STATEMENTS
The Fund's Annual Report to Shareholders for the fiscal year or period
ended November 30, 1998 has been filed with the Securities and Exchange
Commission. The financial statements in such Annual Report (the "Financial
Statements") are [ __________] into this Statement of Additional Information.
The Financial Statements included in such Annual Report have been audited by the
Fund's independent accountants, [_________], whose report thereon also appears
in such Annual Report and is [_________]. The Financial Statements in such
Annual Report have been [__________] in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
-128-
<PAGE> 486
APPENDIX A
COMMERCIAL PAPER RATINGS
A Standard & Poor's ("S&P") commercial paper rating is a current
assessment of the likelihood of timely payment of debt having an original
maturity of no more than 365 days. The following summarizes the rating
categories used by Standard and Poor's for commercial paper:
"A-1" - Obligations are rated in the highest category indicating that
the obligor's capacity to meet its financial commitment on the obligation is
strong. Within this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rating categories. However, the obligor's capacity to meet its financial
commitment on the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
"B" - Obligations are regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and are
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial obligation.
"D" - Obligations are in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless S&P believes such payments will
be made during such grace period. The "D" rating will also be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.
Moody's commercial paper ratings are opinions of the ability of issuers
to repay punctually senior debt obligations not having an original maturity in
excess of one year, unless explicitly noted. The following summarizes the rating
categories used by Moody's for commercial paper:
"Prime-1" - Issuers (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be
-1-
<PAGE> 487
evidenced by many of the following characteristics: leading market positions in
well-established industries; high rates of return on funds employed;
conservative capitalization structure with moderate reliance on debt and ample
asset protection; broad margins in earnings coverage of fixed financial charges
and high internal cash generation; and well-established access to a range of
financial markets and assured sources of alternate liquidity.
"Prime-2" - Issuers (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
"Prime-3" - Issuers (or supporting institutions) have an acceptable
ability for repayment of senior short-term debt obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
"Not Prime" - Issuers do not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses the highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental protection factors. Risk
factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity and other protection
factors qualify issues as investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.
-2-
<PAGE> 488
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch IBCA short-term ratings apply to debt obligations that have time
horizons of less than 12 months for most obligations, or up to three years for
U.S. public finance securities. The following summarizes the rating categories
used by Fitch IBCA for short-term obligations:
"F1" - Securities possess the highest credit quality. This designation
indicates the strongest capacity for timely payment of financial commitments and
may have an added "+" to denote any exceptionally strong credit feature.
"F2" - Securities possess good credit quality. This designation
indicates a satisfactory capacity for timely payment of financial commitments,
but the margin of safety is not as great as in the case of the higher ratings.
"F3" - Securities possess fair credit quality. This designation
indicates that the capacity for timely payment of financial commitments is
adequate; however, near-term adverse changes could result in a reduction to
non-investment grade.
"B" - Securities possess speculative credit quality. This designation
indicates minimal capacity for timely payment of financial commitments, plus
vulnerability to near-term adverse changes in financial and economic conditions.
"C" - Securities possess high default risk. This designation indicates
that default is a real possibility and that the capacity for meeting financial
commitments is solely reliant upon a sustained, favorable business and economic
environment.
"D" - Securities are in actual or imminent payment default.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely payment of principal and interest of debt instruments with original
maturities of one year or less. The following summarizes the ratings used by
Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
category and indicates a very high likelihood that principal and interest will
be paid on a timely basis.
"TBW-2" - This designation represents Thomson BankWatch's
second-highest category and indicates that while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated "TBW-1."
-3-
<PAGE> 489
"TBW-3" - This designation represents Thomson BankWatch's lowest
investment-grade category and indicates that while the obligation is more
susceptible to adverse developments (both internal and external) than those with
higher ratings, the capacity to service principal and interest in a timely
fashion is considered adequate.
"TBW-4" - This designation represents Thomson BankWatch's lowest rating
category and indicates that the obligation is regarded as non-investment grade
and therefore speculative.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations are rated "BB," "B," "CCC," "CC" and "C" are regarded as
having significant speculative characteristics. "BB" indicates the least degree
of speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
"BB" - An obligation rated "BB" is less vulnerable to non-payment than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to the obligor's inadequate capacity to meet its financial commitment on the
obligation.
"B" - An obligation rated "B" is more vulnerable to non-payment than
obligations rated "BB", but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
-4-
<PAGE> 490
"CCC" - An obligation rated "CCC" is currently vulnerable to
non-payment, and is dependent upon favorable business, financial and economic
conditions for the obligor to meet its financial commitment on the obligation.
In the event of adverse business, financial or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable to
non-payment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been taken, but
payments on this obligation are being continued.
"D" - An obligation rated "D" is in payment default. This rating is
used when payments on an obligation are not made on the date due, even if the
applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. "D" rating is also used upon the
filing of a bankruptcy petition or the taking of similar action if payments on
an obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk - such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than the "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium-grade obligations. Factors giving security to
principal and interest
-5-
<PAGE> 491
are considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.
"Baa" - Bonds are considered as medium-grade obligations, (i.e., they
are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" are of poor standing; "Ca" represents obligations
which are speculative in a high degree; and "C" represents the lowest rated
class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operating experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic
rating classification from "Aa" through "Caa." The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid range ranking; and the modifier 3 indicates a ranking in the
lower end of its generic rating category.
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but adequate.
However, risk factors are more variable and greater in periods of economic
stress.
"BBB" - Debt possesses below-average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is
-6-
<PAGE> 492
deemed likely to meet obligations when due. Debt rated "B" possesses the risk
that obligations will not be met when due. Debt rated "CCC" is well below
investment grade and has considerable uncertainty as to timely payment of
principal, interest or preferred dividends. Debt rated "DD" is a defaulted debt
obligation, and the rating "DP" represents preferred stock with dividend
arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch IBCA for corporate
and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. These ratings denote the lowest expectation of investment risk
and are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. These ratings denote a very low expectation of credit risk and indicate
very strong capacity for timely payment of financial commitments. This capacity
is not significantly vulnerable to foreseeable events.
"A" - Bonds considered to be investment grade and of high credit
quality. These ratings denote a low expectation of credit risk and indicate
strong capacity for timely payment of financial commitments. This capacity may,
nevertheless, be more vulnerable to adverse changes in circumstances or in
economic conditions than is the case for higher ratings.
"BBB" - Bonds considered to be investment grade and of good credit
quality. These ratings denote that there is currently a low expectation of
investment risk. The capacity for timely payment of financial commitments is
considered adequate, but adverse changes in circumstances and in economic
conditions are more likely to impair this capacity.
"BB" - Bonds considered to be speculative. These ratings indicate that
there is a possibility of credit risk developing, particularly as the result of
adverse economic changes over time; however, business or financial alternatives
may be available to allow financial commitments to be met. Securities rated in
this category are not investment grade.
"B" - Bonds are considered highly speculative. these ratings indicate
that significant credit risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
"CCC," "CC," and "C" - Bonds have high default risk. Default is a real
possibility and capacity for meeting financial commitments is reliant upon
sustained, favorable
-7-
<PAGE> 493
business or economic developments. "CC" ratings indicate that default of some
kind appears probable, and "C" ratings signal imminent default.
"DDD," "DD" and "D" - Bonds are in default. Securities are not meeting
obligations and are extremely speculative. "DDD" designates the highest
potential of amounts outstanding on any securities involved, and "D" represents
the lowest potential for recovery.
To provide more detailed indications of credit quality, the Fitch IBCA
ratings from and including "AA" to "B" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major rating
categories.
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes the
rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" - This designation indicates that the ability to repay principal
and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis with limited incremental risk compared
to issues rated in the highest category.
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents the lowest investment-grade
category and indicates an acceptable capacity to repay principal and interest.
Issues rated "BBB" are more vulnerable to adverse developments (both internal
and external) than obligations with higher ratings.
"BB," "B," "CCC," and "CC" - These designations are assigned by Thomson
BankWatch to non-investment grade long-term debt. Such issues are regarded as
having speculative characteristics regarding the likelihood of timely payment of
principal and interest. "BB" indicates the lowest degree of speculation and "CC"
the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may include
a plus or minus sign designation which indicates where within the respective
category the issue is placed.
-8-
<PAGE> 494
MUNICIPAL NOTE RATINGS
A Standard and Poor's rating reflects the liquidity concerns and market
access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit a strong capacity
to pay principal and interest. Those issues determined to possess very strong
characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest, with some vulnerability to adverse
financial and economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - This designation denotes best quality. There is
present strong protection by established cash flows, superior liquidity support
or demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high quality, with margins
of protection ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality, with all
security elements accounted for but lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - This designation denotes adequate quality.
Protection commonly regarded as required of an investment security is present
and although not distinctly or predominantly speculative, there is specific
risk.
"SG" - This designation denotes speculative quality. Debt instruments
in this category lack of margins of protection.
Fitch IBCA and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
-9-
<PAGE> 495
APPENDIX B
The U.S. Government Securities, Intermediate Corporate Bond, Bond
Index, Government & Corporate Bond, Equity Income, Equity Index, Growth & Income
Equity, Growth Equity, Small Cap Equity, Small Cap Equity Index, International
Equity and Balanced Portfolios may enter into futures contracts and options for
hedging purposes in furtherance of their respective investment objectives as
described in this Statement of Additional Information. Such transactions are
described further in this Appendix.
I. Interest Rate Futures Contracts.
Use of Interest Rate Futures Contracts. Bond prices are established in
both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the future
for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, each Portfolio may use interest rate
futures as a defense, or hedge, against anticipated interest rate changes and
not for speculation. As described below, this would include the use of futures
contract sales to protect against expected increases in interest rates and
futures contract purchases to offset the impact of interest rate declines.
Each Portfolio presently could accomplish a similar result to that
which it hopes to achieve through the use of futures contracts by selling bonds
with long maturities and investing in bonds with short maturities when interest
rates are expected to increase, or conversely, selling short-term bonds and
investing in long-term bonds when interest rates are expected to decline.
However, because of the liquidity that is often available in the futures market,
the protection is more likely to be achieved, perhaps at a lower cost and
without changing the rate of interest being earned by the Portfolio, through
using futures contracts. A Portfolio would engage in an interest rate futures
contract sale to maintain the income advantage from continued holding of a
long-term bond while endeavoring to avoid part or all of the loss in market
value that would otherwise accompany a decline in long-term securities prices. A
Portfolio would engage in an interest rate futures contract purchase when it is
not fully invested in long-term bonds but wishes to defer for a time the
purchase of long-term bonds in light of the availability of advantageous interim
investments, for example, shorter-term securities whose yields are greater than
those available on long-term bonds.
Description of Interest Rate Futures Contracts. An interest rate
futures contract sale would create an obligation by the Portfolio, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase would
create an obligation by the Portfolio, as purchaser, to take delivery of
-1-
<PAGE> 496
the specific type of financial instrument at a specific future time at a
specific price. The specific securities delivered or taken, respectively, at
settlement date, would not be determined until at or near that date. The
determination would be in accordance with the rules of the exchange on which the
futures contract sale or purchase was made.
Although interest rate futures contracts by their terms call for actual
delivery or acceptance of securities, in most cases the contracts are closed out
before the settlement date without the making or taking of delivery of
securities. Closing out a futures contract sale is effected by the Portfolio's
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
in the sale exceeds the price in the offsetting purchase, the Portfolio is paid
the difference and thus realizes a gain. If the offsetting purchase price
exceeds the sale price, the Portfolio pays the difference and realizes a loss.
Similarly, the closing out of a futures contract purchase is effected by the
Portfolio's entering into a futures contract sale. If the offsetting sale price
exceeds the purchase price, the Portfolio realizes a gain, and if the purchase
price exceeds the offsetting sale price, the Portfolio realizes a loss.
Interest rate futures contracts are traded in an auction environment on
the floors of several exchanges - principally, the Chicago Board of Trade and
the Chicago Mercantile Exchange. A Portfolio would deal only in standardized
contracts on recognized exchanges. Each exchange guarantees performance under
contract provisions through a clearing corporation, a nonprofit organization
managed by the exchange membership.
A public market now exists in futures contracts covering various
financial instruments including long-term United States Treasury Bonds and
Notes; Government National Mortgage Association (GNMA) modified pass-through
mortgage-backed securities; three-month United States Treasury Bills; and
ninety-day commercial paper. The Portfolios may trade in any futures contract
for which there exists a public market, including, without limitation, the
foregoing instruments.
II. Stock Index Futures Contracts.
A stock index assigns relative values to the stocks included in the
index and the index fluctuates with changes in the market values of the stocks
included. Some stock index futures contracts are based on broad market indexes,
such as the Standard & Poor's 500 or the New York Stock Exchange Composite
Index. In contrast, certain exchanges offer futures contracts on narrower market
indexes, such as the Standard & Poor's 100 or indexes based on an industry or
market segment, such as oil and gas stocks. Futures contracts are traded on
organized exchanges regulated by the Commodity Futures Trading Commission.
Transactions on such exchanges are cleared through a clearing corporation, which
guarantees the performance of the parties to each contract.
A Portfolio will sell stock index futures contracts in order to offset
a decrease in market value of its portfolio securities that might otherwise
result from a market decline. The Portfolio may do so either to hedge the value
of its portfolio as a whole, or to protect against
-2-
<PAGE> 497
declines, occurring prior to sales of securities, in the value of the securities
to be sold. Conversely, the Portfolio will purchase stock index futures
contracts in anticipation of purchases of securities. In a substantial majority
of these transactions, the Portfolio will purchase such securities upon
termination of the long futures position, but a long futures position may be
terminated without a corresponding purchase of securities.
In addition, the Portfolio may utilize stock index futures contracts in
anticipation of changes in the composition of its portfolio holdings. For
example, in the event that the Portfolio expects to narrow the range of industry
groups represented in its holdings it may, prior to making purchases of the
actual securities, establish a long futures position based on a more restricted
index, such as an index comprised of securities of a particular industry group.
The Portfolio may also sell futures contracts in connection with this strategy,
in order to protect against the possibility that the value of the securities to
be sold as part of the restructuring of the portfolio will decline prior to the
time of sale.
III. Futures Contracts on Foreign Currencies.
A futures contract on foreign currency creates a binding obligation on
one party to deliver, and a corresponding obligation on another party to accept
delivery of, a stated quantity of a foreign currency, for an amount fixed in
U.S. dollars. Foreign currency futures may be used by a Portfolio to hedge
against exposure to fluctuations in exchange rates between the U.S. dollar and
other currencies arising from multi-national transactions.
IV. Margin Payments.
Unlike when a Portfolio purchases or sells a security, no price is paid
or received by the Portfolio upon the purchase or sale of a futures contract.
Initially, the Portfolio will be required to deposit with the broker or in a
segregated account with the Fund's custodian an amount of cash or cash
equivalents, the value of which may vary but is generally equal to 10% or less
of the value of the contract. This amount is known as initial margin. The nature
of initial margin in futures transactions is different from that of margin in
security transactions in that futures contract margin does not involve the
borrowing of funds by the customer to finance the transactions. Rather, the
initial margin is in the nature of a performance bond or good faith deposit on
the contract which is returned to the Portfolio upon termination of the futures
contract assuming all contractual obligations have been satisfied. Subsequent
payments, called variation margin, to and from the broker, will be made on a
daily basis as the price of the underlying instruments fluctuates making the
long and short positions in the futures contract more or less valuable, a
process known as marking-to-market. For example, when a Portfolio has purchased
a futures contract and the price of the contract has risen in response to a rise
in the underlying instruments, that position will have increased in value and
the Portfolio will be entitled to receive from the broker a variation margin
payment equal to that increase in value. Conversely, where a Portfolio has
purchased a futures contract and the price of the future contract has declined
in response to a decrease in the underlying instruments, the position would be
less valuable and the Portfolio would be required to make a variation margin
payment to the broker. At any time prior
-3-
<PAGE> 498
to expiration of the futures contract, the adviser may elect to close the
position by taking an opposite position, subject to the availability of a
secondary market, which will operate to terminate the Portfolio's position in
the futures contract. A final determination of variation margin is then made,
additional cash is required to be paid by or released to the Portfolio, and the
Portfolio realizes a loss or gain.
V. Other Hedging Transactions.
Although noted above, none of the Portfolios presently intend to use
interest rate futures contracts and stock index and foreign currency futures
contracts (and related options) in connection with their hedging activities.
Nevertheless, each of these Portfolios is authorized to enter into hedging
transactions in any other futures or options contracts which are currently
traded or which may subsequently become available for trading. Such instruments
may be employed in connection with the Portfolios' hedging strategies if, in the
judgment of the adviser, transactions therein are necessary or advisable.
VI. Accounting Treatment.
Accounting for futures contracts and options will be in accordance with
generally accepted accounting principles.
-4-
<PAGE> 499
FORM N-1A
PART C. OTHER INFORMATION
-------------------------
Item 23. EXHIBITS
(a) (1) Articles of Incorporation dated September 9, 1982.(2)
(2) Articles Supplementary to Registrant's Articles of
Incorporation dated October 28, 1982.(2)
(3) Articles Supplementary to Registrant's Articles of
Incorporation dated December 22, 1987.(2)
(4) Articles Supplementary to Registrant's Articles of
Incorporation dated as of October 30, 1990.(2)
(5) Articles Supplementary to Registrant's Articles of
Incorporation dated as of November 9, 1990.(2)
(6) Articles Supplementary to Registrant's Articles of
Incorporation dated as of March 19, 1991.(2)
(7) Certificate of Correction dated April 30, 1991 to
Articles Supplementary dated as of March 19, 1991.(2)
(8) Articles Supplementary to Registrant's Articles of
Incorporation dated as of June 25, 1991.(2)
(9) Articles Supplementary to Registrant's Articles of
Incorporation dated as of November 15, 1991.(2)
(10) Articles Supplementary to Registrant's Articles of
Incorporation dated as of January 26, 1993.(2)
(11) Articles Supplementary to Registrant's Articles of
Incorporation dated as of March 23, 1993.(2)
(12) Articles Supplementary to Registrant's Articles of
Incorporation dated as of March 7, 1994.(2)
(13) Certificate of Correction dated October 17, 1994 to
Articles Supplementary dated as of March 8, 1994 to
Registrant's Articles of Incorporation.(2)
<PAGE> 500
(14) Articles Supplementary to Registrant's Articles of
Incorporation dated as of February 22, 1995.(2)
(15) Articles Supplementary to Registrant's Articles of
Incorporation dated as of April 17, 1995.(2)
(16) Articles Supplementary to Registrant's Articles of
Incorporation dated June 27, 1995.(2)
(17) Articles Supplementary to Registrant's Articles of
Incorporation dated September 18, 1995.(2)
(18) Articles Supplementary to Registrant's Articles of
Incorporation dated August 30, 1996.(4)
(19) Articles Supplementary to Registrant's Articles of
Incorporation dated February 3, 1997.(6)
(20) Articles Supplementary to Registrant's Articles of
Incorporation dated June 17, 1997.(9)
(21) Articles Supplementary to Registrant's Articles of
Incorporation dated October 29, 1997.(11)
(22) Articles Supplementary to Registrant's Articles of
Incorporation dated March 23, 1998.(14)
(23) Articles Supplementary to Registrant's Articles of
Incorporation dated September 17, 1998.(14)
(b) Restated and Amended By-Laws as approved and adopted by
Registrant's Board of Directors.(5)
(c) See Article VI of Registrant's Articles of Incorporation,
incorporated by reference to Post-Effective Amendment No. 34
to Registrant's Registration Statement on Form N-1A (File No.
2-79285) on February 28, 1996 and Articles I and IV of
Registrant's Restated and Amended By-Laws, incorporated by
reference to Post-Effective Amendment No. 37 to Registrant's
Registration Statement on Form N-1A (File No. 2-79285) on
January 30, 1997.
(d) (1) Amended and Restated Advisory Agreement between
Registrant and Mississippi Valley Advisors Inc. dated
April 1, 1991.(2)
(2) Addendum No. 1 to Amended and Restated Advisory
Agreement between Registrant and Mississippi Valley
Advisors Inc. with respect to the ARCH Treasury Money
Market Portfolio, dated September 27, 1991.(2)
<PAGE> 501
(3) Addendum No. 2 to Amended and Restated Advisory
Agreement between Registrant and Mississippi Valley
Advisors Inc. with respect to the ARCH Small Cap
Equity (formerly Emerging Growth) Portfolio, dated
April 1, 1992.(2)
(4) Addendum No. 3 to Amended and Restated Advisory
Agreement between Registrant and Mississippi Valley
Advisors Inc. with respect to the ARCH Balanced
Portfolio dated April 1, 1993.(2)
(5) Addendum No. 4 to Amended and Restated Advisory
Agreement between Registrant and Mississippi Valley
Advisors Inc. dated March 15, 1994.(2)
(6) Addendum No. 5 to Amended and Restated Advisory
Agreement between Registrant and Mississippi Valley
Advisors Inc. with respect to the Short-Intermediate
Municipal Portfolio dated July 10, 1995.(2)
(7) Addendum No. 6 to Amended and Restated Advisory
Agreement between Registrant and Mississippi Valley
Advisors Inc. with respect to the Tax-Exempt Money
Market, Missouri Tax-Exempt Bond and Kansas
Tax-Exempt Bond Portfolios dated September 29,
1995.(2)
(8) Addendum No. 7 to Amended and Restated Advisory
Agreement between Registrant and Mississippi Valley
Advisors Inc. with respect to the Equity Income,
National Municipal Bond and Intermediate Corporate
Bond (formerly Short-Intermediate Corporate Bond)
Portfolios dated November 15, 1996.(5)
(9) Addendum No. 8 to Amended and Restated Advisory
Agreement between Registrant and Mississippi Valley
Advisors Inc. with respect to the Equity Index and
Bond Index Portfolios dated February 14, 1997.(6)
(10) Addendum No. 9 to Amended and Restated Advisory
Agreement between Registrant and Mississippi Valley
Advisors Inc. with respect to the Growth Equity
Portfolio dated November 21, 1997.(11)
(11) Addendum No. 10 to Amended and Restated Advisory
Agreement between Registrant and Mississippi Valley
Advisors Inc. with respect to the Small Cap Equity
Index Portfolio.(15)
(12) Form of Addendum No. 11 to Amended and Restated
Advisory Agreement between the Registrant and
Mississippi Valley Advisors Inc. with respect to the
Conning Money Market Portfolio.(14)
<PAGE> 502
(13) Sub-Advisory Agreement between Mississippi Valley
Advisors Inc. and Clay Finlay Inc. dated August 29,
1996.(4)
(14) Form of Sub-Advisory Agreement between Mississippi
Valley Advisors Inc. and Conning Asset Management Co.
with respect to the Conning Money Market
Portfolio.(14)
(e) (1) Distribution Agreement between Registrant and The
Winsbury Company Limited Partnership dated October 1,
1993. (13)
(2) Addendum No. 1 to Distribution Agreement between
Registrant and The Winsbury Company Limited
Partnership with respect to the ARCH International
Equity Portfolio dated March 15, 1994.(13)
(3) Addendum No. 2 to Distribution Agreement between
Registrant and The Winsbury Company Limited
Partnership with respect to Investor B Shares of the
non-money market Portfolios dated March 1, 1995.(13)
(4) Addendum No. 3 to Distribution Agreement between
Registrant and The Winsbury Company Limited
Partnership with respect to the Short-Intermediate
Municipal Portfolio and Investor B Shares of the
Money Market Portfolio.(13)
(5) Addendum No. 4 to Distribution Agreement between
Registrant and The Winsbury Company Limited
Partnership with respect to the Tax-Exempt Money
Market, Missouri Tax-Exempt Bond and Kansas
Tax-Exempt Bond Portfolios dated September 29,
1995.(2)
(6) Addendum No. 5 to Distribution Agreement between
Registrant and BISYS Fund Services with respect to
the Equity Income, National Municipal Bond and
Intermediate Corporate Bond (formerly
Short-Intermediate Corporate Bond) Portfolios dated
November 15, 1996.(5)
(7) Addendum No. 6 to Distribution Agreement between
Registrant and BISYS Fund Services with respect to
the Equity Index and Bond Index Portfolios dated
February 14, 1997.(6)
(8) Addendum No. 7 to Distribution Agreement between
Registrant and BISYS Fund Services with respect to
the Growth Equity and Small Cap Equity Index
Portfolios dated November 21, 1997.(11)
(9) Addendum No. 8 to Distribution Agreement between
Registrant and BISYS Fund Services with respect to
Trust II Shares of the Money Market Portfolios.(15)
<PAGE> 503
(10) Form of Addendum No. 9 to Distribution Agreement
between the Registrant and BISYS Fund Services with
respect to the Conning Money Market Portfolio.(14)
(11) Amendment No. 1 to Distribution Agreement between
Registrant and The Winsbury Company Limited
Partnership dated as of September 29, 1995.(1)
(f) None.
(g) (1) Custodian Agreement between Registrant and Mercantile
Bank of St. Louis National Association dated as of
April 1, 1992.(13)
(2) Custody Fee Agreement between Registrant and
Mercantile Bank of St. Louis National Association
dated April 1, 1995.(13)
(3) Custody Fee Agreement between Registrant and
Mercantile Bank of St. Louis National Association
dated July 10, 1995.(13)
(4) Custody Fee Agreement between Registrant and
Mercantile Bank of St. Louis National Association
dated September 29, 1995.(2)
(5) Custody Fee Agreement between Registrant and
Mercantile Bank National Association dated November
15, 1996.(5)
(6) Custody Fee Agreement between Registrant and
Mercantile Bank National Association dated February
14, 1997.(6)
(7) Custody Fee Agreement between Registrant and
Mercantile Bank of St. Louis National Association
dated November 21, 1997.(11)
(8) Form of Custody Fee Agreement between Registrant and
Mercantile Bank National Association.(14)
(9) Securities Lending Amendment dated August 4, 1994 to
Custodian Agreement dated April 1, 1992 between
Registrant and Mercantile Bank of St. Louis National
Association.(13)
(10) Assignment and Delegation of Custodian Agreement
between Mercantile Bank National Association and
Mercantile Trust Company National Association dated
December 1, 1998.(15)
(11) Global Sub-Custodian Agreement among Bankers Trust
Company of New York, Registrant and Mercantile Bank
of St. Louis National Association dated as of April
1, 1994.(13)
<PAGE> 504
(12) Foreign Custody Delegation Agreement between the
Registrant and Bankers Trust Company of New York
dated December 4, 1998.(15)
(h) (1) Administration Agreement between Registrant and The
Winsbury Service Corporation dated October 1,
1993.(13)
(2) Addendum No. 1 to Administration Agreement between
Registrant and The Winsbury Service Corporation with
respect to the ARCH International Equity Portfolio
dated March 15, 1994.(13)
(3) Addendum No. 2 to Administration Agreement between
Registrant and BISYS Fund Services Ohio, Inc.
(formerly known as The Winsbury Service Corporation)
with respect to Investor B Shares of the non-money
market Portfolios dated as of March 1, 1995.(13)
(4) Addendum No. 3 to Administration Agreement between
Registrant and BISYS Fund Services Ohio, Inc. with
respect to the Short-Intermediate Municipal Portfolio
and Investor B Shares of the Money Market Portfolio
dated July 10, 1995.(13)
(5) Addendum No. 4 to Administration Agreement between
Registrant and BISYS Fund Services Ohio, Inc. with
respect to the Tax-Exempt Money Market, Missouri
Tax-Exempt Bond and Kansas Tax-Exempt Bond Portfolios
dated September 29, 1995.(2)
(6) Addendum No. 5 to Administration Agreement between
Registrant and BISYS Fund Services Ohio, Inc. with
respect to the Equity Income, National Municipal Bond
and Intermediate Corporate bond (formerly
Short-Intermediate Corporate Bond) Portfolios dated
November 15, 1996.(5)
(7) Addendum No. 6 to Administration Agreement between
Registrant and BISYS Fund Services Ohio, Inc. with
respect to the Equity Index and Bond Index Portfolios
dated February 14, 1997.(6)
(8) Addendum No. 7 to Administration Agreement between
Registrant and BISYS Fund Services Ohio, Inc. with
respect to the Growth Equity and Small Cap Equity
Index Portfolios dated November 21, 1997.(11)
(9) Addendum No. 8 to Administration Agreement between
Registrant and BISYS Fund Services Ohio, Inc. with
respect to Trust II Shares of the Money Market
Portfolios.(15)
<PAGE> 505
(10) Form of Addendum No. 9 to Administration Agreement
between Registrant and BISYS Fund Services Ohio, Inc.
with respect to the Conning Money Market
Portfolio.(14)
(11) Transfer Agency Agreement between Registrant and The
Winsbury Service Corporation dated October 1, 1993.
(13)
(12) Addendum No. 1 to Transfer Agency Agreement between
Registrant and The Winsbury Service Corporation with
respect to the ARCH International Equity Portfolio
dated March 15, 1994.(13)
(13) Addendum No. 2 to Transfer Agency Agreement between
Registrant and BISYS Fund Services Ohio, Inc.
(formerly known as The Winsbury Service Corporation)
with respect to Investor B Shares of the non-money
market Portfolios dated as of March 1, 1995.(13)
(14) Addendum No. 3 to Transfer Agency Agreement between
Registrant and BISYS Fund Services Ohio, Inc. with
respect to the Short-Intermediate Municipal Portfolio
and Investor B Shares of the Money Market Portfolio
dated July 10, 1995.(13)
(15) Addendum No. 4 to Transfer Agency Agreement between
Registrant and BISYS Fund Services Ohio, Inc. with
respect to the Tax-Exempt Money Market, Missouri
Tax-Exempt Bond and Kansas Tax-Exempt Bond Portfolios
dated September 29, 1995.(2)
(16) Addendum No. 5 to Transfer Agency Agreement between
Registrant and BISYS Fund Services Ohio, Inc. with
respect to the Equity Income, National Municipal Bond
and Intermediate Corporate Bond (formerly
Short-Intermediate Corporate Bond) Portfolios dated
November 15, 1996.(5)
(17) Addendum No. 6 to Transfer Agency Agreement between
Registrant and BISYS Fund Services Ohio, Inc. with
respect to the Equity Index and Bond Index Portfolios
dated February 14, 1997.(6)
(18) Addendum No. 7 to Transfer Agency Agreement between
Registrant and BISYS Fund Services Ohio, Inc. with
respect to the Growth Equity and Small Cap Equity
Index Portfolios dated November 21, 1997.(10)
(19) Addendum No. 8 to Transfer Agency Agreement between
Registrant and BISYS Fund Services Ohio, Inc. with
respect to Trust II Shares of the Money Market
Portfolios.(15)
<PAGE> 506
(20) Form of Addendum No. 9 to Transfer Agency Agreement
between Registrant and BISYS Fund Services Ohio, Inc.
with respect to the Conning Money Market
Portfolio.(14)
(21) Amendment No. 1 to Transfer Agency Agreement between
Registrant and BISYS Fund Services Ohio, Inc. dated
as of September 29, 1995.(1)
(22) Amendment No. 2 to Transfer Agency Agreement between
Registrant and BISYS Fund Services Ohio, Inc. dated
October 1, 1995.(2)
(23) Administrative Services Plan (Trust Shares) and Form
of Agreement.(8)
(24) Administrative Services Plan (Institutional Shares)
and Form of Agreement.(8)
(25) Form of Shareholder Services Plan and Form of
Servicing Agreement with respect to the Conning Money
Market Portfolio.(14)
(26) Agreement and Plan of Reorganization between
Registrant and Arrow Funds.(9)
(i) Opinion and consent of counsel. (13)
(j) (1) Consent of Independent Auditors to be filed by
amendment.
(2) Consent of Drinker Biddle & Reath LLP.(15)
(k) None.
(l) (1) Purchase Agreement between Registrant and
Shearson/American Express Inc. dated November 23,
1982.(13)
(2) Purchase Agreement between Registrant and The
Winsbury Service Corporation dated April 1, 1994.(13)
(3) Purchase Agreements between Registrant and BISYS Fund
Services Ohio, Inc. dated as of February 28,
1995.(13)
(4) Purchase Agreements between Registrant and BISYS Fund
Services Ohio, Inc. dated as of July 7, 1995.(13)
(5) Purchase Agreements between Registrant and BISYS Fund
Services Ohio, Inc. dated September 29, 1995.(2)
<PAGE> 507
(6) Purchase Agreement between Registrant and BISYS Fund
Services Ohio, Inc. dated November 14, 1996.(5)
(7) Purchase Agreements between Registrant and BISYS Fund
Services Ohio, Inc. dated February 6, 1997.(6)
(8) Purchase Agreement between Registrant and BISYS Fund
Services Ohio, Inc. dated February 27, 1997.(6)
(9) Purchase Agreement between Registrant and BISYS Fund
Services Ohio, Inc. dated April 30, 1997.(7)
(10) Purchase Agreements between Registrant and BISYS Fund
Services Ohio, Inc. dated November 21, 1997.(11)
(11) Purchase Agreements between Registrant and BISYS Fund
Services Ohio, Inc. dated December 29, 1998.(15)
(12) Form of Purchase Agreement between Registrant and
BISYS Fund Services Ohio, Inc.(14)
(m) (1) Distribution and Services Plan (Investor A Shares)
under Rule 12b-1 and Form of Agreement.(8)
(2) Distribution and Services Plan (Investor B Shares)
under Rule 12b-1 and Form of Agreement.(8)
(n) To be filed by amendment.
(o) Amended and Restated Plan Pursuant to Rule 18f-3 for Operation
of a Multi-Class System.(12)
- ----------------------------------
1. Filed electronically as an Exhibit and incorporated herein by reference
to Post-Effective Amendment No. 33 to Registrant's Registration
Statement on Form N-1A (File No. 2-79285) on January 2, 1996.
2. Filed electronically as an Exhibit and incorporated herein by reference
to Post-Effective Amendment No. 34 to Registrant's Registration
Statement on Form N-1A (File No. 2-79285) on February 28, 1996.
3. Filed electronically as an Exhibit and incorporated herein by reference
to Post-Effective Amendment No. 35 to Registrant's Registration
Statement on Form N-1A (File No. 2-79285) on March 28, 1996.
<PAGE> 508
4. Filed electronically as an Exhibit and incorporated herein by reference
to Post-Effective Amendment No. 36 to Registrant's Registration
Statement on Form N-1A (File No. 2-79285) on October 8, 1996.
5. Filed electronically as an Exhibit and incorporated herein by reference
to Post-Effective Amendment No. 37 to Registrant's Registration
Statement on Form N-1A (File No. 2-79285) on January 30, 1997.
6. Filed electronically as an Exhibit and incorporated herein by reference
to Post-Effective Amendment No. 38 to Registrant's Registration
Statement on Form N-1A (File No. 2-79285) on March 31, 1997.
7. Filed electronically as an Exhibit and incorporated herein by reference
to Post-Effective Amendment No. 39 to Registrant's Registration
Statement on Form N-1A (File No. 2-79285) on May 28, 1997.
8. Filed electronically as an Exhibit and incorporated herein by reference
to Post-Effective Amendment No. 40 to Registrant's Registration
Statement on Form N-1A (File No. 2-79285) on June 18, 1997.
9. Filed electronically as an Exhibit and incorporated herein by reference
to Registrant's Registration Statement on Form N-14 (File No.
333-33423) on August 12, 1997.
10. Filed electronically as an Exhibit and incorporated herein by reference
to Post-Effective Amendment No. 41 to Registrant's Registration
Statement on Form N-1A (File No. 2-79285) on August 29, 1997.
11. Filed electronically as an Exhibit and incorporated herein by reference
to Post-Effective Amendment No. 42 to Registrant's Registration
Statement on Form N-1A (File No. 2-79285) on January 29, 1998.
12. Filed electronically as an Exhibit and incorporated herein by reference
to Post-Effective Amendment No. 43 to Registrant's Registration
Statement on Form N-1A (File No. 2-79285) on January 30, 1998.
13. Filed electronically as an Exhibit and incorporated herein by reference
to Post-Effective Amendment No. 44 to Registrant's Registration
Statement on Form N-1A (File No. 2-79285) on March 31, 1998.
14. Filed electronically as an Exhibit and incorporated herein by reference
to Post-Effective Amendment No. 45 to Registrant's Registration
Statement on Form N-1A (File No. 2-79285) on November 5, 1998.
15. A copy of such Exhibit is filed electronically herein
Item 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
<PAGE> 509
Not applicable
Item 25. INDEMNIFICATION
Indemnification of Registrant's principal underwriter, custodian and
transfer agent against certain losses is provided for, respectively, in Section
7 of the Distribution Agreement, incorporated herein by reference as Exhibit
(6)(a), in Section 24 of the Custodian Agreement, incorporated herein by
reference as Exhibit (8)(a) and in Section 18 of the Transfer Agency Agreement
incorporated herein by reference as Exhibit (9)(k). The Registrant has obtained
from a major insurance carrier a directors' and officers' liability policy
covering certain types of errors and omissions. In no event will the Registrant
indemnify any of its directors, officers, employees or agents against any
liability to which such person would otherwise be subject by reason of his
willful misfeasance, bad faith or gross negligence in the performance of his
duties, or by reason of his reckless disregard of the duties involved in the
conduct of his office or under his agreement with the Registrant. Registrant
will comply with Rule 484 under the Securities Act of 1933 and Release 11330
under the Investment Company Act of 1940 in connection with any indemnification.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
Registrant pursuant to the foregoing provisions, or otherwise, Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses incurred or
paid by a director, officer or controlling person of Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Item 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
A. Mississippi Valley Advisors Inc. is registered as an investment
adviser with the Securities and Exchange Commission and is responsible for
providing advisory services to each of Registrant's investment portfolios.
B. The information required by this Item 26 with respect to each
Director and Officer of Mississippi Valley Advisors Inc. is incorporated by
reference to Form ADV and Schedules A and D filed by Mississippi Valley Advisors
Inc. with the Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934 (File No. 801-28897).
C. Clay Finlay Inc. is registered as an investment adviser with the
Securities and Exchange Commission and provides sub-advisory services to the
Registrant's International Equity Portfolio.
<PAGE> 510
D. The information required by this Item 26 with respect to each
Director and Officer of Clay Finlay Inc. is included in Form ADV and Schedules A
and D filed by Clay Finlay Inc. with the Securities and Exchange Commission
pursuant to the Securities Exchange Act of 1934 (File No. 801-17316).
E. Conning Asset Management Co. is registered as an investment adviser
with the Securities and Exchange Commission and provides sub-advisory services
to the Registrant's Conning Money Market Portfolio.
F. The information required by this Item 26 with respect to each
Director and Officer of Conning Asset Management Co. is included in Form ADV and
Schedules A and D filed by Conning Asset Management Co. with the Securities and
Exchange Commission pursuant to the Securities Exchange Act of 1934 (File No.
801-________).
Item 27. PRINCIPAL UNDERWRITER
A. BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services
(formerly The Winsbury Company Limited Partnership) acts as distributor
and its affiliate, BISYS Fund Services Ohio, Inc., acts as
administrator and transfer agent for the Registrant. BISYS Fund
Services also distributes the securities of Alpine Equity Trust,
American Performance Funds, AmSouth Mutual Funds, The BB&T Mutual Funds
Group, The Coventry Group, ESC Strategic Funds, The Eureka Funds,
Governor Funds, Gradison Custodian Trust, Gradison Growth Trust,
Gradison-MCDonald Cash Reserves Trust, Gradison-McDonald Municipal
Custodian Trust, Fifth Third Funds, Hirtle Callaghan Trust, HSBC Family
of Funds, INTRUST Funds Trust, The Infinity Mutual Funds, Inc., The
Kent Funds, Magna Funds, Meyers Investment Trust, MMA Praxis Mutual
Funds, M.S.D.&T. Funds, Pacific Capital Funds, The Parkstone Advantage
Funds, Pegasus Funds, The Republic Advisors Funds Trust, Puget Sound
Alternative Investment Series Trust, The Republic Funds Trust, The
Riverfront Funds, Inc., Sefton Funds, The Sessions Group, SsgA
Liquidity Fund, Summit Investment Trust, Variable Insurance Funds, The
Victory Portfolios, The Victory Variable Funds and Vintage Mutual
Funds, Inc.
B. To the best of Registrant's knowledge, the partners of BISYS Fund
Services are as follows:
<PAGE> 511
<TABLE>
<CAPTION>
====================================================================================================================
Positions and Offices
Name and Principal with BISYS Positions and Offices
Business Address Fund Services With Registrant
---------------- ------------- ---------------
====================================================================================================================
<S> <C> <C>
BISYS Fund Services, Inc. Sole General Partner None
3435 Stelzer Road
Columbus, Ohio 43219-3035
- --------------------------------------------------------------------------------------------------------------------
WC Subsidiary Corporation Sole Limited Partner
150 Clove Road None
Little Falls, NJ 07424
====================================================================================================================
</TABLE>
C. None.
Item 28. LOCATION OF ACCOUNTS AND RECORDS
(1) Mercantile Trust Company National Association, One Mercantile
Center, 8th and Locust Streets, St. Louis, MO 63101 (records relating
to its functions as custodian).
(2) BISYS Fund Services, 3435 Stelzer Road, Columbus, Ohio 43219
(records relating to its functions as distributor).
(3) Mississippi Valley Advisors Inc., 7th and Washington Streets, 21st
Floor, St. Louis, MO 63101 (records relating to its functions as
investment adviser).
(4) BISYS Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus, Ohio
43219 (records relating to its function as administrator).
(5) BISYS Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus, Ohio
43219 (records relating to its function as transfer agent and
dividend disbursing agent).
(6) Drinker Biddle & Reath LLP, Philadelphia National Bank Building,
1345 Chestnut Street, Philadelphia, PA 19107-3496 (Registrant's
Articles of Incorporation, By-Laws and Minute Books).
(7) Clay Finlay Inc., 200 Park Avenue, 56th Floor, New York, New York
10166 (records relating to its function as sub-adviser to the
International Equity Portfolio).
(8) Bankers Trust Company, 16 Wall Street, New York, New York 10005
(records relating to its function as sub-custodian for the
International Equity Portfolio).
(9) Conning Asset Management Co., 700 Market Street, St. Louis,
Missouri 63101 (records relating to its function as sub-adviser to the
Conning Money Market Portfolio).
<PAGE> 512
Item 29. MANAGEMENT SERVICES
Not applicable.
Item 30. UNDERTAKINGS
Not applicable.
<PAGE> 513
SIGNATURES
-----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment No. 46 to its Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of St.
Louis and the State of Missouri, on the 28th day of January, 1999.
THE ARCH FUND, INC.
(Registrant)
/s/ Jerry V. Woodham
-------------------------
Jerry V. Woodham
President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 46 to Registrant's Registration Statement on Form
N-1A has been signed below by the following persons in the capacities and on the
dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Jerry V. Woodham Chairman of the Board, January 28, 1999
- -------------------- Director and President
Jerry V. Woodham
/s/* James C. Jacobsen Director January 28, 1999
- ----------------------
James C. Jacobsen
/s/* Joseph J. Hunt Director January 28, 1999
- -------------------
Joseph J. Hunt
/s/* Robert M. Cox, Jr. Director January 28, 1999
- -----------------------
Robert M. Cox, Jr.
/s/* Ronald D. Winney Director & Treasurer January 28, 1999
- ---------------------
Ronald D. Winney
/s/* Donald E. Brandt Director January 28, 1999
- ---------------------
Donald E. Brandt
/s/* Patrick J. Moore Director January 28, 1999
- ---------------------
Patrick J. Moore
*By: /s/ Jerry V. Woodham
- -------------------------
Jerry V. Woodham
Attorney-in-fact
<PAGE> 514
THE ARCH FUND(R), INC.
POWER OF ATTORNEY
Donald E. Brandt, whose signature appears below, does hereby
constitute and appoint Jerry V. Woodham and W. Bruce McConnel, III, and either
of them, his true and lawful attorneys and agents, with full power of
substitution and resubstitution, to do any and all acts and things and execute
any and all instruments which said attorneys and agents, or either of them, may
deem necessary or advisable or which may be required to enable The ARCH Fund,
Inc. (the "Fund") to comply with the Investment Company Act of 1940, as amended,
and the Securities Act of 1933, as amended, and any rules, regulations, or
requirements of the Securities and Exchange Commission in respect thereof, in
connection with the filing and effectiveness of the Fund's Registration
Statement and of any and all amendments (including post-effective amendments) to
the Fund's Registration Statement on Form N-1A pursuant to said Acts, including
specifically, but without limiting the generality of the foregoing, the power
and authority to sign in the name and on behalf of the undersigned on behalf of
the Fund and/or as a director and/or officer of the Fund any and all amendments
filed with the Securities and Exchange Commission under said Acts, and any other
instruments or documents related thereto, and the undersigned does hereby ratify
and confirm all that said attorneys and agents, or either of them, shall do or
cause to be done by virtue hereof.
/s/ Donald E. Brandt
--------------------------
Donald E. Brandt
Date: January 20, 1998
<PAGE> 515
THE ARCH FUND(R), INC.
POWER OF ATTORNEY
Robert M. Cox, Jr., whose signature appears below, does hereby
constitute and appoint Jerry V. Woodham and W. Bruce McConnel, III, and either
of them, his true and lawful attorneys and agents, with full power of
substitution and resubstitution, to do any and all acts and things and execute
any and all instruments which said attorneys and agents, or either of them, may
deem necessary or advisable or which may be required to enable The ARCH Fund,
Inc. (the "Fund") to comply with the Investment Company Act of 1940, as amended,
and the Securities Act of 1933, as amended, and any rules, regulations, or
requirements of the Securities and Exchange Commission in respect thereof, in
connection with the filing and effectiveness of the Fund's Registration
Statement and of any and all amendments (including post-effective amendments) to
the Fund's Registration Statement on Form N-1A pursuant to said Acts, including
specifically, but without limiting the generality of the foregoing, the power
and authority to sign in the name and on behalf of the undersigned on behalf of
the Fund and/or as a director and/or officer of the Fund any and all amendments
filed with the Securities and Exchange Commission under said Acts, and any other
instruments or documents related thereto, and the undersigned does hereby ratify
and confirm all that said attorneys and agents, or either of them, shall do or
cause to be done by virtue hereof.
/s/ Robert M. Cox, Jr.
--------------------------
Robert M. Cox, Jr.
Date: January 20, 1998
<PAGE> 516
THE ARCH FUND(R), INC.
POWER OF ATTORNEY
Patrick J. Moore, whose signature appears below, does hereby
constitute and appoint Jerry V. Woodham and W. Bruce McConnel, III, and either
of them, his true and lawful attorneys and agents, with full power of
substitution and resubstitution, to do any and all acts and things and execute
any and all instruments which said attorneys and agents, or either of them, may
deem necessary or advisable or which may be required to enable The ARCH Fund,
Inc. (the "Fund") to comply with the Investment Company Act of 1940, as amended,
and the Securities Act of 1933, as amended, and any rules, regulations, or
requirements of the Securities and Exchange Commission in respect thereof, in
connection with the filing and effectiveness of the Fund's Registration
Statement and of any and all amendments (including post-effective amendments) to
the Fund's Registration Statement on Form N-1A pursuant to said Acts, including
specifically, but without limiting the generality of the foregoing, the power
and authority to sign in the name and on behalf of the undersigned on behalf of
the Fund and/or as a director and/or officer of the Fund any and all amendments
filed with the Securities and Exchange Commission under said Acts, and any other
instruments or documents related thereto, and the undersigned does hereby ratify
and confirm all that said attorneys and agents, or either of them, shall do or
cause to be done by virtue hereof.
/s/ Patrick J. Moore
--------------------------
Patrick J. Moore
Date: January 20, 1998
<PAGE> 517
THE ARCH FUND(R), INC.
POWER OF ATTORNEY
Ronald D. Winney, whose signature appears below, does hereby
constitute and appoint Jerry V. Woodham and W. Bruce McConnel, III, and either
of them, his true and lawful attorneys and agents, with full power of
substitution and resubstitution, to do any and all acts and things and execute
any and all instruments which said attorneys and agents, or either of them, may
deem necessary or advisable or which may be required to enable The ARCH Fund,
Inc. (the "Fund") to comply with the Investment Company Act of 1940, as amended,
and the Securities Act of 1933, as amended, and any rules, regulations, or
requirements of the Securities and Exchange Commission in respect thereof, in
connection with the filing and effectiveness of the Fund's Registration
Statement and of any and all amendments (including post-effective amendments) to
the Fund's Registration Statement on Form N-1A pursuant to said Acts, including
specifically, but without limiting the generality of the foregoing, the power
and authority to sign in the name and on behalf of the undersigned on behalf of
the Fund and/or as a director and/or officer of the Fund any and all amendments
filed with the Securities and Exchange Commission under said Acts, and any other
instruments or documents related thereto, and the undersigned does hereby ratify
and confirm all that said attorneys and agents, or either of them, shall do or
cause to be done by virtue hereof.
/s/ Ronald D. Winney
--------------------------
Ronald D. Winney
Date: January 20, 1998
<PAGE> 518
THE ARCH FUND(R), INC.
POWER OF ATTORNEY
James C. Jacobsen, whose signature appears below, does hereby
constitute and appoint Jerry V. Woodham and W. Bruce McConnel, III, and either
of them, his true and lawful attorneys and agents, with full power of
substitution and resubstitution, to do any and all acts and things and execute
any and all instruments which said attorneys and agents, or either of them, may
deem necessary or advisable or which may be required to enable The ARCH Fund,
Inc. (the "Fund") to comply with the Investment Company Act of 1940, as amended,
and the Securities Act of 1933, as amended, and any rules, regulations, or
requirements of the Securities and Exchange Commission in respect thereof, in
connection with the filing and effectiveness of the Fund's Registration
Statement and of any and all amendments (including post-effective amendments) to
the Fund's Registration Statement on Form N-1A pursuant to said Acts, including
specifically, but without limiting the generality of the foregoing, the power
and authority to sign in the name and on behalf of the undersigned on behalf of
the Fund and/or as a director and/or officer of the Fund any and all amendments
filed with the Securities and Exchange Commission under said Acts, and any other
instruments or documents related thereto, and the undersigned does hereby ratify
and confirm all that said attorneys and agents, or either of them, shall do or
cause to be done by virtue hereof.
/s/ James C. Jacobsen
--------------------------
James C. Jacobsen
Date: January 20, 1998
<PAGE> 519
THE ARCH FUND(R), INC.
POWER OF ATTORNEY
Joseph J. Hunt, whose signature appears below, does hereby
constitute and appoint Jerry V. Woodham and W. Bruce McConnel, III, and either
of them, his true and lawful attorneys and agents, with full power of
substitution and resubstitution, to do any and all acts and things and execute
any and all instruments which said attorneys and agents, or either of them, may
deem necessary or advisable or which may be required to enable The ARCH Fund,
Inc. (the "Fund") to comply with the Investment Company Act of 1940, as amended,
and the Securities Act of 1933, as amended, and any rules, regulations, or
requirements of the Securities and Exchange Commission in respect thereof, in
connection with the filing and effectiveness of the Fund's Registration
Statement and of any and all amendments (including post-effective amendments) to
the Fund's Registration Statement on Form N-1A pursuant to said Acts, including
specifically, but without limiting the generality of the foregoing, the power
and authority to sign in the name and on behalf of the undersigned on behalf of
the Fund and/or as a director and/or officer of the Fund any and all amendments
filed with the Securities and Exchange Commission under said Acts, and any other
instruments or documents related thereto, and the undersigned does hereby ratify
and confirm all that said attorneys and agents, or either of them, shall do or
cause to be done by virtue hereof.
/s/ Joseph J. Hunt
--------------------------
Joseph J. Hunt
Date: January 20, 1998
<PAGE> 520
EXHIBIT INDEX
-------------
Exhibit No. Description Page No.
- ----------- ----------- --------
(d) (11) Addendum No. 10 to Amended and Restated Advisory Agreement
between Registrant and Mississippi Valley Advisors Inc. with
respect to the Small Cap Equity Index Portfolio.
(e)(9) Addendum No. 8 to Distribution Agreement between
Registrant and BISYS Fund Services with respect to Trust II
Shares.
(g)(10) Assignment and Delegation of Custodian Agreement between
Mercantile Bank National Association and Mercantile Trust
Company National Association dated December 1, 1998
(g)(12) Foreign Custody Delegation Agreement between the Registrant
and Bankers Trust Company of New York dated December 4, 1998
(h) (9) Addendum No. 8 to Administration Agreement between
Registrant and BISYS Fund Services Ohio, Inc. with respect
to Trust II Shares
(h) (19) Addendum No. 8 to Transfer Agency Agreement between
Registrant and BISYS Fund Services Ohio, Inc. with respect
to Trust II Shares
(j) (2) Consent of Drinker Biddle & Reath LLP.
(l) (11) Purchase Agreements between Registrant and BISYS Fund
Services Ohio, Inc. dated December 29, 1998.
<PAGE> 1
EXHIBIT (d)(11)
ADDENDUM NO. 10 TO AMENDED AND RESTATED ADVISORY AGREEMENT
----------------------------------------------------------
This Addendum, dated as of December 29, 1998, is entered into
between THE ARCH FUND, INC., a Maryland corporation (the "Fund"), and
MISSISSIPPI VALLEY ADVISORS INC., a Missouri corporation ("MVA").
WHEREAS, the Fund and MVA have entered into an Amended and
restated Advisory Agreement dated as of April 1, 1991, which was extended to
additional investment portfolios of the Fund (pursuant to Section 1(b) of the
Agreement) by Addenda dated September 27, 1991, April 1, 1992, April 1, 1993,
March 15, 1994, July 10, 1995, September 29, 1995, November 15, 1996, February
14, 1997 and November 21, 1997 (the "Advisory Agreement"), pursuant to which the
Fund appointed MVA to act as investment adviser to the Fund for the ARCH Money
Market, Treasury Money Market, Growth & Income Equity, Small Cap Equity
(formerly Emerging Growth), Government & Corporate Bond, U.S. Government
Securities, Balanced, International Equity, Short-Intermediate Municipal,
Tax-Exempt Money Market, Missouri Tax-Exempt Bond, Kansas Tax-Exempt Bond,
Equity Income, National Municipal Bond, Intermediate Corporate Bond (formerly
Short-Intermediate Corporate Bond), Equity Index, Bond Index and Growth Equity
Portfolios;
WHEREAS, Section 1(b) of the Advisory Agreement provides that
in the event the Fund establishes one or more additional investment portfolios
with respect to which it desires to retain MVA to act as the investment adviser
under the Advisory Agreement, the Fund shall so notify MVA in writing, and if
MVA is willing to render such services it shall notify the Fund in writing, and
the compensation to be paid to MVA shall be that which is agreed to in writing
by the Fund and MVA; and
WHEREAS, the Fund has notified MVA that it has established one
new portfolio, namely, the ARCH Small Cap Equity Index Portfolio (the "New
Portfolio"), and that it desires to retain MVA to act as the investment adviser
therefor, and MVA has notified the Fund that it is willing to serve as
investment adviser for the New Portfolio;
NOW THEREFORE, the parties hereto, intended to be legally
bound, hereby agree as follows:
1. APPOINTMENT. The Fund hereby appoints MVA to act
<PAGE> 2
as investment adviser to the Fund for the New Portfolio for the period and on
the terms set forth in the Advisory Agreement. MVA hereby accepts such
appointment and agrees to render the services set forth in the Advisory
Agreement, for the compensation hereby provided.
2. COMPENSATION. For the services provided and expenses
assumed pursuant to the Advisory Agreement with respect to the New Portfolio,
the Fund will pay MVA from the assets belonging to the New Portfolio, and MVA
will accept as full compensation therefor a fee, computed daily and payable
monthly (in arrears), at the annual rate of .40% of the average daily net assets
of the New Portfolio.
The fee attributable to the New Portfolio shall be the
obligation of the New Portfolio and not of any other Portfolio of the Fund.
3. CAPITALIZED TERMS. From and after the date hereof, the term
"Portfolios" as used in the Advisory Agreement shall be deemed to include the
New Portfolio. Capitalized terms used herein and not otherwise defined shall
have the meanings ascribed to them in the Advisory Agreement.
4. MISCELLANEOUS. Except to the extent supplemented hereby,
the Advisory Agreement shall remain unchanged and in full force and effect and
is hereby ratified and confirmed in all respects as supplemented hereby.
IN WITNESS WHEREOF, the undersigned have executed this
Addendum as of the date and year first above written.
THE ARCH FUND, INC.
By: /s/ Jerry V. Woodham
-----------------------------------
Jerry V. Woodham
President
MISSISSIPPI VALLEY ADVISORS, INC.
By: /s/ John H. Blixen
-----------------------------------
John H. Blixen
President
-2-
<PAGE> 1
EXHIBIT (e)(9)
ADDENDUM NO. 8 TO DISTRIBUTION AGREEMENT
----------------------------------------
This Addendum, dated as of November 2, 1998, is entered into
between THE ARCH FUND, INC. (the "Fund"), a Maryland corporation, and BISYS FUND
SERVICES ("BISYS"), an Ohio limited partnership formerly known as The Winsbury
Company Limited Partnership.
WHEREAS, the Fund and BISYS have entered into a Distribution
Agreement dated as of October 1, 1993 as amended March 15, 1994, March 1, 1995,
July 10, 1995, September 29, 1995, November 15, 1996, February 14, 1997 and
November 21,1997 (the "Distribution Agreement"), pursuant to which the Fund
appointed BISYS to act as Distributor for the Fund's ARCH Money Market, Treasury
Money Market, Growth & Income Equity, Small Cap Equity (formerly Emerging
Growth), Government & Corporate Bond, U.S. Government Securities, Balanced,
International Equity, Short-Intermediate Municipal, Tax-Exempt Money Market,
Missouri Tax-Exempt Bond, Kansas Tax-Exempt Bond, Equity Income, National
Municipal Bond, Intermediate Corporate Bond (formerly Short-Intermediate
Corporate Bond), Equity Index, Bond Index, Small Cap Equity Index and Growth
Equity Portfolios;
WHEREAS, Section 9 of the Distribution Agreement provides that
no provision of the Agreement may be changed, discharged or terminated orally,
but only by an instrument in writing signed by the party against which
enforcement of the change, discharge or termination is sought; and
WHEREAS, the Fund has notified BISYS that it has established a
new class of shares, namely, Class A - Special Series 4, Class B - Special
Series 3 and Class J - Special Series 2 shares (collectively, "Trust II Shares")
in each of the ARCH Money Market, Treasury Money Market and Tax-Exempt Money
Market Portfolios, respectively.
NOW THEREFORE, the parties hereto, intending to be legally
bound, hereby agree as follows:
<PAGE> 2
1. TERMS. From and after the date hereof, the term "shares" as
used in the Distribution Agreement shall be deemed to include the Trust II
Shares. Capitalized terms used herein and not otherwise defined shall have the
meanings ascribed to them in the Distribution Agreement.
2. APPENDIX A. Appendix A to the Distribution Agreement is
hereby supplemented to read as set forth in Appendix A attached hereto.
3. MISCELLANEOUS. Except to the extent supplemented hereby,
the Distribution Agreement shall remain unchanged and in full force and effect
and is hereby ratified and confirmed in all respects as supplemented hereby.
IN WITNESS WHEREOF, the undersigned have executed this
Addendum as of the date and year first above written.
THE ARCH FUND, INC.
By: /s/ Jerry V. Woodham
--------------------------------
Jerry V. Woodham
President
BISYS FUND SERVICES
By: /s/ J. David Huber
--------------------------------
J. David Huber
Vice President
-2-
<PAGE> 3
APPENDIX A
to the
DISTRIBUTION AGREEMENT
between
THE ARCH FUND, INC.
and
BISYS FUND SERVICES
- ------------------------------------------------------------------------------
Money Market Portfolio (Trust shares, Trust II shares, Investor A shares,
Institutional shares and Investor B shares)
Treasury Money Market Portfolio (Trust shares, Trust II shares, Investor A
shares and Institutional shares)
Growth & Income Equity Portfolio (Trust shares, Investor A shares, Institutional
shares and Investor B shares)
Small Cap Equity Portfolio (Trust shares, Investor A shares, Institutional
shares and Investor B shares)
Government & Corporate Bond Portfolio (Trust shares, Investor A shares,
Institutional shares and Investor B shares)
U.S. Government Securities Portfolio (Trust shares, Investor A shares,
Institutional shares and Investor B shares)
Balanced Portfolio (Trust shares, Investor A shares, Institutional shares and
Investor B shares)
International Equity Portfolio (Trust shares, Investor A shares, Institutional
shares and Investor B shares)
<PAGE> 4
Short-Intermediate Municipal Portfolio (Trust Shares and Investor A shares)
Tax-Exempt Money Market Portfolio (Trust shares, Trust II shares and Investor A
shares)
Missouri Tax-Exempt Bond Portfolio (Trust shares, Investor A shares and Investor
B shares)
Kansas Tax-Exempt Bond Portfolio (Trust shares, Investor A shares and Investor B
shares)
Equity Income Portfolio (Trust shares, Investor A shares, Institutional shares
and Investor B shares)
National Municipal Bond Portfolio (Trust shares, Investor A shares and Investor
B shares)
Intermediate Corporate Bond Portfolio (Trust shares, Investor A shares and
Institutional shares)
Equity Index Portfolio (Trust shares, Investor A shares and Institutional
shares)
Bond Index Portfolio (Trust shares, Investor A shares and Institutional shares)
Small Cap Equity Index Portfolio (Trust shares, Investor A shares and
Institutional shares)
Growth Equity Portfolio (Trust shares, Investor A shares, Institutional shares
and Investor B shares)
-2-
<PAGE> 1
EXHIBIT (g)(10)
ASSIGNMENT AND DELEGATION AGREEMENT
AGREEMENT made as of December 1, 1998 between MERCANTILE BANK
NATIONAL ASSOCIATION ("Mercantile Bank"), a nationally chartered banking
institution, and MERCANTILE TRUST COMPANY NATIONAL ASSOCIATION ("Mercantile
Trust"), also a nationally-chartered banking institution.
WHEREAS, The ARCH Fund(R), Inc. (the "Fund") is registered as
an open-end management investment company under the Investment Company Act of
1940, as amended (the "1940 Act");
WHEREAS, Mercantile Bank has been previously appointed as
custodian for the Fund pursuant to a Custodian Agreement between Mercantile Bank
and the Fund dated April 1, 1992 (the "Custodian Agreement"); and
WHEREAS, Mercantile Bank and Mercantile Trust desire to have
Mercantile Trust act as custodian for the Fund pursuant to the Custodian
Agreement;
NOW, THEREFORE, the parties hereto, intending to be legally
bound, agree as follows:
1. Pursuant to Paragraph 30 of the Custodian Agreement,
Mercantile Bank hereby assigns its rights and delegates its duties with respect
to the Fund to Mercantile Trust.
2. Mercantile Trust hereby assumes all rights and obligations
of Mercantile Bank under the Custodian Agreement.
3. Mercantile Trust represents that it meets the
qualifications of a "bank," as specified in Section 26(a) of the 1940 Act, and
that it meets the qualifications to act as a custodian pursuant to Section 17(f)
of the 1940 Act.
4. Pursuant to Paragraph 30 of the Custodian Agreement,
Mercantile Bank agrees that, notwithstanding the assignment and delegation
described herein, it shall remain liable to the Fund for the acts and omissions
of Mercantile Trust to the same extent that it is liable to the Fund for its own
acts and omissions under the Custodian Agreement.
5. Both parties hereby agree that this Assignment and
Delegation Agreement shall be attached to and made a part of the Custodian
Agreement.
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have caused this
instrument to be executed by their officers designated below as of the day and
year first above written.
Attest:
MERCANTILE BANK NATIONAL ASSOCIATION
signature illegible
- -------------------
By: signature illegible
-----------------------------------
(Authorized Officer)
Attest: MERCANTILE TRUST COMPANY NATIONAL
ASSOCIATION
Janie Greenwood Harris
- ----------------------
By: signature illegible
-----------------------------------
(Authorized Officer)
2
<PAGE> 1
Exhibit (g)(12)
Bankers Trust Company
One Bankers Trust Plaza, New York, New York 10006
Mailing Address:
P.O. Box 318, Church Street Station
New York, New York 10008-0318
December 4, 1998
The Board of Directors
The ARCH Fund, Inc.
3435 Stelzer Road
Columbus, Ohio 43219
Re: Delegation of Responsibilities as a Foreign Custody Manager
---------------------------------------------------------------
Dear Sirs:
Pursuant to the provisions of Rule 17f-5(b) under the Investment
Company Act of 1940, as amended (the "1940 Act"), and subject to the terms and
conditions set forth herein, you (the "Board") on behalf of The ARCH Fund, Inc.,
a Maryland corporation (the "Fund") hereby delegate, and Bankers Trust Company,
a New York banking corporation (the "Delegate"), hereby agrees to accept and
assume certain responsibilities described herein concerning custody of (1) the
Fund's investments for which the primary market is outside of the United States
and (2) such cash and cash equivalents as are reasonably necessary to effect the
Fund's transactions in such investments (such investments, cash and cash
equivalents shall hereinafter be referred to collectively as "Assets").
1. Representations of the Parties
The Delegate represents and warrants that it is a U.S. Bank within the
meaning of Rule 17f-5(a)(7) under the 1940 Act and has the power and authority
to execute, deliver and perform this Agreement.
The Board represents and warrants that it has determined that it is
reasonable to rely on the Delegate to perform the responsibilities delegated by
this Agreement and has duly authorized the execution and delivery of this
Agreement on behalf of the Fund.
<PAGE> 2
2. Jurisdictions Covered
The authority delegated by this Agreement subject to the provisions of
the last paragraph of this Section 2 applies with respect to Assets held in the
jurisdictions covered by the Delegate's subcustodial network which are currently
listed in Appendix A. Jurisdictions may be added by electronic notification via
the Delegate's electronic on-line systems to which the Fund or its Investment
Manager may subscribe. The Delegate's responsibility and authority with respect
to jurisdictions so added shall commence subject to the provisions of the last
paragraph of this Section 2 on the date of, or set forth in, the flash notice.
Each of the Board and the Delegate may withdraw its delegation or its
acceptance of such delegation with respect to any jurisdiction upon written
notice to the Delegate or the Board, as the case may be. Such withdrawal shall
be effective sixty (60) days after receipt of such notice by the party to which
notice has been sent and thereafter the Delegate shall have no further
responsibility or authority under this Agreement with respect to the
jurisdiction or jurisdictions as to which authority or acceptance of delegation
is so withdrawn.
3. Delegation of Authority to Act as Foreign Custody Manager
(a) Subject to the provisions of this Agreement and the requirements of
applicable law, including Rule 17f-5 under the 1940 Act, the Delegate is
authorized to place and maintain Assets in the care of any Eligible Foreign
Custodian or Custodians within the meaning of Section 17f of the 1940 Act, Rule
17f-5(a)(1) under the 1940 Act, including Foreign Branches of U.S. Banks, in
each jurisdiction in which this Agreement applies and to enter into on behalf of
the Fund such written contract or contracts governing the Fund's foreign custody
arrangements with such Eligible Foreign Custodian or Custodians as the Delegate
deems appropriate.
(b) The authority granted in (a) of this paragraph 3 shall include,
subject to the same limitations set forth therein, the authority to withdraw
Assets from an Eligible Foreign Custodian in any jurisdiction in which this
Agreement applies and to place and maintain the Assets so withdrawn in the care
of another Eligible Foreign Custodian in the same jurisdiction and to enter into
appropriate written contracts governing the Fund's foreign custody arrangements
with such Eligible Foreign Custodian.
4. Monitoring of Eligible Foreign Custodians and Contracts
In each case in which the Delegate has exercised the authority
delegated under this Agreement under Section 3(a) to place Assets with an
Eligible Foreign Custodian, the Delegate is authorized to, and shall on behalf
of the Fund, establish, pursuant to Section 17f-5(c)(3) a system to monitor the
appropriateness of maintaining the Fund's Assets with such Eligible Foreign
Custodian and the contract with such Eligible Foreign Custodian. If the
placement of Assets with any party in any country outside of the United States
no longer meets the requirements of Rule 17f-5 under the 1940 Act, the Delegate
shall withdraw such Assets from such party as soon as reasonably practicable.
-2-
<PAGE> 3
5. Guidelines and Procedures for the Exercise of Delegated Authority
(a) Board's Conclusive Determination Regarding Country Risk.
In exercising its delegated authority under this Agreement, the
Delegate may assume, for all purposes, that the Board (or the Fund's investment
adviser pursuant to authority delegated by the Board) has considered and,
pursuant to its fiduciary duties to the Fund and its shareholders, determined to
accept such country risk as is incurred by placing and maintaining Assets in the
jurisdictions to which this Agreement applies. In exercising its delegated
authority under this Agreement, the Delegate may also assume that the Board (or
the Fund's investment adviser pursuant to authority delegated by the Board) has,
and will continue to monitor such country risk to the extent that the Board
deems necessary or appropriate. Nothing in this Agreement shall require the
Delegate to make any selection or to engage in any monitoring on behalf of the
Fund that would entail the consideration of country risk. For purposes of this
Section 5(a), country risk means all factors reasonably related to the systemic
risk of holding assets in a particular country, including, without limitation,
such country's financial infrastructure (including any compulsory securities
depositories (as hereinafter defined) operating in such country); prevailing
custody and settlement practices; and laws and regulations applicable to the
safekeeping and recovery of assets held in custody. A compulsory securities
depository is a securities depository within the meaning of Rule 17f-5(a)(6)
under the 1940 Act the use of which is (i) mandatory by law or regulation or
(ii) in practice mandatory because (x) securities cannot be withdrawn from the
depository or (y) maintaining securities outside of the depository is not
consistent with prevailing custodial practices.
(b) Selection of Eligible Foreign Custodians.
In exercising the authority delegated under this Agreement to place
Assets with an Eligible Foreign Custodian, the Delegate shall determine that
Assets will be held by such Eligible Foreign Custodian subject to reasonable
care based on the standards applicable to custodians in the relevant market in
which the Assets will be held after considering all factors relevant to the
safekeeping of such Assets, including, without limitation, those set forth in
Rule 17f-5(c)(1) of the 1940 Act.
(c) Evaluation of Written Contracts.
In exercising the authority delegated under this Agreement to enter
into written contracts governing the Fund's foreign custody arrangements with an
Eligible Foreign Custodian, the Delegate shall determine that such contracts
(or, in the case of a securities depository (as defined in Section (a)(6) of
Rule 17f-5) other than a compulsory securities depository, such contract, the
rules or established practices and procedures of such depository, or any
combination of the foregoing) provide reasonable care for any Assets based on
the standards applicable to Eligible Foreign Custodians in the relevant market,
as specified in Rule 17f-5(c)(1) under the 1940 Act. In making this
determination, the Delegate shall consider the criteria identified in of Rule
17f5(c)(2) of the 1940 Act.
-3-
<PAGE> 4
6. Standard of Care
In exercising the authority delegated under this Agreement, the
Delegate will exercise reasonable care, prudence and diligence such as a person
having responsibility for the safekeeping of Assets would exercise, consistent
with the provisions of this Agreement and its obligations as Delegate pursuant
to Section (b)(3) of Rule 17f-5 under the 1940 Act.
7. Notification of Custodial Placement
The Delegate agrees to provide written reports notifying the Board of
the placement of Assets with a particular Eligible Foreign Custodian and of any
material change in the Fund's foreign custody arrangements. Such reports shall
be provided to the Board quarterly. Upon the occurrence of a material change in
the Fund's foreign custody arrangements, the Delegate shall notify the Board in
writing within a reasonable time after such change.
8. Fees and Expenses
The Delegate shall charge fees and be reimbursed for expenses for
performing its functions under this Agreement as may be agreed between the
parties hereto.
9. Effectiveness and Termination
This Agreement shall become effective as of the date set forth above
upon the execution and delivery of this Agreement or a counterpart thereof by
each party thereto to the other party. This Agreement may be terminated at any
time, without penalty, by either party hereto, by written notice from the
terminating party to the non-terminating party. Such termination shall become
effective 30 days after receipt by the non-terminating party of such notice.
This Agreement shall also terminate upon the effectiveness of termination of the
employment of the Delegate as custodian of Assets.
10. Notices
All communications and notices between the parties hereto in connection
herewith (a) shall be in writing, hand delivered or sent by telex, telegram,
cable, facsimile or other means of electronic communication agreed upon by the
parties hereto addressed, if to the Fund, to:
Mr. Timothy S. Englebrecht
The ARCH Mutual Fund Group
Mercantile Investment Services, Inc.
1 Mercantile Center
St. Louis, Missouri 63101
Tel: (314) 418-2692
Fax: (314) 418-1827
-4-
<PAGE> 5
If to the Delegate, to: Mr. Todd Naznitsky
Bankers Trust Company
16 Wall Street, 3rd Floor
New York, New York 10005
Tel: (212) 618-2190
Fax: (212) 618-3042
or in either case to such other address as shall have been furnished to the
receiving party pursuant to the provisions hereof and (b) shall be deemed
effective when received, or, in the case of a telex, when sent to the proper
number and acknowledged by a proper answerback.
11. Governing Law and Successors and Assigns
This Agreement shall be construed in accordance with the laws of the
State of New York and shall not be assignable by either party but shall bind the
successors in interest of the Board and the Delegate. Any suit, action or
proceeding arising out of this Agreement may be instituted in any State or
Federal court sitting in the City of New York, State of New York, United States
of America, and the Fund irrevocably submits to the exclusive jurisdiction of
any such court in any such suit, action or proceeding and waives, to the fullest
extent permitted by law, any objection which it may now or hereafter have to the
laying of venue of any such suit, action or proceeding brought in such a court
and any claim that such suit, action or proceeding was brought in an
inconvenient forum. Each party hereto irrevocably consents to the service of
process out of any of the aforementioned courts in any such action or proceeding
by the mailing of copies thereof by certified air mail, postage prepaid, to the
other party at its address set forth in Section 10 above or in any other manner
permitted by law.
12. Counterparts
This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original.
-5-
<PAGE> 6
If the foregoing correctly sets forth our understanding, please execute
in the space provided below and return to the undersigned the enclosed copy of
this Agreement.
Very truly yours,
BANKERS TRUST COMPANY
By: /s/ Richard M. Quintal
----------------------
Richard M Quintal
Managing Director
AGREED AS SET FORTH ABOVE
The ARCH Fund, Inc.
By: /s/ Jerry Woodham
-----------------
-6-
<PAGE> 7
APPENDIX A
The following are the jurisdictions covered by the Delegate's subcustodial
network, as referenced in Paragraph 2:
Argentina Peru
Australia Poland
Austria Portugal
Bangladesh Russia
Belgium Singapore
Botswana Slovak Republic
Brazil South Africa
Canada South Korea
Chile Spain
People's Republic of China-Shanghai Sri Lanka
People's Republic of China-Shenzhen Sweden
Colombia Switzerland
Czech Republic Taiwan
Denmark Thailand
Ecuador Turkey
Egypt United Kingdom
Finland Venezuela
France Zambia
Germany Zimbabwe
Ghana
Greece
Hong Kong
Hungary
India
Indonesia
Ireland
Israel
Italy
Japan
Jordan
Kenya
Luxembourg
Malaysia
Mauritius
Mexico
Morocco
Netherlands
New Zealand
Norway
Pakistan
-7-
<PAGE> 1
EXHIBIT (h) (9)
ADDENDUM NO. 8 TO ADMINISTRATION AGREEMENT
------------------------------------------
This Addendum, dated as of November 2, 1998, is entered into
between THE ARCH FUND, INC. (the "Fund"), a Maryland corporation, and BISYS FUND
SERVICES OHIO, INC. ("BISYS Ohio"), an Ohio corporation formerly known as The
Winsbury Service Corporation.
WHEREAS, the Fund and BISYS Ohio have entered into an
Administration Agreement dated as of October 1, 1993 as amended March 15, 1994,
March 1, 1995, July 10, 1995, September 29, 1995, November 15, 1996, February
14, 1997 and November 21, 1997 (the "Administration Agreement"), pursuant to
which the Fund appointed BISYS Ohio to act as Administrator for the Fund's ARCH
Money Market, Treasury Money Market, Growth & Income Equity, Small Cap Equity
(formerly Emerging Growth), Government & Corporate Bond, U.S. Government
Securities, Balanced, International Equity, Short-Intermediate Municipal,
Tax-Exempt Money Market, Missouri Tax-Exempt Bond, Kansas Tax-Exempt Bond,
Equity Income, National Municipal Bond, Intermediate Corporate Bond (formerly
Short-Intermediate Corporate Bond), Equity Index, Bond Index, Small Cap Equity
Index and Growth Equity Portfolios;
WHEREAS, Section 10 of the Administration Agreement provides
that no provision of the Agreement may be changed, discharged or terminated
orally, but only by an instrument in writing signed by the party against which
enforcement of the change, discharge or termination is sought; and
WHEREAS, the Fund has notified BISYS Ohio that it has
established a new class of shares, namely, Class A - Special Series 4, Class B -
Special Series 3 and Class J - Special Series 3 shares (collectively, "Trust II
Shares") in each of the ARCH Money Market, Treasury Money Market and Tax-Exempt
Money Market Portfolios, respectively.
NOW THEREFORE, the parties hereto, intending to be legally
bound, hereby agree as follows:
1. TERMS. From and after the date hereof, the term "shares" as used in
the
<PAGE> 2
Administration Agreement shall be deemed to include the Trust II Shares.
Capitalized terms used herein and not otherwise defined shall have the meanings
ascribed to them in the Administration Agreement.
2. APPENDIX A. Appendix A to the Administration Agreement is hereby
supplemented to read as set forth in Appendix A attached hereto.
3. MISCELLANEOUS. Except to the extent supplemented hereby, the
Administration Agreement shall remain unchanged and in full force and effect and
is hereby ratified and confirmed in all respects as supplemented hereby.
IN WITNESS WHEREOF, the undersigned have executed this
Addendum as of the date and year first above written.
THE ARCH FUND, INC.
By: /s/ Jerry V. Woodham
---------------------------------
Jerry V. Woodham
President
BISYS FUND SERVICES OHIO, INC.
By: /s/ J. David Huber
--------------------------------
J. David Huber
Vice President
-2-
<PAGE> 3
APPENDIX A
to the
ADMINISTRATION AGREEMENT
between
THE ARCH FUND, INC.
and
BISYS FUND SERVICES OHIO, INC. (formerly
known as The Winsbury Service Corporation)
- --------------------------------------------------------------------------------
Money Market Portfolio (Trust Shares, Trust II Shares, Investor A Shares,
Institutional Shares and Investor B Shares)
Treasury Money Market Portfolio (Trust Shares, Trust II Shares, Investor A
Shares and Institutional Shares)
Growth & Income Equity Portfolio (Trust Shares, Investor A Shares, Institutional
and Investor B Shares)
Small Cap Equity Portfolio (Trust Shares, Investor A Shares, Institutional and
Investor B Shares)
Government & Corporate Bond Portfolio (Trust Shares, Investor A Shares,
Institutional and Investor B Shares)
U.S. Government Securities Portfolio (Trust Shares, Investor A Shares,
Institutional and Investor B Shares)
Balanced Portfolio (Trust Shares, Investor A Shares, Institutional and Investor
B Shares)
International Equity Portfolio (Trust Shares, Investor A Shares, Institutional
and Investor B Shares)
<PAGE> 4
Short-Intermediate Municipal Portfolio (Trust Shares and Investor A Shares)
Tax-Exempt Money Market Portfolio (Trust Shares, Trust II Shares and Investor A
Shares)
Missouri Tax-Exempt Bond Portfolio (Trust Shares, Investor A Shares and Investor
B Shares)
Kansas Tax Exempt Bond Portfolio (Trust Shares, Investor A Shares and Investor B
Shares)
Equity Income Portfolio (Trust Shares, Investor A Shares, Institutional Shares
and Investor B Shares)
National Municipal Bond Portfolio (Trust Shares, Investor A Shares and Investor
B Shares)
Intermediate Corporate Bond Portfolio (Trust Shares, Investor A Shares and
Institutional Shares)
Equity Index Portfolio (Trust Shares, Investor A Shares and Institutional
Shares)
Bond Index Portfolio (Trust Shares, Investor A Shares and Institutional Shares)
Small Cap Equity Index Portfolio (Trust Shares, Investor A Shares and
Institutional Shares)
Growth Equity Portfolio (Trust Shares, Investor A Shares, Institutional Shares
and Investor B Shares)
-2-
<PAGE> 1
EXHIBIT (h) (19)
ADDENDUM NO. 8 TO TRANSFER AGENCY AGREEMENT
-------------------------------------------
This Addendum, dated as of November 2, 1998, is entered into
between THE ARCH FUND, INC. (the "Fund"), a Maryland corporation, and BISYS FUND
SERVICES OHIO, INC. ("BISYS Ohio"), an Ohio corporation formerly known as The
Winsbury Service Corporation.
WHEREAS, the Fund and BISYS Ohio have entered into a Transfer
Agency Agreement dated as of October 1, 1993 as amended March 15, 1994, March 1,
1995, July 10, 1995, September 29, 1995, October 1, 1995, November 15, 1996,
February 14, 1997 and November 21, 1997 (the "Transfer Agency Agreement"),
pursuant to which the Fund appointed BISYS Ohio to act as Transfer Agent for the
Fund's ARCH Money Market, Treasury Money Market, Growth & Income Equity, Small
Cap Equity (formerly Emerging Growth), Government & Corporate Bond, U.S.
Government Securities, Balanced, International Equity, Short-Intermediate
Municipal, Tax-Exempt Money Market, Missouri Tax-Exempt Bond, Kansas Tax-Exempt
Bond, Equity Income, National Municipal Bond, Intermediate Corporate Bond
(formerly Short-Intermediate Corporate Bond), Equity Index, Bond Index, Small
Cap Equity Equity Index and Growth Equity Portfolios;
WHEREAS, Section 20 of the Transfer Agency Agreement provides
that no provision of the Agreement may be changed, discharged or terminated
orally, but only by an instrument in writing signed by the party against which
enforcement of the change, discharge or termination is sought; and
WHEREAS, the Fund has notified BISYS Ohio that it has
established a new class of shares, namely, Class A - Special Series 4, Class B -
Special Series 3 and Class J - Special Series 2 shares (collectively, "Trust II
Shares") in each of the ARCH Money Market, Treasury Money Market and Tax-Exempt
Money Market Portfolios, respectively.
NOW THEREFORE, the parties hereto, intending to be legally
bound, hereby agree as follows:
1. TERMS. From and after the date hereof, the term "shares" as
used in the Transfer Agency Agreement shall be deemed to include the Trust II
Shares. Capitalized terms used herein and not otherwise defined shall have the
meanings ascribed to them in the Transfer Agency Agreement.
2. APPENDIX A. Appendix A to the Transfer Agency Agreement is
hereby supplemented to read as set forth in Appendix A attached hereto.
<PAGE> 2
3. Appendix C to the Transfer Agreement is hereby supplemented
to read as set forth in Appendix C attached hereto.
4. MISCELLANEOUS. Except to the extent supplemented hereby,
the Transfer Agency Agreement shall remain unchanged and in full force and
effect and is hereby ratified and confirmed in all respects as supplemented
hereby.
IN WITNESS WHEREOF, the undersigned have executed this
Addendum as of the date and year first above written.
THE ARCH FUND, INC.
By: Jerry V. Woodham
-----------------------------------
Jerry V. Woodham
President
BISYS FUND SERVICES OHIO, INC.
By: J. David Huber
-----------------------------------
J. David Huber
Vice President
-2-
<PAGE> 3
APPENDIX A
TO THE
TRANSFER AGENCY AGREEMENT
BETWEEN
THE ARCH FUND, INC.
AND
BISYS FUND SERVICES OHIO, INC. (FORMERLY
KNOWN AS THE WINSBURY SERVICE CORPORATION)
- ----------------------------------------------------------------------------
Money Market Portfolio (Trust shares, Trust II shares, Investor A shares,
Institutional shares and Investor B shares)
Treasury Money Market Portfolio (Trust shares, Trust II shares, Investor A
shares and Institutional shares)
Growth & Income Equity Portfolio (Trust shares, Investor A shares, Institutional
shares and Investor B shares)
Small Cap Equity Portfolio (Trust shares, Investor A shares, Institutional
shares and Investor B shares)
Government & Corporate Bond Portfolio (Trust shares, Investor A shares,
Institutional shares and Investor B shares)
U.S. Government Securities Portfolio (Trust shares, Investor A shares,
Institutional shares and Investor B shares)
Balanced Portfolio (Trust shares, Investor A shares, Institutional shares and
Investor B shares)
International Equity Portfolio (Trust shares, Investor A shares, Institutional
shares and Investor B shares)
Short-Intermediate Municipal Portfolio (Trust Shares and Investor A shares)
Tax-Exempt Money Market Portfolio (Trust shares, Trust II shares and Investor A
shares)
Missouri Tax-Exempt Bond Portfolio (Trust shares, Investor A shares and Investor
B shares)
A-1
<PAGE> 4
Kansas Tax-Exempt Bond Portfolio (Trust shares, Investor A shares and Investor B
shares)
Equity Income Portfolio (Trust shares, Investor A shares, Institutional shares
and Investor B shares)
National Municipal Bond Portfolio (Trust shares, Investor A shares and Investor
B shares)
Intermediate Corporate Bond Portfolio (Trust shares, Investor A shares and
Institutional shares)
Equity Index Portfolio (Trust shares, Investor A shares and Institutional
shares)
Bond Index Portfolio (Trust shares, Investor A shares and Institutional shares)
Small Cap Equity Index Portfolio (Trust shares, Investor A shares and
Institutional shares)
Growth Equity Portfolio (Trust shares, Investor A shares, Institutional shares
and Investor B shares)
A-2
<PAGE> 5
APPENDIX C
----------
TO THE TRANSFER AGENCY AGREEMENT
BETWEEN
THE ARCH FUND, INC. AND BISYS FUND SERVICES OHIO, INC.
------------------------------------------------------
(FORMERLY KNOWN AS THE WINSBURY SERVICE CORPORATION)
----------------------------------------------------
FEE SCHEDULE
------------
A. ANNUAL BASE FEE
1. Portfolios which have Investor A Shares shall pay an Annual Base
Fee of $10,000 plus $19 per shareholder per Portfolio.
2. Portfolios which have Investor B Shares shall pay an Annual Base
Fee of $10,000 plus $19 per shareholder per Portfolio.
3. Portfolios which have Trust Shares shall pay an Annual Base Fee
of $8,000 plus $15 per shareholder per Portfolio.
4. Portfolios which have Institutional Shares shall pay an Annual
Base Fee of $8,000 plus $15 per shareholder per Portfolio.
5. Portfolios which have Trust II Shares shall pay an Annual Base
Fee of $8,000 plus $15 per shareholder per Portfolio.
B. ANNUAL ADDITIONAL FEES. These fees are in addition to the Annual
Base Fees.
1. Portfolios participating in the Asset Advisor (asset allocation)
program shall pay an annual fee of $3,000 per Portfolio
2. Out of pocket costs, including postage, Tymnet charges,
statement/confirm paper, forms, and microfiche will be added to
the Transfer Agency Fees.
C. ALLOCATION OF FEES. Transfer Agency fees paid under this Agreement
shall be treated as an expense of the Company and shall be accrued and
allocated pro rata each month to the Portfolios on the basis of their
respective net assets at the end of the preceding month and paid
monthly.
C-1
<PAGE> 1
EXHIBIT (j)(2)
CONSENT OF COUNSEL
We hereby consent to the use of our name and to the references
to our Firm under the caption "Counsel" in the Statement of Additional
Information that is included in Post-Effective Amendment No. 46 to the
Registration Statement (No. 2-79285) on Form N-1A under the Securities Act of
1933, as amended, of The Arch Fund, Inc. This consent does not constitute a
consent under Section 7 of the Securities Act of 1933, and in consenting to the
use of our name and the references to our Firm under such caption we have not
certified any part of the Registration Statement and do not otherwise come
within the categories of persons whose consent is required under Section 7 or
the rules and regulations of the Securities and Exchange Commission thereunder.
/s/ Drinker Biddle & Reath LLP
------------------------------
Drinker Biddle & Reath LLP
Philadelphia, Pennsylvania
January __, 1999
<PAGE> 1
EXHIBIT (l)(11)
PURCHASE AGREEMENT
------------------
The ARCH Fund, Inc. (the "Fund"), a Maryland corporation with
transferable shares, and BISYS Fund Services Ohio, Inc. ("BISYS Ohio"), an Ohio
corporation, hereby agree with each other as follows:
1. The Fund hereby offers BISYS Ohio and BISYS Ohio hereby
purchases one (1) Class R share of common stock representing an interest in the
ARCH Small Cap Equity Index Portfolio (the "Portfolio") at a price of $10.00
(such share of common stock in the Portfolio being hereinafter known as the
"Share"). BISYS Ohio hereby acknowledges the purchase of the Share and the Fund
hereby acknowledges receipt from BISYS Ohio of funds in the amount of $10.00 in
full payment for the Share.
2. BISYS Ohio represents and warrants to the Fund that the
Share is being acquired for investment purposes and not with a view to the
distribution thereof.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the 29th day of December, 1998.
THE ARCH FUND, INC.
By: Jerry v. Woodham
-------------------------------
Jerry V. Woodham
President
BISYS FUND SERVICES OHIO, INC.
By: J. David Huber
-------------------------------
J. David Huber
President
<PAGE> 2
PURCHASE AGREEMENT
------------------
The ARCH Fund, Inc. (the "Fund"), a Maryland corporation with
transferable shares, and BISYS Fund Services Ohio, Inc. ("BISYS Ohio"), an Ohio
corporation, hereby agree with each other as follows:
1. The Fund hereby offers BISYS Ohio and BISYS Ohio hereby
purchases one (1) Class R Special Series 1 share of common stock representing an
interest in the ARCH Small Cap Equity Index Portfolio (the "Portfolio") at a
price of $10.00 (such share of common stock in the Portfolio being hereinafter
known as the "Share"). BISYS Ohio hereby acknowledges the purchase of the Share
and the Fund hereby acknowledges receipt from BISYS Ohio of funds in the amount
of $10.00 in full payment for the Share.
2. BISYS Ohio represents and warrants to the Fund that the
Share is being acquired for investment purposes and not with a view to the
distribution thereof.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the 29th day of December, 1998.
THE ARCH FUND, INC.
By: Jerry V. Woodham
------------------------------
Jerry V. Woodham
President
BISYS FUND SERVICES OHIO, INC.
By: J. David Huber
------------------------------
J. David Huber
President
<PAGE> 3
PURCHASE AGREEMENT
------------------
The ARCH Fund, Inc. (the "Fund"), a Maryland corporation with
transferable shares, and BISYS Fund Services Ohio, Inc. ("BISYS Ohio"), an Ohio
corporation, hereby agree with each other as follows:
1. The Fund hereby offers BISYS Ohio and BISYS Ohio hereby
purchases one (1) Class R Special Series 2 share of common stock representing an
interest in the ARCH Small Cap Equity Index Portfolio (the "Portfolio") at a
price of $10.00 (such share of common stock in the Portfolio being hereinafter
known as the "Share"). BISYS Ohio hereby acknowledges the purchase of the Share
and the Fund hereby acknowledges receipt from BISYS Ohio of funds in the amount
of $10.00 in full payment for the Share.
2. BISYS Ohio represents and warrants to the Fund that the
Share is being acquired for investment purposes and not with a view to the
distribution thereof.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the 29th day of December, 1998.
THE ARCH FUND, INC.
By: Jerry V. Woodham
------------------------------
Jerry V. Woodham
President
BISYS FUND SERVICES OHIO, INC.
By: J. David Huber
------------------------------
J. David Huber
President
