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MERCANTILE MUTUAL FUNDS, 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, 2000
(As Revised April 24, 2000)
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, 1999 with respect to the Portfolios (the "Annual
Report"), may be obtained, without charge, by writing:
Mercantile Mutual Funds, Inc.
c/o Firstar Mutual Fund Services, LLC
P.O. Box 3011
Milwaukee, Wisconsin 53201-3011
or by calling 1-800-452-2724.
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Current Prospectuses
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. Prospectus for Trust Shares and Trust II Shares of the Portfolios dated
March 31, 2000
. Prospectus for Trust Shares of the Money Market Portfolios dated March 31,
2000
. Prospectus for Institutional Shares of the Portfolios dated March 31, 2000
. Prospectus for Investor A Shares and Investor B Shares of the Money Market
Portfolios dated March 31, 2000
. Prospectus for Investor A Shares and Investor B Shares of the Taxable Bond
Portfolios dated March 31, 2000
. Prospectus for Investor A Shares and Investor B Shares of the Tax-Exempt
Bond Portfolios dated March 31, 2000
. Prospectus for Investor A Shares and Investor B Shares of the Stock
Portfolios dated March 31, 2000
The financial statements included in the Annual Report and the report
thereon of KPMG LLP, the Fund's independent auditors, are incorporated by
reference into this Statement of Additional Information.
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TABLE OF CONTENTS
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Page
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GENERAL INFORMATION...................................................... 1
DESCRIPTION OF MERCANTILE MUTUAL FUNDS, INC.............................. 1
DESCRIPTION OF SHARES.................................................... 2
INVESTMENT STRATEGIES, POLICIES AND RISKS................................ 6
PRICING OF SHARES........................................................ 62
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION........................... 63
YIELD AND TOTAL RETURN INFORMATION....................................... 73
ADDITIONAL INFORMATION CONCERNING TAXES.................................. 88
MANAGEMENT OF THE FUND................................................... 91
CODE OF ETHICS........................................................... 115
INDEPENDENT AUDITORS..................................................... 115
COUNSEL.................................................................. 116
MISCELLANEOUS............................................................ 116
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GENERAL INFORMATION
This Statement of Additional Information should be read in conjunction
with a current Prospectus. This Statement of Additional Information relates to
the Prospectuses for Trust Shares, Trust II Shares, Institutional Shares,
Investor A Shares and Investor B Shares of the eighteen separate investment
portfolios ("Portfolios") listed on the cover page. Each Portfolio, except the
Tax-Exempt Money Market Portfolio and Missouri Tax-Exempt Bond Portfolio, is a
diversified portfolio under the Investment Company Act of 1940, as amended (the
"1940 Act"). 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, Firstar Corporation, Firstar Mutual Fund Services, LLC, 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"), known as The ARCH Fund,
Inc. until March 31, 1999, 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 and the Missouri Tax Exempt
Bond Portfolio commenced operations on July 10, 1986 and July 15, 1988,
respectively, as separate investment portfolios (the "Predecessor Tax-Exempt
Money Market Portfolio" and the "Predecessor Missouri Tax-Exempt Bond
Portfolio", respectively), of The ARCH Tax-Exempt Trust, which was organized as
a Massachusetts business trust. On October 2, 1995, the Predecessor Tax-Exempt
Money
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Market Portfolio and the Predecessor Missouri Tax-Exempt Bond Portfolio were
reorganized as new portfolios of the Fund. Prior to the reorganization, these
Predecessor Portfolios offered and sold shares of 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 interest 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
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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.
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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.
Trust Shares are offered to financial institutions acting on their own
behalf or on behalf of discretionary and non-discretionary accounts for which
they may receive account-level asset-based management fees. Trust Shares also
are offered to financial institutions for accounts for which they provide cash
management services. Trust II Shares are offered to financial institutions
acting on their own behalf or on behalf of certain qualified accounts.
Institutional Shares are offered to financial institutions acting on behalf of
discretionary and non-discretionary accounts for which they do not receive
account-level asset-based management fees. Investor A Shares and Investor B
Shares are sold through selected broker/dealers and other financial
intermediaries to individual or institutional customers. Trust Shares, Trust II
Shares and
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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 are sold with a maximum 5.5% front-end sales charge,
Investor A Shares of the Bond Portfolios are sold with a maximum 4.00% 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.
Payments under the Administrative Services Plans for Trust Shares and
Institutional Shares are made to Service Organizations (defined below) for
administrative services provided to the Service Organizations' clients or
account holders who are the beneficial owners of Trust Shares or Institutional
Shares, respectively. Payments under the Administrative Services Plans may not
exceed .25% (on an annual basis) of the average daily net asset value of the
outstanding Trust Shares or Institutional Shares, as the case may be, of the
Money Market Portfolios or .30% (on an annual basis) of the average daily net
asset value of the outstanding Trust Shares or Institutional Shares, as the case
may be, of the Equity and Bond Portfolios.
Payments under the Distribution and Services Plans for Investor A
Shares and Investor B Shares are made to (i) the Fund's distributor or another
person for providing distribution assistance and assuming certain related
expenses, and (ii) Service Organizations for administrative services provided to
the Service Organizations' clients or account holders who are the beneficial
owners of Investor A Shares or Investor B Shares. Payments under the
Distribution and Services Plan for Investor A Shares may not exceed .25% (on an
annual basis) of the average daily net asset value of outstanding Investor A
Shares of the Money Market Portfolios or .30% (on an annual basis) of the
average daily net asset value of Investor A Shares of the Equity and Bond
Portfolios. Payments under the Distribution and Services Plan for Investor B
Shares may not exceed 1.00% (on an annual basis) of the average daily net asset
value of outstanding Investor B Shares of a Portfolio. Distribution payments
made under the 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 six 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
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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 Services Plan for Institutional Shares,
Investor A Shares of a particular Portfolio will be solely responsible for that
Portfolio's payments pursuant to the Distribution and Services Plan for Investor
A Shares and Investor B Shares of a particular Portfolio will be solely
responsible for that Portfolio's payments pursuant to the Distribution and
Services Plan for Investor B Shares. In addition, Institutional Shares will be
solely responsible for the payment of certain sub-transfer agency fees
attributable to those shares.
Shareholders are entitled to one vote for each full Share held and
proportionate fractional votes for fractional Shares held. Holders of all
outstanding Shares of a particular Portfolio will vote together in the aggregate
and not by class, unless otherwise required by law or permitted by the Board of
Directors. However, only Trust Shares of a Portfolio will be entitled to vote
on matters submitted to a vote of shareholders pertaining to a Portfolio's
Administrative Services Plan for Trust Shares, only Institutional Shares of a
Portfolio will be entitled to vote on matters submitted to a vote of
shareholders pertaining to such Portfolio's Administrative Services Plan for
Institutional Shares, only Investor A Shares of a Portfolio will be entitled to
vote on matters submitted to a vote of shareholders pertaining to such
Portfolio's Distribution and Services Plan for Investor A Shares and only
Investor B Shares of a Portfolio will be entitled to vote on matters submitted
to a vote of shareholders pertaining to such Portfolio's Distribution and
Services Plan for Investor B Shares. Further, shareholders of all of the
Portfolios, irrespective of class, will vote in the aggregate and not separately
on a Portfolio-by-Portfolio basis, except as otherwise required by law or when
the Board of Directors determines that the matter to be voted upon affects only
the interests of the shareholders of a particular Portfolio or class of Shares.
Rule 18f-2 under the 1940 Act provides that any matter required to be submitted
to the holders of the outstanding voting securities of a "series" investment
company such as the Fund shall not be deemed to have been effectively acted upon
unless approved by the holders of a majority of the outstanding shares of each
series (Portfolio) affected by the matter. A Portfolio is considered to be
affected by a matter unless it is clear that the interests of each Portfolio in
the matter are identical or that the matter does not affect any interest of the
Portfolio. Under the 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.
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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 these latter Portfolios will be
given at least 30 days' written notice before any such change occurs.
Treasury Money Market Portfolio
Firstar Investment and Research Management Company, L.L.C. ("FIRMCO"
or 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
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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 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 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
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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 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.
Commercial paper may include securities issued by corporations without
registration under the Securities Act of 1933, as amended (the "1933 Act"), in
reliance on the so-called "private placement" exemption in Section 4(2)
("Section 4(2) Paper"). Section 4(2) Paper is restricted as to disposition
under the federal securities laws in that any resale must similarly be made in
an exempt transaction. Section 4(2) Paper is normally resold to other
institutional investors through or with the assistance of investment dealers who
make a market in Section 4(2) Paper, thus providing liquidity. For purposes of
the Money Market Portfolio's limitation on purchases of illiquid instruments
described below, Section 4(2) Paper will not be considered illiquid if the
Portfolio's Adviser has determined that a liquid trading market exists.
Government Obligations. The Money Market Portfolio may invest in
obligations issued or guaranteed by the U.S. Government, its agencies and
instrumentalities. In addition, the Portfolio may, when deemed appropriate by
the Adviser, invest in short-term obligations issued by state and local
governmental issuers that meet the quality requirements described above and,
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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.
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 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
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<PAGE>
In addition to those instruments specified in the Prospectuses, the
Intermediate Corporate Bond Portfolio may also invest in asset-backed
securities, including CMOs and other mortgage-related securities. For further
information regarding these instruments, see "Other Investment Policies and Risk
Considerations -- Asset-Backed Securities" below.
The Portfolio may only purchase investment grade debt securities,
which are those rated in one of the four highest rating categories assigned by
one or more rating agencies. Securities that are rated in the lowest of the
four highest rating categories have speculative characteristics, even though
they are of investment grade quality, and such securities will be purchased (and
retained) only if the Adviser believes that the issuers have an adequate
capacity to pay interest and repay principal. Occasionally, the rating of a
security held by the Portfolio may be downgraded below investment grade. If
that happens, the Portfolio does not have to sell the security unless the
Adviser determines that under the circumstances the security is no longer an
appropriate investment for the Portfolio. The applicable ratings issued by
rating agencies are described in Appendix A to this Statement of Additional
Information.
The Portfolio reserves the right to hold as a temporary defensive
measure up to 100% of its total assets in cash and short-term obligations
(having remaining maturities of 13 months or less) at such times and in such
proportions as, in the opinion of the Adviser, prevailing market or economic
conditions warrant. Short-term obligations in which the Portfolio may invest
include (i) money market instruments, such as commercial paper, including
variable and floating rate instruments, rated at the time of purchase in one of
the two highest rating categories assigned by a rating agency or, if unrated,
deemed to be of comparable quality by the Adviser at the time of purchase, and
bank obligations, including bankers' acceptances, negotiable certificates of
deposit and non-negotiable time deposits of U.S. and foreign banks having total
assets at the time of purchase in excess of $1 billion, (ii) obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities, and
(iii) repurchase agreements. For further information regarding variable and
floating rate instruments, see "Money Market Portfolio - Commercial Paper and
Variable and Floating Rate Instruments" above. Although the Portfolio will
invest in obligations of foreign banks or foreign branches of U.S. banks only
when the Adviser determines that the instrument presents minimal credit risks,
such investments nevertheless entail risks that are different from those of
investments in domestic obligations of U.S. banks. See "Special Risk
Considerations -- Risks Associated with Foreign Securities and Currencies"
below. Investments in the obligations of foreign banks or foreign branches of
U.S. banks will not exceed 25% of the Portfolio's total assets at the time of
purchase.
An increase in interest rates will generally reduce the value of the
investments in the Portfolio, and a decline in interest rates will generally
increase the value of those investments. Depending upon the prevailing market
conditions, the Adviser may purchase debt securities at a discount from face
value, which produces a yield greater than the coupon rate. Conversely, if debt
securities are purchased at a premium over face value, the yield will be lower
than the coupon rate. In response to changing conditions in fixed-income
markets, the Portfolio may make modest shifts in terms of anticipated interest
rate and sector spread changes.
Bond Index Portfolio
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<PAGE>
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 Investors Service, 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, 1999, over 5.565 issues were included
in the Lehman Aggregate, representing approximately $5.4 trillion in market
value. U.S. Treasury and agency securities represented approximately 41% of the
total market value, asset-backed and mortgage-backed securities represented
approximately 37% of the total market value, with corporate debt securities
representing the balance of approximately 22%. The average maturity of the
Lehman Aggregate was approximately 8.9 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.
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
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<PAGE>
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 in 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 in 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).
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<PAGE>
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
As a matter of fundamental policy, under normal market conditions or
when the Adviser deems suitable tax-exempt municipal securities to be available,
at least 80% of the Missouri Tax-Exempt Bond Portfolio's total assets will be
invested in municipal securities. In addition, as a matter of fundamental
policy, under normal market conditions, at least 65% of the Portfolio's total
assets will be invested in Missouri municipal securities, which are 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.
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
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<PAGE>
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.
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
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<PAGE>
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 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.
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<PAGE>
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, 1999, the stocks in the S&P 500 have a market capitalization of $12.3
trillion. 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 shareholder
purchase and redemption activity and the composition of the S&P 500. The Adviser
believes that the S&P 500 is an appropriate benchmark for the Portfolio because
it is diversified, it is familiar to many investors and it is widely accepted as
a reference for common stock investments.
Growth & Income Equity Portfolio
In addition to common stock, the Growth & Income Equity Portfolio may
invest in preferred stock, rights, warrants and securities convertible into
common stock. A convertible security may be purchased for the Portfolio when, in
the Adviser's opinion, the price and yield of the convertible security is
favorable compared to the price and yield of the common stock.
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<PAGE>
The Portfolio may invest in foreign securities either directly or
indirectly 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 foreign
securities held by the Portfolio would exceed 15% of the its 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.
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<PAGE>
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.
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<PAGE>
With respect to the remaining portion of its total assets, the
Portfolio has the ability to hold temporary cash balances which may be invested
in U.S. Government obligations and money market instruments, including variable
and floating rate obligations such as variable rate master demand notes. (See
"Intermediate Corporate Bond Portfolio" above for a description of the money
market instruments in which the Portfolio may invest and the applicable
limitations with respect to such instruments.) If appropriate, the Portfolio may
use options, futures contracts and depository receipts to hedge its positions or
for other permissible purposes. The Portfolio also may enter into repurchase and
reverse repurchase agreements and lend its portfolio securities.
The S&P SmallCap 600. The S&P SmallCap 600 is composed of
approximately 600 common stocks. These companies are chosen to be part of the
S&P SmallCap 600 based upon their market size, liquidity and industry group
representation. As of December 31, 1999, stocks in the S&P SmallCap 600 had a
market capitalization of $374 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 shareholder
purchase and redemption activity 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 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
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offerings and purchase warrants. The Portfolio will not invest more than 5% of
its net assets, taken at market value, in warrants. Warrants acquired by the
Portfolio in units or attached to other securities are not subject to this
restriction.
During temporary defensive periods, when deemed necessary by the
Adviser or Sub-Adviser, the Portfolio may invest up to 100% of its assets in
U.S. Government obligations, debt obligations of companies incorporated and
having their principal business activities in the United States, or cash and
short-term obligations (having remaining maturities of 13 months or less). (See
"Government & Corporate Bond Portfolio" above for a description of the types of
short-term obligations in which the Portfolio may invest.) The Portfolio does
not intend to invest in such securities for the purpose of meeting its
investment objective.
The Portfolio may also invest, without limitation, in foreign
securities through the purchase of ADRs and EDRs. For further information, see
"Special Risk Consideration -- Risks Associated with Foreign Securities and
Currencies" and "Other Investment Policies and Risk Considerations -- ADRs and
EDRs" below.
The Portfolio will not normally invest in securities of issuers having
a record, together with their predecessors, of less than three years of
continuous operations.
Although investing in any mutual fund has certain inherent risks, an
investment in the Portfolio may have even greater risks than investments in most
other types of mutual funds. The Portfolio is not a complete investment program,
and it may not be appropriate for investors who cannot financially bear the loss
of at least a significant portion of their investment. The Portfolio's net asset
value per Share is subject to rapid and substantial changes because greater risk
is assumed in seeking the Portfolio's objective. See "Special Risk
Considerations -- Risks Associated with Foreign Securities and Currencies"
below.
Special Risk Considerations
Market Risk. The Equity Income, Equity Index, Growth & Income Equity,
Growth Equity, Small Cap Equity, Small Cap Equity Index and International Equity
Portfolios 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
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the financial strength of an issuer or changes in the ratings of any particular
security may also offset the value of these investments. Fluctuations in the
market value of fixed income securities subsequent to their acquisition will not
offset cash income from such securities but will be reflected in a Portfolio's
net asset value.
Risks Associated with Foreign Securities and Currencies. Investments
in securities of foreign issuers, whether made directly or indirectly, carry
certain risks not ordinarily associated with investments in securities of
domestic issuers. Such risks include future political and economic developments,
and the possible imposition of exchange controls or other foreign governmental
laws or restrictions. In addition, with respect to certain countries, there is
the possibility of expropriation of assets, confiscatory taxation, political or
social instability or diplomatic developments which could adversely affect
investments in those countries.
There may be less publicly available information about a foreign
company than about a U.S. company, and foreign companies may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to or as uniform as those of U.S.-based companies. Foreign securities
markets, while growing in volume, have, for the most part, substantially less
volume than U.S. markets, and securities of many foreign companies are less
liquid and their prices more volatile than securities of comparable U.S.-based
companies. There is generally less government supervision and regulation of
foreign exchanges, brokers and issuers than there is in the United States. In
the event of a default by the issuer of a foreign security, it may be more
difficult to obtain or enforce a judgment against such issuer than it would be
against a domestic issuer. In addition, foreign banks and foreign branches of
U.S. banks are subject to less stringent reserve requirements and to different
accounting, auditing, reporting, and recordkeeping standards than those
applicable to domestic branches of U.S. banks.
Certain of the risks associated with international investments are
heightened with respect to investments in developing countries. The risks of
expropriation, nationalization and social, political and economic instability
are greater in those countries than in more developed capital markets. In
addition, developing countries may have economies based on only a few industries
and small securities markets with a low volume of trading. Certain countries may
also 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
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future could have a significant effect on economic conditions in these
countries, affecting private sector companies, the International Equity
Portfolio and the value of its portfolio securities.
Since the International Equity Portfolio will invest substantially in
securities denominated or quoted in currencies other than the U.S. dollar,
changes in foreign currency exchange rates will affect the value of securities
in the International Equity Portfolio and the unrealized appreciation or
depreciation of investments so far as U.S. investors are concerned. Foreign
currency exchange rates are determined by forces of supply and demand on the
foreign exchange markets and the regulatory control of the exchanges on which
the currencies trade. These forces are themselves affected by the international
balance of payments and other economic and financial conditions, government
intervention, speculation and other factors. Costs are incurred in connection
with conversions between various currencies.
The expense ratio of the International Equity Portfolio can be
expected to be higher than that of funds investing in domestic securities. The
costs attributable to investing abroad are usually higher for several reasons,
such as the higher cost of investment research, higher cost of custody of
foreign securities, higher commissions paid on comparable transactions on
foreign markets and additional costs arising from delays in settlements of
transactions involving foreign securities.
Interest and dividends payable on the International Equity Portfolio's
foreign portfolio securities may be subject to foreign withholding taxes. To the
extent such taxes are not offset by credits or deductions allowed to investors
under U.S. federal income tax provisions, they may reduce the net return to the
Portfolio's shareholders. For further information, see "Taxes."
In addition to the International Equity Portfolio, other Portfolios
may be subject to certain of the risks described above in connection with
investment in foreign securities.
Risks Associated with Municipal Securities. The ability of the Tax-
Exempt Money Market, Short-Intermediate Municipal, Missouri Tax-Exempt Bond and
National Municipal Bond Portfolios (collectively, the "Tax-Exempt Portfolios")
to achieve their 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,
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which generally provide funds for a specific project, and payments are generally
limited to the revenue from that project. The State may, however, enact a tax
specifically to repay the State's revenue bonds. Therefore, a reduction of
revenues on a project financed by revenue bonds may adversely affect the State's
ability to make payments on such bonds. No assurances can be given that the
State will receive sufficient revenues from the projects, or that the State will
enact and collect tax to be used to make the required payments on such bonds.
See "Other Investment Policies and Risk Considerations - Special Considerations
Regarding Investment in Missouri Municipal Securities" below.
Additional Risks and Other Considerations. Although the Tax-Exempt
Money Market, Short-Intermediate Municipal and National Municipal Bond
Portfolios may invest 25% or more of their respective net assets in (i)
municipal securities whose issuers are in the same state, (ii) municipal
securities the interest on which is paid solely from revenues of similar
projects, and (iii) private activity bonds, no Portfolio presently intends to do
so unless in the opinion of the Adviser the investment is warranted. Although
the Missouri Tax-Exempt Bond Portfolio does not presently intend to do so on a
regular basis, it may invest more than 25% of its assets in industrial
development bonds issued before August 7, 1986, the interest on which is not
treated as a specific tax preference item under the federal alternative minimum
tax, and in municipal securities, the interest on which is paid solely from
revenues of similar projects, if such investments are deemed necessary or
appropriate by the Adviser. To the extent that a Portfolio's assets are invested
in municipal securities the issuers of which are in the same state or that are
payable from the revenues of similar projects or in private activity bonds, a
Portfolio will be subject to the peculiar risks presented by the laws and
economic conditions relating to such projects and bonds to a greater extent than
it would be if its assets were not so invested.
Each of the Tax-Exempt Money Market and Missouri Tax-Exempt Bond
Portfolios is classified as non-diversified under the 1940 Act. Investment
return on a non-diversified portfolio typically is dependent upon the
performance of a smaller number of securities relative to the number held in a
diversified portfolio. Consequently, the change in value of any one security may
affect the overall value of a non-diversified portfolio more than it would a
diversified portfolio. In addition, a non-diversified portfolio may be more
susceptible to 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
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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.
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.
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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. Revenue securities are payable only from
the revenues derived from a particular facility or class of facilities or, in
some cases, from the proceeds of a special excise tax or other specific revenue
source such as the user of the facility being financed. 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 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.
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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 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.
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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
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
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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,
Section 4(2) Paper and securities that are not registered under 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
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
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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.
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.
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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 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
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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 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
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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 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
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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 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
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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.
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.
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
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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.
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
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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 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
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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 its 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 its when-issued, forward commitments and
delayed settlement transactions will not exceed 25% of the value of its total
assets (at the time of purchase) under normal market conditions. Because the
Portfolios will each set aside cash or liquid assets to satisfy its purchase
commitments in the manner described, a Portfolio's liquidity and ability to
manage its portfolio might be affected in the event its commitments to purchase
securities on a when-issued, forward commitment or delayed settlement 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.
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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. The Portfolio may
enter into forward foreign currency exchange contracts when deemed advisable by
the Sub-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
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
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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 cash or liquid
securities in an amount equal to the value of the International Equity
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 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
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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.
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
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<PAGE>
capital gains for federal income tax purposes, and losses on closing purchase
transactions are short-term capital losses.
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 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.
As noted previously, there are several risks associated with
transactions in options on securities and indices. For example, there are
significant differences between the securities and options markets that could
result in an imperfect correlation between these markets, causing a given
transaction not to achieve its objectives. In addition, a liquid secondary
market for particular options, even when traded on a national securities
exchange ("Exchange"), may be absent for reasons which include the following:
there may be insufficient trading interest in certain options; restrictions may
be imposed by an Exchange on opening transactions or closing transactions or
both; trading halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of options or underlying securities;
unusual or unforeseen circumstances may interrupt normal operations on an
Exchange; the facilities of an Exchange or the Options Clearing Corporation may
not at all times be adequate to handle current trading volume; or one or more
Exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that Exchange (or in
that class or series of options) would cease to exist, although outstanding
options that had been issued by the Options Clearing Corporation as a result of
trades on that Exchange would continue to be exercisable in accordance with
their terms. Exchange-traded options have a continuous liquid market while over-
the-counter options may not.
The Growth Equity Portfolio may purchase and write over-the-counter
options on portfolio securities in negotiated transactions with the buyers or
writers of the options when options on the portfolio securities held by such
Portfolio are not traded on a national securities
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<PAGE>
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 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.
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<PAGE>
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 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
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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 timeframe.
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.
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.
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<PAGE>
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
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.)
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<PAGE>
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 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
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<PAGE>
("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 S&P 500. 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 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
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<PAGE>
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.
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. Portfolio turnover will not be a limiting
factor in making investment decisions. See "Additional Information Concerning
Taxes" below.
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, 1999, 1998 and 1997, the Growth &
Income Equity Portfolio paid $936,835, $1,278,698, and $858,757, respectively,
in brokerage commissions. During the fiscal years ended November 30, 1999, 1998
and 1997, the Small Cap Equity Portfolio paid $319,318, $550,114, and $428,191,
respectively, in brokerage commissions. During the fiscal years ended November
30, 1999, 1998 and 1997, the International Equity Portfolio paid $387,288,
$293,093, and $248,564, respectively, in brokerage commissions. During the
fiscal years ended November 30, 1999, 1998 and 1997, the Balanced Portfolio paid
$114,130, $123,935, and $120,705, respectively, in brokerage commissions. During
the fiscal years ended November 30, 1999 and 1998, the period October 1, 1997
through November 30, 1997 and for the fiscal year ended September 30, 1997, the
Growth Equity Portfolio paid brokerage commissions of $44,009, $122,348, and
$95,470, respectively. During the fiscal years ended November 30, 1999 and 1998
and the period February 27, 1997 (commencement of operations) through November
30, 1997, the Equity Income Portfolio paid $275,891, $361,966 and $151,046,
respectively, in brokerage commissions. During the fiscal years ended November
30, 1999 and 1998 and the period May 1, 1997 (commencement of operations)
through November 30, 1997, the Equity Index Portfolio
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<PAGE>
paid $27,818, $15,775 and $10,259 in brokerage commissions. During the period
December 30, 1998 (commencement of operations) through November 30, 1999, the
Small Cap Equity Index Portfolio paid $98,519 in brokerage commissions. No
commissions were paid by the Fund to any "affiliated" persons (as defined in the
1940 Act) of the Fund.
Securities purchased and sold by the Portfolios which are traded in
the over-the-counter market generally are 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 co-administrators or any "affiliated person" (as such
term is defined under the 1940 Act) or any of them acting as principal, except
to the extent permitted by the SEC. In addition, the Portfolios will not give
preference to the Adviser's correspondents with respect to such transactions,
securities, savings deposits, repurchase agreements and reverse repurchase
agreements.
Investment decisions for the Portfolios are made independently from
those for other investment companies and accounts advised or managed by the
Adviser (or Sub-Adviser). Such other investment companies and accounts may also
invest in the same securities as the Portfolios. When a purchase or sale of the
same security is made at substantially the same time
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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.
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 1998, which
represents a 6.3% increase from the 1990 decennial census of the U.S. Census
Bureau. Based on 1998 U.S. Census Bureau estimates, Missouri constituted the
16th most populous state and its two largest cities, St. Louis and Kansas City
and their surrounding metropolitan areas, constituted the 18th and 24th largest
metropolitan areas in the nation, respectively. St. Louis is a distribution
center and an important site for banking and manufacturing activity. Kansas City
is a major agri-business center for the United States and an important center
for finance and industry. In 1999, per capita income in Missouri is estimated to
have increased about 5%, consistent with the increase in national per capita
income during the same period. [Source: U.S. Department of Commerce, Bureau of
the Census.]
The major sectors of the State's economy include services,
manufacturing, trade, and state and local government. Although farming
traditionally has played a dominant role in the State's economy, with increasing
urbanization, significant income-generating activity has shifted from
agriculture to the services, manufacturing, trade and government 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. Manufacturing represented the single most important economic activity,
followed by wholesale and retail trade. Manufacturing is concentrated in
defense, transportation and other durable goods. The State's top five largest
manufacturers are Boeing Co., Anheuser-Busch Co., Hallmark Cards, Ford Motor Co.
and Chrysler Corp. [Source: Missouri Department of Economic Development.]
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Defense-related business plays an important role in Missouri's
economy. Over the past decade, aircraft production and defense-related
businesses have received sizable annual defense contract awards. Declining
defense appropriation and federal downsizing may continue to have an impact on
the State. Wal-Mart is the State's largest employer, with approximately 27,500
to 32,500 employees during January 2000. The next two largest employers in
Missouri are the University of Missouri and Boeing Co. with approximately 17,500
to 22,500 employees each during January 2000. Missouri's unemployment rate was
4.1% in December 1998, compared to the 4.4% national unemployment rate during
this period. The unemployment rate for 1999 is expected to remain stable at
approximately 4.0 to 4.5%. [Source: Missouri Dept. of Economic Development.]
Revenue collections for the fiscal year ended June 30, 1999 ("Fiscal
Year 1999") are estimated to be $6.4 billion, an increase of 5.5% over fiscal
year 1998. Expenditures for Fiscal Year 1999 are estimated at $6.9, billion
including $173 million and $99 million, respectively for the St. Louis and
Kansas City Desegregation cases. For the fiscal year ending June 30, 2000
("Fiscal Year 2000"), revenues are projected to be $7.2 billion. Expenditures
are projected at $7.1 billion and do not include expenditures for the St. Louis
and Kansas City school desegregation cases which ended during Fiscal Year 1999.
INVESTMENT LIMITATIONS
Except as otherwise noted in the Prospectuses or this Statement of
Additional Information, each Portfolio's investment policies are not fundamental
and may be changed by the Fund's Board of Directors without shareholder
approval. However, each Portfolio also has in place certain fundamental
investment limitations, which are set forth below, which may be changed only by
a vote of a majority of the outstanding Shares of a Portfolio.
The Treasury Money Market Portfolio may not:
1. Acquire any other investment company or investment company
security except in connection with a merger, consolidation, reorganization or
acquisition of assets or where otherwise permitted by the 1940 Act.
2. Borrow money or issue senior securities, except from banks for
temporary purposes and then in an amount not exceeding 10% of the value of the
Portfolio's total assets at the time of such borrowing, or mortgage, pledge or
hypothecate its assets except in connection with any such borrowing and in
amounts not in excess of the lesser of the dollar amounts borrowed or 10% of the
value of the Portfolio's total assets at the time of such borrowing. The
Portfolio will not purchase securities while its borrowings are outstanding.
(This borrowing provision is not for investment leverage, but solely to
facilitate management of the Portfolio by enabling the Fund to meet redemption
requests where the liquidation of portfolio securities is deemed to be
inconvenient or disadvantageous).
3. Underwrite the securities of other issuers.
4. Make loans except that the Portfolio may purchase or hold debt
instruments in accordance with its investment objective and policies, lend
portfolio securities and enter into repurchase
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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.
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 the 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
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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 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
1933 Act, 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.
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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.
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 for diversification purposes
as the Fund does not consider the latter instruments to be securities.
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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 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
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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.
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
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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 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
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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.
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
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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.
14. The Portfolio will not invest more than 5% of its net assets in
warrants. No more than 2% of the Portfolio's net assets, to be included within
the overall 5% limit on investments in warrants, may be warrants which are not
listed on the New York Stock Exchange or the American Stock Exchange. For
purposes of this investment restriction, warrants will be valued at the lower of
cost or market, except that warrants acquired by the Portfolio in units with or
attached to securities may be deemed to be without value.
15. Make loans, except that (a) the Portfolio may purchase or hold
debt instruments, lend portfolio securities and make other investments in
accordance with its investment objective and policies, and (b) the Portfolio may
enter into repurchase agreements.
The International Equity Portfolio may not:
1. Make investments for the purpose of exercising control or
management.
2. Purchase or sell real estate, provided that the Portfolio may
invest in securities secured by real estate or interests therein or issued by
companies or investment trusts which invest in real estate or interests therein.
3. Act as an underwriter of securities within the meaning of the
Securities Act of 1933 except insofar as the Portfolio might be deemed to be an
underwriter upon disposition of portfolio securities acquired within the
limitation on purchases of restricted securities and except to the extent that
the purchase of obligations directly from the issuer thereof in accordance with
the Portfolio's investment objective, policies and limitations may be deemed to
be underwriting.
4. Purchase or sell commodity contracts, or invest in oil, gas or
mineral exploration or development programs, except that: (a) it may, to the
extent appropriate to its investment objective, invest in securities issued by
companies which purchase or sell commodities or commodity contracts or which
invest in such programs; and (b) it may purchase and sell futures contracts and
options on futures contracts.
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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.
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.
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<PAGE>
7. Write or sell put options, call options, straddles, spreads, or
any combination thereof.
8. Purchase any securities, except securities issued (as defined in
Investment Limitation No. 11 above with respect to the Tax-Exempt Money Market
Portfolio) or guaranteed by the United States, any state, territory or
possession of the United States, the District of Columbia or any of their
authorities, agencies, instrumentalities or political subdivisions, which would
cause 25% or more of the Portfolio's net assets at the time of purchase to be
invested in the securities of issuers conducting their principal business
activities in the same industry.
9. Make loans except that the Portfolio may purchase and hold debt
instruments and enter into repurchase agreements in accordance with its
investment objective and policies.
10. Purchase securities of any one issuer if, immediately after and
as a result of such purchase, more than 5% of the Portfolio's total assets would
be invested in the securities of such issuer, except that (a) up to 50% of the
Portfolio's total assets may be invested without regard to this 5% limitation
provided that no more than 25% of the Portfolio's total assets are invested in
the securities of any one issuer and (b) this 5% limitation does not apply to
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. For purposes of this limitation, a security is considered to
be issued by the governmental entity (or entities) whose assets and revenues
back the security, or, with respect to a private activity bond that is backed
only by the assets and revenues of a non-governmental user, a security is
considered to be issued by such non-governmental user. In certain circumstances,
the guarantor of a guaranteed security may also be considered to be an issuer in
connection with such guarantee, except that a guarantee of a security shall not
be deemed to be a security issued by the guarantor when the value of all
securities issued and guaranteed by the guarantor, and owned by the Portfolio,
does not exceed 10% of the Portfolio's total assets.
11. Borrow money or issue senior securities, except that the
Portfolio may borrow from banks and enter into reverse repurchase agreements for
temporary defensive purposes in amounts not in excess of 10% of its total assets
at the time of such borrowing; or mortgage, pledge, or hypothecate any assets
except in connection with any such borrowing and in amounts not in excess of the
lesser of the dollar amounts borrowed or 10% of its total assets at the time of
such borrowing (including any reverse repurchase agreements); or purchase
securities while borrowings exceed 5% of the Portfolio's total assets.
Securities held in escrow or separate accounts in connection with the
Portfolio's investment practices described in the Prospectus or this Statement
of Additional Information are not subject to this limitation.
The following additional investment policies with respect to the Tax-
Exempt Money Market and Missouri Tax-Exempt Bond Portfolios are not fundamental
and may be changed by the Board of Directors without shareholder approval:
The Portfolios may not purchase securities which are not readily
marketable, enter into repurchase agreements providing for settlement in
more than seven days after notice, or purchase other illiquid securities
if, as a result of such purchase, illiquid securities
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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 action, if any, should be
initiated. If the Board believes that the extent of any deviation from a
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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.
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ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares in each Portfolio are sold on a continuous basis by the Fund's
distributor. As described in the applicable Prospectuses, Trust Shares, Trust II
Shares and Institutional Shares of each Portfolio (Money Market Portfolios only,
with respect to Trust II Shares) are sold to certain qualified customers at
their net asset value without a sales charge. Investor A Shares of each
Portfolio (other than Investor A Shares of the Money Market Portfolios which are
sold at their net asset value without a sales charge) are sold to retail
customers at the public offering price based on a Portfolio's net asset value
plus a front-end load or sales charge as described in the applicable
Prospectuses. Investor B Shares of each Portfolio (other than the Treasury Money
Market, Tax-Exempt Money Market, Intermediate Corporate Bond, Bond Index, Short-
Intermediate Municipal, Equity Index and Small Cap Equity Index Portfolios,
which do not offer Investor B Shares) are sold to retail customers at the net
asset value next determined after a purchase order is received, but are subject
to a contingent deferred sales charge which is payable on redemption of such
shares as described in the applicable Prospectuses.
Purchases of Investor A Shares and Investor B Shares
Investor A Shares of each Portfolio are sold subject to a front-end
sales charge, except for Investor A Shares of the Money Market Portfolios which
are sold without any sales charge. Investor B Shares of each Portfolio, except
for the Treasury Money Market, Tax-Exempt Money Market, Intermediate Corporate
Bond, Bond Index, Short-Intermediate Municipal, Equity Index and Small Cap
Equity Index Portfolios, which do not offer Investor B Shares, are sold subject
to a back-end sales charge (the "CDSC Portfolios"). This back-end sales charge
declines over time and is known as a "contingent deferred sales charge." Before
choosing between Investor A Shares or Investor B Shares of a Portfolio,
investors should read "Characteristics of Investor A Shares and Investor B
Shares" and "Factors to Consider When Selecting Investor A Shares or Investor B
Shares" below.
All shareholders of record will receive confirmations of Share
purchases, exchanges, and redemptions in the mail. If Shares are held in the
name of an organization, such organization is responsible for transmitting
purchase, exchange, and redemption orders to the Fund on a timely basis,
recording all purchase, exchange, and redemption transactions, and providing
regular account statements which confirm such transactions to beneficial owners
(or arranging for such services).
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.
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
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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 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.
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<PAGE>
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, 1999 and the maximum front-end sales charge of 5.5% with respect
to the Equity Portfolios, 4.00% with respect to the Bond Portfolios, currently
applicable, is as follows:
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<TABLE>
<CAPTION>
Equity Growth & Small Cap International Equity Small Cap
Balanced Income Income Equity Growth Equity Equity Equity Index Equity
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Index
--------- --------- --------- --------- --------- --------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Assets $11,416,303 $1,336,429 $51,301,765 $8,893,074 $8,884,717 $3,939,197 $3,385,344 $134,297
Outstanding Shares 918,062 170,761 2,573,281 392,792 641,900 231,329 197,858 13,197
Net Asset Value $ 12.44 $ 7.83 $ 19.94 $ 22.64 $ 13.84 $ 17.03 $ 17.11 $ 10.18
Per Share
Sales Charge, 5.50% $ .72 $ .46 $ 1.16 $ 1.32 $ .81 $ .99 $ 1.00 $ .59
of offering price
(5.82% of net asset
value per share)
Offering Price to
Public $ 13.16 $ 8.29 $ 21.10 $ 23.96 $ 14.65 $ 18.02 $ 18.11 $ 10.77
</TABLE>
<TABLE>
<CAPTION>
Intermediate Corporate Government & Missouri Tax-Exempt National Municipal
Bond Corporate Bond Bond Bond Bond Index
Portfolio Portfolio Portfolio Portfolio Portfolio
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Assets $435,763 $3,877,782 $ 3,877,782 $1,582,011 $1,074,416
Outstanding Shares 45,613 394,002 1,877,478 167,803 110,322
Net Asset Value $ 9.55 $ 9.84 $ 11.31 $ 9.43 $ 9.74
Per Share
Sales Charge, 4.00% $ .40 $ .41 $ .47 $ .39 $ .41
of offering price
(4.16% of net
asset value per
share)
Offering Price to Public $ 9.95 $ 10.25 $ 11.78 $ 9.82 $ 10.15
</TABLE>
<TABLE>
<CAPTION>
U.S. Government Short-Intermediate
Securities Municipal
Portfolio Portfolio
--------- ---------
<S> <C> <C>
Net Assets $ 4,619,812 $ 19,783
Outstanding Shares 446,719 1,987
Net Asset Value $ 10.34 $ 9.96
Per Share
Sales Charge, 4.00% $ .43 $ .42
of offering price
(4.16% of net
asset value per
share)
Offering Price to Public $ 10.77 $ 10.38
</TABLE>
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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
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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.
Six 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 six 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 - six years after
the beginning of the calendar month in which the reinvestment occurred or the
date of conversion of the most recently purchased Investor B Shares that were
not acquired through reinvestment of dividends or distributions. For example, if
an investor makes a one-time purchase of Investor B Shares of a particular
Portfolio, and subsequently acquires additional Investor B Shares of that
Portfolio only through reinvestment of dividends and/or distributions, all of
such investor's Investor B Shares in that Portfolio, including those acquired
through reinvestment, will convert to Investor A Shares of that Portfolio on the
same date.
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<PAGE>
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 six years after the
purchase. In order to reduce such fees of investors that hold Investor B Shares
for more than six years, Investor B Shares will be automatically converted to
Investor A Shares as described above at the end of such six-year period.
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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 acquired through reinvestment of dividends or
distributions on such Shares) may exchange those Shares for Investor A Shares of
another load Portfolio without paying an additional sales load. Shareholders who
have purchased Investor A Shares of a Portfolio (other than through a previous
exchange from another load Portfolio on which any applicable sales load has been
paid) with a lower sales load may be charged an additional sales load on
exchanges of Shares of such Portfolio for Shares of a Portfolio with a higher
sales load. Shareholders may also exchange Investor A Shares of a no-load
Portfolio for Investor A Shares of another no-load Portfolio without paying a
sales load. When Investor A Shares of a no-load Portfolio are exchanged for
Investor A Shares of a load Portfolio, the applicable sales load (if any) will
be assessed. However, shareholders exchanging Investor A Shares of a no-load
Portfolio that were acquired through a previous exchange involving Shares on
which a load was paid will not be required to pay an additional sales load upon
the reinvestment of the equivalent investment into a load Portfolio within a
twelve month period. Under such circumstances, the shareholder must notify the
Distributor that a sales load was originally paid and provide the Distributor
with sufficient information to permit confirmation of the shareholder's right
not to pay a sales load.
In addition, shareholders who have a qualified trust, agency or
custodian account with the trust department of Mercantile Trust or any of its
affiliated or correspondent banks, and whose Shares are to be held in that
account, may also exchange Investor A Shares of a Portfolio for Trust Shares or
Institutional Shares in the same Portfolio, and vice versa, without payment of
any exchange or sales charge.
Exchanges - Investor B Shares. Shareholders who have purchased
Investor B Shares of a Portfolio (including Shares acquired through reinvestment
of dividends or distributions on such Shares) may exchange those Shares for
Investor B Shares of another Portfolio without the payment of any contingent
deferred sales charge at the time the exchange is made. In determining the
holding period for calculating the contingent deferred sales charge payable on
redemptions of Investor B Shares, the holding period of the Investor B Shares
originally held will be added to the holding period of the Investor B Shares
acquired through the exchange. No exchange fee is imposed by the Fund.
Other Information Concerning Exchanges. The Shares exchanged must have
a current value at least equal to the minimum initial or subsequent investment
required by the particular Portfolio into which the exchange is being made. An
investor may telephone an exchange request by calling his or her broker-dealer
or financial institution, which is responsible for transmitting such exchange
request to the Fund.
Automatic Exchange Program. The Automatic Exchange Program enables
shareholders to make regular, automatic withdrawals from an Investor A Share or
Investor B Share account in a Portfolio and use those proceeds to benefit from
Dollar Cost Averaging by automatically making purchases of the same class of
Shares in another Portfolio. With shareholder authorization, the Fund's Transfer
Agent will withdraw the amount specified (subject to the applicable minimums)
from the shareholder's account and will automatically invest that amount in
Shares of the Portfolio designated by the shareholder on the date of such
deduction.
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<PAGE>
In order to participate in the Automatic Exchange Program,
shareholders must make a minimum initial purchase of $5,000 and maintain a
minimum account balance of $1,000. Additionally, shareholders must complete the
supplementary authorization form which may be obtained from their broker-dealer
or financial institution or the Fund. To change instructions with respect to the
Automatic Exchange Program or to discontinue this feature, shareholders must
send a written request to their broker-dealer or financial institution or to the
Fund. The Automatic Exchange Program may be amended or terminated without notice
at any time by the Fund.
Checkwriting -- Money Market Portfolios
To establish the checkwriting service after opening an account in a
Money Market Portfolio, the shareholder must contact his or her broker-dealer or
financial institution by telephone or mail to obtain an account application. A
signature guarantee may be required. A shareholder will receive the daily
dividends declared on the Shares to be redeemed up to the day that a check is
presented to the Custodian for payment. The checkwriting privilege may be
disadvantageous for holders of Investor B Shares of the Money Market Portfolio
due to the effect of the contingent deferred sales charge.
Automatic Withdrawal Plan (AWP)
An Automatic Withdrawal Plan may be established by a new or existing
shareholder of any Portfolio if the value of his or her account (valued at the
net asset value at the time of the establishment of the AWP) equals $10,000 or
more. Shareholders who elect to establish an AWP may receive a monthly,
quarterly, semi-annual, or annual check in a stated amount of not less than $50
on or about the 25th day of the applicable month of withdrawal. Portfolio Shares
will be redeemed as necessary to meet withdrawal payments. Withdrawals may
reduce principal and eventually deplete the shareholder's account. A shareholder
who desires to establish an AWP after opening an account should complete the AWP
form in the back of the Prospectus or contact his or her investment
representative or the Fund for an AWP application. A signature guarantee will be
required. An AWP may be terminated by a shareholder on 30 days' written notice
to his or her investment representative or to the Fund or by the Fund at any
time. No contingent deferred sales charge will be assessed on redemptions of
Investor B Shares of a Portfolio made through an AWP that do not exceed 12% of
an account's net asset value on an annualized basis. For example, monthly,
quarterly, semi-annual and annual AWP redemptions of Investor B Shares will not
be subject to the contingent deferred sales charge if they do not exceed 1%, 3%,
6% and 12%, respectively, of an account's net asset value on the redemption
date. AWP redemptions of Investor B Shares in excess of this limit are still
subject to the applicable contingent deferred sales charge.
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<PAGE>
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
As noted in the prospectuses, shares of Mercantile Mutual Funds, Inc.
may be exchanged with shares of corresponding classes of the Firstar Stellar
Funds and the Firstar Funds. The Firstar Stellar Funds currently offers the
Treasury, Tax-Free Money Market, Ohio Tax-Free Money Market Strategic Income,
U.S. Government Income, Insured Tax-Free Bond, Growth Equity, Relative Value,
Science and Technology, Stellar, Capital Appreciation and International Equity
Funds. Firstar Funds currently offers the Money Market Fund, Institutional Money
Market Fund, U.S. Treasury Money Market Fund, U.S. Government Money Market Fund,
Tax-Exempt Money Market Fund, Short-Term Bond Market Fund, Intermediate Bond
Market Fund, Tax-Exempt Intermediate
-73-
<PAGE>
Bond Fund, Bond IMMDEX(TM) Fund, Balanced Income Fund, Balanced Growth Fund,
Growth and Income Fund, Equity Index Fund, Growth Fund, MidCap Index Fund,
Special Growth Fund, Emerging Growth Fund, MicroCap Fund, Core International
Equity Fund, and International Equity Fund. FIRMCO, Mercantile's adviser, also
serves as the adviser to Firstar Funds. The Firstar Stellar Funds are advised by
Firstar Bank, N.A. Firstar Bank, N.A. and FIRMCO are under the common control of
Firstar Corporation.
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.
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 615 East Michigan Street, P.O. Box 3011, Milwaukee, WI 53201-3011.
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.
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<PAGE>
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 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
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<PAGE>
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, 1999, the 7-day yields, 7-day effective yields
and the 30-day yields were as follows:
<TABLE>
<CAPTION>
7-Day Effective
Portfolio* 7-Day Yield Yield 30-Day Yield
--------- ----------- --------------- ------------
<S> <C> <C> <C>
Treasury Money Market
Trust Shares 4.13% 4.22% 4.07%
Trust Shares II 4.36% 4.46% 4.30%
Institutional Shares 4.13% 4.22% 4.07%
Investor A Shares 4.13% 4.22% 4.07%
Money Market
Trust Shares 4.71% 4.82% 4.65%
Trust II Shares 4.94% 5.06% 4.88%
Institutional Shares 4.71% 4.82% 4.65%
Investor A Shares 4.71% 4.82% 4.65%
Investor B Shares 3.96% 4.04% 3.90%
Tax-Exempt Money Market
Trust Shares 2.95% 3.00% 2.75%
Trust II Shares 3.18% 3.23% 2.98%
Investor A Shares 7.95% 3.00% 2.75%
</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- 30-Day Tax-
Equivalent Equivalent Equivalent
Portfolio* Yield Effective Yield Yield
--------- ----------- --------------- ------------
<S> <C> <C> <C>
Tax-Exempt Money Market
Trust Shares 4.88% 4.97% 4.55%
Trust II Shares 5.26% 5.35% 4.93%
Investor A Shares 4.88% 4.97% 4.55%
</TABLE>
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<PAGE>
____________________
* 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.
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
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<PAGE>
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 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.
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<PAGE>
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, 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,
1999, the yields on the Bond Portfolios were as follows:
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<PAGE>
<TABLE>
<CAPTION>
Portfolio 30-Day Yield
--------- ------------
<S> <C>
U.S. Government Securities
Trust Shares 5.79%
Institutional Shares 5.48%
Investor A Shares 5.34%
Investor B Shares 4.77%
Intermediate Corporate Bond
Trust Shares 6.29%
Institutional Shares 5.99%
Investor A Shares 5.69%
Bond Index
Trust Shares 6.17%
Institutional Shares 5.87%
Investor A Shares 5.58%
Government & Corporate Bond
Trust Shares 6.06%
Institutional Shares 5.76%
Investor A Shares 5.48%
Investor B Shares 5.05%
Short-Intermediate Municipal
Trust Shares 3.75%
Investor A Shares 3.42%
Missouri Tax Exempt Bond
Trust Shares 4.64%
Investor A Shares 4.23%
Investor B Shares 3.63%
National Municipal Bond
Trust Shares 4.71%
Investor A Shares 4.29%
Investor B Shares 3.71%
Balanced
Trust Shares 2.38%
Institutional Shares 2.07%
Investor A Shares 1.96%
Investor B Shares 1.36%
</TABLE>
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<PAGE>
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 6.21% 6.60%
Investor A Shares 5.66% 6.02%
Missouri Tax-Exempt Bond
Trust Shares 7.68% 8.17%
Investor A Shares 7.00% 7.45%
Investor B Shares 6.01% 6.39%
National Municipal Bond
Trust Shares 7.80% 8.29%
Investor A Shares 7.10% 7.55%
Investor B Shares 6.14% 6.53%
</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
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
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<PAGE>
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.
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<PAGE>
Based on the foregoing calculations, the average annual total returns
for the year/period ended November 30, 1999, the average annual total returns
for the 5-year and 10-year periods ended November 30, 1999 (where applicable)
and the average annual total returns for the periods from commencement of
operations, reflecting sales loads in effect at the date of this SAI, 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 11/30/99 11/30/99 11/30/99 of Operations
--------- -------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
U.S. Government Securities
Trust Shares/(1)/ 1.67 % 6.71% N/A 6.45%
Institutional Shares/(4)/ 1.45 % 6.39% N/A 5.55%
Investor A Shares/(22)/ (2.71)% 5.53% 6.29% 6.61%
Investor B Shares/(2)/ (3.97)% N/A N/A 4.15%
Intermediate Corporate Bond/(15)/
Trust Shares (1.26)% N/A N/A 5.23%
Institutional Shares (1.56)% N/A N/A 5.02%
Investor A Shares (5.59)% N/A N/A 3.41%
Bond Index/(15)/
Trust Shares (0.61)% N/A N/A 5.70%
Institutional Shares (0.90)% N/A N/A 5.53%
Investor A Shares (4.91)% N/A N/A 3.87%
Government & Corporate Bond
Trust Shares/(1)/ (0.83)% 7.09% N/A 6.85%
Institutional Shares/(23)/ (1.12)% 6.78% N/A 5.04%
Investor A Shares/(3)/ (5.12)% 5.87% 6.10% 6.56%
Investor B Shares/(24)/ (6.49)% N/A N/A 5.27%
Short-Intermediate Municipal
Trust Shares/(10)/ 0.55 % N/A N/A 3.77%
Investor A Shares/(25)/ (3.63)% N/A N/A 2.26%
Missouri Tax-Exempt Bond/(11)/
Trust Shares/(12)/ (1.81)% 6.68% 6.32% 6.93%
Investor A Shares/(13)/ (5.99)% 5.59% N/A 5.91%
Investor B Shares/(24)/ (7.48)% N/A N/A 3.86%
National Municipal Bond/(14)/
Trust Shares (2.97)% N/A N/A 4.33%
Investor A Shares (6.79)% N/A N/A 2.78%
Investor B Shares (8.63)% N/A N/A 2.41%
Balanced
Trust Shares/(7)/ 8.53 % 14.77% N/A 11.22%
Institutional Shares/(23)/ 8.24 % 14.43% N/A 11.56%
Investor A Shares/(7)/ 2.30 % 13.17% N/A 10.04%
Investor B Shares/(26)/ 2.83 % N/A N/A 12.83%
Equity Income/(16)/
Trust Shares 0.23 % N/A N/A 10.61%
Institutional Shares 0.09 % N/A N/A 10.49%
Investor A Shares (5.58)% N/A N/A 8.08%
Investor B Shares (4.67)% N/A N/A 8.78%
Equity Index/(17)/
Trust Shares 20.16 % N/A N/A 25.13%
Institutional Shares 19.83 % N/A N/A 24.87%
Investor A Shares 13.22 % N/A N/A 22.07%
Growth & Income Equity
Trust Shares/(27)/ 13.94 % 20.51% N/A 15.48%
Institutional Shares/(23)/ 13.61 % 20.10% N/A 16.57%
Investor A Shares/(22)/ 7.42 % 18.75% 13.74% 14.55%
Investor B Shares/(24)/ 7.79 % N/A N/A 18.72%
</TABLE>
-83-
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Return
---------------------------
For the 5 For the 10 Since
For the Year Years Ended Years Ended Commencement
Portfolio Ended 11/30/99 11/30/99 11/30/99 of Operations
--------- -------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Growth Equity
Trust Shares/(18)/ 26.97% N/A % N/A% 25.21 %
Institutional Shares/(20)/ 26.56% N/A % N/A% 22.93 %
Investor A Shares/(19)/ 19.70% 25.46% N/A% 17.38 %
Investor B Shares/(28)/ 20.77% N/A % N/A% 18.08 %
Small Cap Equity
Trust Shares/(5)/ 17.57% 9.92% N/A% 11.80 %
Institutional Shares/(23)/ 17.27% 9.61% N/A% 8.14 %
Investor A Shares/(6)/ 10.77% 8.36% N/A% 10.73 %
Investor B Shares/(26)/ 11.57% N/A % N/A% 7.55 %
Small Cap Equity Index/(21)/
Trust Shares N/A % N/A % N/A% 2.01 %
Institutional Shares N/A % N/A % N/A% 1.74 %
Investor A Shares N/A % N/A % N/A% (3.72)%
International Equity
Trust Shares/(8)/ 36.98% 14.83% N/A% 12.84 %
Institutional Shares/(29)/ 36.61% 14.50% N/A% 12.76 %
Investor A Shares/(9)/ 29.13% 13.23% N/A% 11.42 %
Investor B Shares/(26)/ 30.65% N/A % N/A% 15.12 %
</TABLE>
- --------------------
(1) Commenced operations on February 1, 1991.
(2) Date of initial public investment on May 11, 1995.
(3) Commenced operations on June 15, 1988.
(4) Commenced operations on June 7, 1994.
(5) Commenced operations on May 6, 1992.
(6) Initial public offering commenced on May 6, 1992.
(7) Commenced operations on April 1, 1993.
(8) Commenced operations on April 4, 1994.
(9) Commenced operations on May 2, 1994.
(10) Commenced operations on July 10, 1995.
(11) Commenced operations on July 15, 1988 as a portfolio of The ARCH
Tax-Exempt Trust. On October 2, 1995, the Portfolio was
reorganized as a new Portfolio of the Fund.
(12) Commenced operations on July 15, 1988.
(13) Initial public offering commenced on September 28, 1990.
(14) Commenced operations on November 18, 1996.
(15) Commenced operations on February 10, 1997.
(16) Commenced operations on February 27, 1997.
(17) Commenced operations on May 1, 1997.
(18) Commenced operations on November 24, 1997.
(19) Performance information includes that of Predecessor Growth
Equity Portfolio, which commenced operations on January 4, 1993.
(20) Commenced operations on December 2, 1997.
(21) Commenced operations on December 30, 1998.
(22) Commenced operations on June 2, 1988.
(23) Commenced operations on January 3, 1994.
(24) Date of initial public investment on March 7, 1995.
(25) Date of initial investment on December 5, 1995.
(26) Date of initial public investment on March 6, 1995.
(27) Commenced operations on April 1, 1991.
(28) Commenced operations on February 23, 1998.
(29) Date of initial public investment on April 24, 1994.
Based on the foregoing calculations, the aggregate total returns
for the Equity and Bond Portfolios from their respective dates of commencement
of operations through November 30, 1999 were as follows:
-84-
<PAGE>
<TABLE>
<CAPTION>
Aggregate Total Return
Since Commencement
Portfolio of Operations
---------- ------------------
<S> <C>
U.S. Government Securities
Trust Shares 73.65%
Institutional Shares/(1)/ 34.49%
Investor A Shares 108.63%
Investor B Shares/(2)/ 20.37%
Intermediate Corporate Bond
Trust Shares 15.35%
Institutional Shares 14.72%
Investor A Shares 9.86%
Bond Index
Trust Shares 16.82%
Institutional Shares 16.27%
Investor A Shares 11.22%
Government & Corporate Bond
Trust Shares 79.52%
Institutional Shares/(1)/ 33.74%
Investor A Shares 107.20%
Investor B Shares/(2)/ 27.53%
Short-Intermediate Municipal
Trust Shares 17.62%
Investor A Shares 9.32%
Missouri Tax-Exempt Bond
Trust Shares 114.31%
Investor A Shares 69.32%
Investor B Shares/(2)/ 19.64%
National Municipal Bond
Trust Shares 13.72%
Investor A Shares 8.68%
Investor B Shares 6.26%
Equity Income
Trust Shares 103.10%
Institutional Shares 90.96%
Investor A Shares 89.19%
Investor B Shares 77.15%
Balanced
Trust Shares 32.05%
Institutional Shares/(1)/ 31.66%
Investor A Shares 23.90%
Investor B Shares/(2)/ 26.11%
Equity Index
Trust Shares 78.45%
Institutional Shares 77.50%
Investor A Shares 67.39%
Growth & Income Equity
Trust Shares 248.32%
Institutional Shares/(1)/ 147.67%
Investor A Shares 376.50%
Investor B Shares/(2)/ 125.32%
Growth Equity
Trust Shares 57.36%
Institutional Shares 50.96%
Investor A Shares/(3)/ 202.35%
Investor B Shares 34.19%
Small Cap Equity
Trust Shares 132.59%
Institutional Shares/(1)/ 58.87%
Investor A Shares 116.31%
Investor B Shares/(2)/ 41.17%
</TABLE>
-85-
<PAGE>
<TABLE>
<CAPTION>
Aggregate Total Return
Since Commencement
Portfolio of Operations
---------- ----------------------
<S> <C>
Small Cap Equity Index
Trust Shares 2.01 %
Institutional Shares 1.74 %
Investor A Shares (3.72)%
International Equity
Trust Shares 98.08 %
Institutional Shares/(1)/ 95.98 %
Investor A Shares 81.97 %
Investor B Shares/(2)/ 94.82 %
</TABLE>
- -----------------------------
(1) Reflects combined performance of Institutional Shares which were initially
offered to the public on January 4, 1994 and Investor A Shares for the
period prior to January 4, 1994.
(2) Investor B Shares were initially offered on March 1, 1995. The performance
figures for Investor B Shares for periods prior to such date represent the
performance for Investor A Shares of the Portfolio which has been restated
to reflect the contingent deferred sales charges payable by holders of
Investor B Shares that redeem within six years of the date of purchase.
Investor B Shares are also subject to distribution and services fees at a
maximum annual rate of 1.00%. Had those distribution and services fees
been reflected, performance would have been reduced.
(3) Total return information includes that of Predecessor Growth Equity
Portfolio, which commenced operations on January 4, 1993.
Investor A Shares and Investor B Shares of a Portfolio may also
calculate total return figures for that Portfolio without deducting the maximum
sales charge imposed on purchases or redemptions. The effect of not deducting
the sales charge will be to increase the total return reflected.
Investors may judge the performance of the Portfolios by comparing
them to the performance of other mutual funds or mutual fund portfolios with
comparable investment objectives and policies. Such comparisons may be made by
referring to market indices and data such as those prepared by Dow Jones & Co.,
Inc., Russell, Salomon Brothers, Inc., Lehman Brothers or Standard & Poor's
Ratings Group or any of their affiliates, the Consumer Price Index, the EAFE
Index, the NASDAQ Composite, or to rankings prepared by independent services or
other financial or industry publications that monitor the performance of mutual
funds. Such comparisons may also be made by referring to data prepared by Lipper
Analytical Services, Inc., (a widely recognized independent service which
monitors the performance of mutual funds) Indata, Frank Russell, CDA, and the
Bank Rate Monitor (which reports average yields for money market accounts
offered by the 50 leading banks and thrift institutions in the top five standard
metropolitan statistical areas). Other similar yield data, including comparisons
to the performance of Mercantile Trust repurchase agreements, or the average
yield data for similar asset classes including but not limited to Treasury
bills, notes and bonds, may also be used for comparison purposes. Comparisons
may also be made to indices or data published in the following national
financial publications: IBC's Money Fund Report(R), MorningStar,
CDA/Wiesenberger, Money Magazine, Forbes, Barron's, The Wall Street Journal, The
New York Times, Business Week, American Banker, Fortune, Pension's and
Investments, Institutional Investor, U.S.A. Today and publications of Ibbotson
Associates, Inc. and other publications of a local or regional nature. In
addition to performance information, general information about the Portfolios
that appears in a publication such as those mentioned above may be included in
advertisements, supplemental sales literature and in reports to Shareholders.
From time to time, the Fund may include the following types of
information in advertisements, supplemental sales literature and reports to
Shareholders: (1) discussions of
-86-
<PAGE>
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 2000. Investors should consult their tax advisor with
specific reference to their own tax situation.
-87-
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE YIELD TABLE: SHORT-INTERMEDIATE MUNICIPAL AND NATIONAL MUNICIPAL BOND PORTFOLIOS
- -------------------------------------------------------------------------------------------
SINGLE RETURN
Sample Taxable Federal
Income Marginal
(2000) Tax Rate --------Tax-Exempt Yields----------
4.50% 5.00% 5.50% 6.50% 7.00%
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FROM
$0 TO 15.00% 5.29% 5.88% 6.47% 7.65% 8.24%
$ 26,250
FROM
$26,251 TO 28.00% 6.25% 6.94% 7.64% 9.03% 9.72%
$ 63,550
FROM
$63,551 TO 31.00% 6.52% 7.25% 7.97% 9.42% 10.14%
$132,600
FROM
$132,601 TO 36.00% 7.03% 7.81% 8.59% 10.16% 10.94%
$288,350
OVER
$288,350 39.60% 7.45% 8.28% 9.11% 10.76% 11.59%
- -------------------------------------------------------------------------------------------
<CAPTION>
APPROXIMATE YIELD TABLE: SHORT-INTERMEDIATE MUNICIPAL AND NATIONAL MUNICIPAL BOND PORTFOLIOS
- -------------------------------------------------------------------------------------------
MARRIED FILING
JOINTLY
Sample Taxable Federal
Income Marginal
(2000) Tax Rate --------Tax-Exempt Yields-------
4.50% 5.00% 5.50% 6.50% 7.00%
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FROM
$0 TO 15.00% 5.29% 5.88% 6.47% 7.65% 8.24%
$ 43,850
FROM
$43,851 TO 28.00% 6.25% 6.94% 7.64% 9.03% 9.72%
$105,950
FROM
$105,951 TO 31.00% 6.52% 7.25% 7.97% 9.42% 10.14%
$161,450
FROM
$161,451 TO 36.00% 7.03% 7.81% 8.59% 10.16% 10.94%
$288,350
OVER
$288,350 39.60% 7.45% 8.28% 9.11% 10.76% 11.59%
- -------------------------------------------------------------------------------------------
</TABLE>
-88-
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE YIELD TABLE: MISSOURI TAX-EXEMPT BOND PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------
Combined
SINGLE RETURN Federal and
Sample Taxable Federal Missouri Missouri
Income Marginal Marginal Marginal Tax
(2000) 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
$25,750
FROM 28.00% 6.00% 32.32% 6.65% 7.39% 8.13% 8.87% 9.60% 10.34%
$25,751 TO
$62,450
FROM 31.00% 6.00% 35.14% 6.94% 7.71% 8.48% 9.25% 10.02% 10.79%
$62,451 TO
$130,250
FROM 36.00% 6.00% 39.84% 7.48% 8.31% 9.14% 9.97% 10.80% 11.64%
$130,251 TO
$283,150
OVER 39.60% 6.00% 43.22% 7.93% 8.81% 9.69% 10.57% 11.45% 12.33%
$283,150
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
APPROXIMATE YIELD TABLE: MISSOURI TAX-EXEMPT BOND PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------
MARRIED FILING Combined
JOINTLY 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
$43,850
FROM 28.00% 6.00% 32.32% 6.65% 7.39% 8.13% 8.87% 9.60% 10.34%
$43,851 TO
$105,950
FROM 31.00% 6.00% 35.14% 6.94% 7.71% 8.48% 9.25% 10.02% 10.79%
$105,951 TO
$161,450
FROM 36.00% 6.00% 39.84% 7.48% 8.31% 9.14% 9.97% 10.80% 11.64%
$161,451 TO
$288,350
OVER 39.60% 6.00% 43.22% 7.93% 8.81% 9.69% 10.57% 11.45% 12.33%
$288,350
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Such data are for illustrative purposes only and are not intended to indicate
past or future performance results of a Portfolio. Actual performance of the
Portfolios' may be more or less than that noted in the hypothetical
illustrations.
Performance quotations of a class of Shares in a Portfolio represent
that Portfolio's past performance and should not be considered as representative
of future results. Any account fees charged by an investment representative will
not be included in the calculation of the Portfolios yield and total returns.
Since performance will fluctuate, performance data for the Portfolios cannot
necessarily be used to compare an investment in the Portfolios' shares with
-89-
<PAGE>
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 intends to qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code, and to distribute out its
income to shareholders each year, so that each Portfolio itself generally will
be relieved of federal income and excise taxes. If a Portfolio were to fail to
so qualify: (1) the Portfolio would be taxed at regular corporate rates without
any deduction for distributions to shareholders; and (2) shareholders would be
taxed as if they received ordinary dividends, although corporate shareholders
could be eligible for the dividends received deduction.
Dividends declared by a Portfolio in October, November, or December of
any year payable to shareholders of record on a specified date in such months
will be deemed to have been received by shareholders and paid by the Fund on
December 31 of such year, if such dividends are actually paid during January of
the following year.
Each Portfolio may be required in certain cases to withhold and remit
to the U.S. Treasury 31% of taxable dividends or gross sale proceeds paid to
shareholders who have failed to provide a correct tax identification number in
the manner required, who are subject to backup withholding by the Internal
Revenue Service for prior failure properly to include on their return payments
of taxable interest or dividends, or who have failed to certify to the Portfolio
that they are not subject to backup withholding when required to do so or that
they are "exempt recipients."
A 4% nondeductible excise tax is imposed on regulated investment
companies that fail to currently distribute specified percentages of their
ordinary taxable income and capital gain net income (excess of capital gains
over capital losses). Each Portfolio intends to make sufficient distributions or
deemed distributions of its ordinary taxable income and any capital gain net
income each year to avoid liability for this excise tax.
-90-
<PAGE>
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 States, 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.
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
-91-
<PAGE>
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 acquired. "Related persons" include certain related natural
persons, affiliated corporations, partnerships and its partners, and S
corporations and their shareholders.
Taxation of Certain Financial Instruments & Investments in Passive Foreign
Investment Companies
The tax principle applicable to transactions in financial instruments
and futures contacts and options that may be engaged in by a Portfolio, and
investments in passive foreign investment companies ("PFICs"), are complex and,
in some cases, uncertain. Such transactions and investments may cause a
Portfolio to recognize taxable income prior to the receipt of cash, thereby
requiring the Portfolio to liquidate other positions, or to borrow money, so as
to make sufficient distributions to shareholders to avoid corporate-level tax.
Moreover, some or all of the taxable income recognized may be ordinary income or
short-term capital gain, so that the distributions may be taxable to
shareholders as ordinary income.
In addition, in the case of any shares of a PFIC in which a Portfolio
invest, the Portfolio may be liable for corporate-level tax on any ultimate gain
or distributions on the shares if the Portfolio fails to make an election to
recognize income annually during the period of its ownership of the PFIC shares.
-92-
<PAGE>
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 63103 1981 to 1995
Age: 56
Robert M. Cox, Jr. Director Senior Vice President, Emerson
Emerson Electric Co. Electric Co. since November
8000 W. Florissant Ave. 1990.
P.O. Box 4100
St. Louis, MO 63136-8506
Age: 54
Joseph J. Hunt Director General Vice-President
Iron Workers International Union International Association of
1750 New York Avenue, N.W. Bridge, Structural and Orna
Suite 700 mental Iron Workers (Interna-
Washington, D.C. 2000 tional Labor Union), January
Age: 57 1994 to present.
James C. Jacobsen Director Director, Kellwood Company,
Kellwood Company (manufacturer of wearing
600 Kellwood Parkway apparel and camping
Chesterfield, MO 63017 softgoods) since 1975;
Age: 64 Vice Chairman, Kellwood
Company since May 1989.
________________________
</TABLE>
* Mr. Woodham is an "interested person" of the Fund as defined in the 1940
Act.
-93-
<PAGE>
<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
Ameren Corporation Ameren Corporation; Director,
P.O. Box 66149 Huntco, Inc. (intermediate
St. Louis, MO 63166-6149 steel processors).
Age: 44
Ronald D. Winney* Director and Treasurer Private Investor; Treasurer, Ralston Purina
1111 N. Oxfordshire Drive Company, 1985-1999.
Edwardsville, IL 62025
Age: 57
W. Bruce McConnel, III* Secretary Partner of the law firm of Drinker Biddle &
One Logan Square Reath LLP, Philadelphia, Pennsylvania since 1977.
/18/th & Cherry Streets
Philadelphia, PA 19103-6996
Age: 55
Walter B. Grimm* Vice President and Employee of BISYS Fund Services.
3435 Stelzer Road Assistant Treasurer
Columbus, OH 43219
Age: 53
R. Jeffrey Young* Assistant Secretary Employee of BISYS Fund Services.
3435 Stelzer Road
Columbus, OH 43219
Age: 35
Joseph C. Neuberger* Assistant Treasurer Employee of Firstar Mutual Fund Services, LLC.
615 E. Michigan Street
2nd Floor
Milwaukee, WI 53202
Age: 37
Michael T. Karbouski* Assistant Treasurer Employee of Firstar Mutual Fund Services, LLC.
615 E. Michigan Street
2nd Floor
Milwaukee, WI 53202
Age: 35
Katharine A. Harwood* Assistant Secretary Employee of Firstar Mutual Fund Services, LLC.
615 E. Michigan Street
2nd Floor
Milwaukee, WI 53202
Age: 25
</TABLE>
________________________
* Messrs. Grimm, Young, Winney, McConnel, Neuberger, Karbouski, and Ms.
Harwood 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
-94-
<PAGE>
additional annual fee of $5,000 for his services in these capacities. For the
fiscal year ended November 30, 1999, the Fund paid or accrued for the account of
its directors as a group, for services in all capacities, a total of $75,000.
Drinker Biddle & Reath LLP, of which Mr. McConnel is a partner, receives legal
fees as counsel to the Fund. As of the date of this Statement of Additional
Information, the directors and officers of the Fund, as a group, owned less than
1% of the outstanding shares of the Fund.
The following chart provides certain information about the fees received by
the Fund's directors for their services as members of the Board of Directors and
committees thereof for the fiscal year ended November 30, 1999:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Pension or
Retirement Total
Aggregate Benefits Accrued Compensation
Compensation as Part of Fund from the Fund and
Name of Director from the Fund Expense Fund Complex*
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Jerry V. Woodham 15,000 N/A 15,000
- ---------------------------------------------------------------------------------------------------------
Donald E. Brandt 10,000 N/A 10,000
- ---------------------------------------------------------------------------------------------------------
Robert M. Cox, Jr. 10,000 N/A 10,000
- ---------------------------------------------------------------------------------------------------------
Joseph J. Hunt 10,000 N/A 10,000
- ---------------------------------------------------------------------------------------------------------
James C. Jacobsen 10,000 N/A 10,000
- ---------------------------------------------------------------------------------------------------------
Patrick J. Moore** 10,000 N/A 10,000
- ---------------------------------------------------------------------------------------------------------
Ronald D. Winney 10,000 N/A 10,000
- ---------------------------------------------------------------------------------------------------------
</TABLE>
* The "Fund Complex" consists solely of the Fund.
** Mr. Moore resigned as a director of the Fund on January 4, 2000.
Investment Advisory and Sub-Advisory Agreements
Firstar Investment and Research Management Company, LLC ("FIRMCO") serves
as investment adviser to each Portfolio as a result of FIRMCO's acquisition of
all of the assets and liabilities of the Portfolios' former adviser, Mississippi
Valley Advisors Inc. ("MVA"), on March 1, 2000. FIRMCO is a subsidiary of
Firstar Corporation, a banking and financial services organization. Prior to
September 17, 1999, MVA was an indirect wholly-owned subsidiary of Mercantile
Bancorporation Inc. On September 17, 1999, Mercantile Bancorporation Inc. merged
into Firstar Corporation.
For the services provided and expenses assumed pursuant to its investment
advisory agreement with the Fund, FIRMCO 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,
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<PAGE>
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, 1999, MVA
received advisory fees (net of waivers) at the effective annual rates of .35%,
.35%, .35%, .45%, .55%, .30%, .45%, .55%, .45%, .55%, .75%, .30%, .55%, .75%,
.75%, .35%, 1.00% and .75% of the respective average daily net assets of the
Treasury Money Market, Money Market, Tax-Exempt Money Market, U.S. Government
Securities, Intermediate Corporate Bond, Bond Index, Government & Corporate
Bond, Short-Intermediate Municipal, 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.
FIRMCO 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 FIRMCO, Clay Finlay receives from FIRMCO 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, 1999,
Clay Finlay received sub-advisory fees at the effective annual rate of .67% 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, FIRMCO and Clay
Finlay have agreed to provide investment advisory and sub-investment advisory
services, respectively, as described in the Portfolios' Prospectuses. FIRMCO 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 FIRMCO 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.
-96-
<PAGE>
For the fiscal year or period ended November 30, 1999, MVA was paid advisory
fees, after waivers, as follows:
<TABLE>
<CAPTION>
Fees Paid
Portfolios (After Waivers) Waivers
---------- --------------- --------
<S> <C> <C>
Treasury Money Market Portfolio $1,118,644 $159,812
Money Market Portfolio $5,634,447 $762,438
Tax-Exempt Money Market Portfolio $ 625,247 $ 89,324
U.S. Government Securities Portfolio $ 479,599 $ 0
Intermediate Corporate Bond Portfolio $ 330,032 $ 0
Bond Index Portfolio $ 596,823 $ 0
Government & Corporate Bond Portfolio $ 795,816 $ 0
Short-Intermediate Municipal Portfolio $ 222,864 $ 0
Missouri Tax-Exempt Bond Portfolio $ 586,025 $ 0
National Municipal Bond Portfolio $2,017,683 $ 0
Balanced Portfolio $ 884,054 $ 0
Equity Income Portfolio $ 830,725 $ 0
Equity Index Portfolio $ 275,897 $ 0
Growth & Income Equity Portfolio $2,670,936 $ 0
Growth Equity Portfolio $ 789,145 $ 0
Small Cap Equity Portfolio $ 942,833 $ 0
Small Cap Equity Index Portfolio(1) $ 97,603 $ 22,754
International Equity Portfolio $ 785,618 $ 1,033
</TABLE>
1. For the period from commencement of operations (December 30, 1998) through
November 30, 1999.
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<PAGE>
For the fiscal year or period ended November 30, 1998, MVA was paid advisory
fees, after waivers, as follows:
<TABLE>
<CAPTION>
Fees Paid
Portfolios (After Waivers) Waivers
---------- --------------- --------
<S> <C> <C>
Treasury Money Market Portfolio $ 983,103 $140,506
Money Market Portfolio $4,836,247 $690,964
Tax-Exempt Money Market Portfolio $ 595,181 $ 85,029
U.S. Government Securities Portfolio $ 459,829 $ 0
Intermediate Corporate Bond Portfolio $ 203,401 $ 91,356
Bond Index Portfolio $ 329,684 $142,709
Government & Corporate Bond Portfolio $ 913,545 $ 0
Short-Intermediate Municipal Portfolio $ 153,355 $ 62,423
Missouri Tax-Exempt Bond Portfolio $ 484,088 $ 0
National Municipal Bond Portfolio $1,389,193 $663,264
Balanced Portfolio $ 944,820 $ 0
Equity Income Portfolio $ 577,324 $280,161
Equity Index Portfolio $ 104,594 $ 35,308
Growth & Income Equity Portfolio $2,595,524 $ 0
Growth Equity Portfolio $ 702,079 $ 0
Small Cap Equity Portfolio $1,776,373 $ 0
International Equity Portfolio $ 731,113 $ 0
</TABLE>
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<PAGE>
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.
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.
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<PAGE>
Administrator
Effective January 1, 2000, BISYS Fund Services Ohio, Inc. ("BISYS"), a
subsidiary of BISYS Group, located at 3435 Stelzer Road, Columbus, Ohio 43219,
and Firstar Mutual Fund Services, LLC ("Firstar"), a subsidiary of Firstar
Corporation, located at 615 E. Michigan Street, Milwaukee, WI 53202, serve as
the Portfolios' co-administrators (the "Co-Administrators").
For the period from January 1, 2000 through March 31, 2000, the following
are some of the services jointly provided by the Co-Administrators to the
Portfolios: providing personnel and supervision of an office facility to receive
purchase, exchange and redemption orders via the Fund's toll-free telephone
lines; providing information and distributing written communications concerning
the Portfolios to their shareholders of record, and assisting in handling
shareholder problems and calls; monitoring the Fund's arrangements with respect
to services provided by certain institutional shareholders ("Service
Organizations") under its Administrative Services Plans for Trust Shares and
Institutional Shares, respectively, and its Distribution and Services Plans for
Investor A Shares and Investor B Shares, respectively, including monitoring and
reviewing the services rendered by Service Organizations to their customers who
are the record or beneficial owners of such shares, pursuant to agreements
between the Fund and such Service Organizations; furnishing statistical and
research data, clerical and certain bookkeeping services and stationery and
office supplies; and assisting in monitoring of regulatory and legislative
developments which may affect the Fund. For the same period, the following are
some services provided by Firstar to the Portfolios: completing blue sky
compliance starting January 10, 2000; monitoring compliance with Subchapter M of
Internal Revenue Code; monitoring fidelity bond coverage; monitoring directors'
and officers' liability coverage; and monitoring expense ratios/budget expenses.
For the same period, the following are some services provided by BISYS to the
Portfolios: preparing annual reports to the SEC on Form N-SAR; compiling data
for, and assisting in preparation for execution and filing by the Fund, all of
the Fund's federal and state tax returns and required tax filings other than
those required to be made by the Company's custodian or transfer agent;
assisting in preparation and filing of Rule 24f-2 Notices; and mailing all
communications by the Fund to its shareholders to their authorized
representatives.
For the period beginning April 1, 2000, Firstar 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.
Firstar 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,
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<PAGE>
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.
For the same period, BISYS has agreed to assist in responding to examination
letters received from the SEC; review prospectuses and supplements to
prospectuses as prepared by counsel to the Fund; and review Board agendas and
participate in Board meetings.
Effective January 1, 2000, the Fund will pay the Co-Administrators jointly
a fee, computed daily and payable monthly, with respect to each Portfolio other
than the Tax-Exempt Money Market Portfolio, at the annual rate of .20% of the
average daily net assets of each Portfolio, and (ii) with respect to the Tax-
Exempt Money Market Portfolio, at the annual rate of .10% of the average daily
net assets of the Portfolio. The Co-Administrators have agreed to bear all
expenses in connection with the performance of their services, except that a
Portfolio bears any expenses incurred in connection with any use of a pricing
service to value portfolio securities.
Prior to January 1, 2000, BISYS served as the sole administrator to the
Fund. BISYS generally assisted in all aspects of each Portfolio's administration
and operation and also monitored and performed other services pertaining to the
Fund's arrangements under the Administrative Services Plan described below. For
its services, BISYS was 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, 1999, BISYS received administration fees (net of
waivers) at the effective annual rates of .10%, .10% and .10% of the average
daily net assets of the Intermediate Corporate Bond, National Municipal Bond and
Equity Income Portfolios, respectively, and .10% of the average daily net assets
of each of the other Portfolios. From time to time, either Co-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.
For the fiscal year or period ended November 30, 1999, BISYS was paid
administration fees, after waivers, as follows:
<TABLE>
<CAPTION>
Fees Paid
Portfolios (After Waivers) Waivers
---------- --------------- -------
<S> <C> <C>
Treasury Money Market Portfolio $ 350,554 $ 288,680
Money Market Portfolio $1,767,058 $1,452,668
Tax-Exempt Money Market Portfolio $ 178,643 $ 0
U.S. Government Securities Portfolio $ 106,581 $ 106,576
Intermediate Corporate Bond Portfolio $ 60,008 $ 60,005
Bond Index Portfolio $ 198,945 $ 198,939
Government & Corporate Bond Portfolio $ 176,852 $ 176,846
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Fees Paid
Portfolios (After Waivers) Waivers
---------- --------------- -------
<S> <C> <C>
Short-Intermediate Municipal Portfolio $ 40,522 $ 40,520
Missouri Tax-Exempt Bond Portfolio $ 130,231 $ 130,226
National Municipal Bond Portfolio $ 366,861 366,848
Balanced Portfolio $ 117,877 $ 117,873
Equity Income Portfolio $ 110,766 $ 110,763
Equity Index Portfolio $ 91,968 $ 91,964
Growth & Income Equity Portfolio $ 485,638 $ 485,620
Growth Equity Portfolio $ 105,223 $ 105,218
Small Cap Equity Portfolio $ 125,715 $ 125,710
Small Cap Equity Index Portfolio(1) $ 29,760 $ 29,759
International Equity Portfolio $ 78,667 $ 78,664
</TABLE>
1. For the period from commencement of operations (December 30, 1998) through
November 30, 1999.
-102-
<PAGE>
For the fiscal year or period ended November 30, 1998, BISYS was paid
administration fees, after waivers, as follows:
<TABLE>
<CAPTION>
Fees Paid
Portfolios (After Waivers) Waivers
---------- --------------- -------
<S> <C> <C>
Treasury Money Market Portfolio $ 280,895 $ 280,909
Money Market Portfolio $1,381,828 $1,381,778
Tax-Exempt Money Market Portfolio $ 170,051 $ 0
U.S. Government Securities Portfolio $ 102,187 $ 102,181
Intermediate Corporate Bond Portfolio $ 46,054 $ 61,001
Bond Index Portfolio $ 157,468 $ 157,460
Government & Corporate Bond Portfolio $ 203,015 $ 203,004
Short-Intermediate Municipal Portfolio $ 39,233 $ 39,231
Missouri Tax-Exempt Bond Portfolio $ 107,578 $ 107,574
National Municipal Bond Portfolio $ 318,915 $ 427,432
Balanced Portfolio $ 125,979 $ 125,973
Equity Income Portfolio $ 97,524 $ 131,138
Equity Index Portfolio $ 46,635 $ 46,633
Growth & Income Equity Portfolio $ 471,926 $ 471,900
Growth Equity Portfolio $ 93,613 $ 93,608
Small Cap Equity Portfolio $ 236,856 $ 236,844
International Equity Portfolio $ 73,113 $ 73,109
</TABLE>
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<PAGE>
For the fiscal year or period ended November 30, 1997, BISYS (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 Portfolio1 $ 181,277 $478,060
Balanced Portfolio $ 118,068 $118,063
Equity Income Portfolio(2) $ 49,963 $131,717
Equity Index Portfolio(3) $ 17,039 $ 17,038
Growth & Income Equity Portfolio $ 435,186 $435,169
Growth Equity Portfolio(4) $ 16,610 $ 1,287
Small Cap Equity Portfolio $ 237,783 $237,775
International Equity Portfolio $ 75,322 $ 54,941
</TABLE>
______________________
1. For the period from commencement of operations (February 10, 1997) through
November 30, 1997.
2. For the period from commencement of operations (March 7, 1997) through
November 30, 1997.
3. For the period from commencement of operations (May 1, 1997) through
November 30, 1997.
4. For the period October 1, 1997 through November 30, 1997.
For the fiscal year ended September 30, 1997, Federated Administrative
Services, the former administrator of the Predecessor Growth Equity Portfolio,
earned administrative fees of $90,965 and $71,420, respectively.
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<PAGE>
Custodian, Sub-Custodian and Transfer Agent
Mercantile Trust Company National Association ("Mercantile Trust"), an
indirect wholly-owned subsidiary of Firstar Corporation, 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, Deutsche Bank AG, New York Branch, with principal
offices at 16 Wall Street, New York, New York 10005, serves as the Sub-Custodian
for the International Equity Portfolio. Effective March 20, 2000, Firstar
Mutual Fund Services, LLC, ("Firstar"), with principal offices at 615 E.
Michigan Street, Milwaukee, WI 53202, serves as the Fund's transfer agent and
dividend disbursing agent. Prior to March 20, 2000, BISYS Fund Services Ohio,
Inc., ("BISYS")located at 3435 Stelzer Road, Columbus, Ohio 43219, served as the
Fund's transfer agent and dividend disbursing agent.
Under a Custodian Agreement between the Fund and Mercantile Trust,
Mercantile Trust has agreed to (i) maintain a separate account or accounts in
the name of each Portfolio; (ii) receive and disburse money on behalf of each
Portfolio; (iii) collect and receive all income and other payments and
distributions on account of each Portfolio's portfolio securities; (iv) respond
to correspondence relating to its duties; and (v) make periodic reports to the
Fund's Board of Directors concerning the operations of each Portfolio.
Mercantile Trust may, at its own expense, open and maintain a custody account or
accounts on behalf of each Portfolio with other banks or trust companies,
provided that Mercantile Trust shall remain liable for the performance of all of
its custodial duties under the Custodian Agreement, notwithstanding any
delegation. Mercantile Trust is authorized to select one or more banks or trust
companies to serve as sub-custodian on behalf of the Portfolios, provided that
Mercantile Trust shall remain responsible for the performance of all of its
duties under the Custodian Agreement and shall hold the Fund harmless from the
acts and omissions of any bank or trust company servicing as sub-custodian.
Pursuant to the terms of the Assignment and Delegation Agreement, Mercantile
Trust National Association remains liable for the acts and omissions of
Mercantile Trust under the Custodian Agreement.
In the opinion of the staff of the SEC, since the Custodian is an affiliate
of the investment adviser, the Fund and the Custodian are subject to the
requirements of Rule 17f-2 under the 1940 Act. Accordingly the Fund and the
Custodian intend to comply with the requirements of such rule.
Pursuant to the Custodian Agreement with the Fund, each Portfolio pays
Mercantile Trust an annual fee. For each Money Market Portfolio this fee is
paid monthly and calculated daily at the rate of $.20 for each $1,000 of each
such Portfolio's average daily net assets plus, in the case of the Tax-Exempt
Money Market Portfolio only, $50 for each interest collection or claim item.
For the Equity and Bond Portfolios (except the International Equity Portfolio),
this fee, which is paid monthly, is calculated as the greater of $6,000 or $.50.
For the International Equity Portfolio, this fee, which is calculated daily and
paid monthly, is .17% of the Portfolio's average daily net assets for the first
$50 million; .155% of the Portfolio's average daily net assets for the next $50
million; .13% of the Portfolio's average daily net assets for the next $150
million; and .105% of the Portfolio's average daily net assets thereafter. Each
Equity and Bond Portfolio also pays $15.00 for each purchase, sale or delivery
of a security upon its
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<PAGE>
maturity date, $50.00 for each interest collection or claim item, $20.00 for
each transaction involving GNMA, tax-free or other non-depository registered
items with monthly dividends or interest, $30.00 for each purchase, sale or
expiration of an option contract, $50.00 for each purchase, sale or expiration
of a futures contract, and $15.00 for each repurchase trade with an institution
other than Mercantile Trust. In addition, each Portfolio pays Mercantile Trust's
incremental costs in providing foreign custody services for any foreign-
denominated and foreign-held securities and reimburses Mercantile Trust for out-
of-pocket expenses related to such services.
Pursuant to an agreement with the Fund's transfer agent and in
connection with the Shares offered to its customers, a financial institution
(which may include Mercantile or its affiliated or correspondent banks) may
serve as sub-transfer agent with respect to the underlying beneficial owners of
Shares. For the account maintenance services provided, a sub-transfer agent is
entitled to receive an annual fee of $30 with respect to each beneficial owner's
holdings in Shares (irrespective of the number of Portfolios in which such
Shares are held).
Effective March 20, 2000, Firstar replaced BISYS as the Fund's
transfer agent and dividend disbursing agent (in those capacities, the "Transfer
Agent"). Under the Transfer Agent Servicing Agreement with Firstar, 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. Prior to March
20, 2000, such services were provided by BISYS to the Portfolios.
Distributor
BISYS Fund Services Limited Partnership (the "Distributor"), an
affiliate of BISYS Fund Services Ohio, Inc., a Co-Administrator of the Fund,
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
-106-
<PAGE>
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, 1999, 1998 and 1997, the Distributor received front-end sales
charges in connection with Investor A share purchases as follows: U.S.
Government Securities Portfolio -- $10,810, $1,218 and $2,052, respectively;
Government & Corporate Bond Portfolio -- $7,960, $8,853 and $9,635,
respectively; Missouri Tax-Exempt Bond Portfolio -- $65,564, $75,697 and
$46,690, respectively; Growth & Income Equity Portfolio --$91,256, $171,703, and
$167,110, respectively; Small Cap Equity Portfolio -- $9,646, $26,651 and
$33,777, respectively; Balanced Portfolio -- $50,524, $37,468 and $20,227,
respectively; International Equity Portfolio -- $5,610, $9,765 and $18,258,
respectively; Short-Intermediate Municipal Portfolio -- $0, $0, and $0,
respectively; and National Municipal Bond Portfolio -- $12,643, $9,641, and
$4,340, respectively. For the fiscal years ended November 30, 1999 and 1998 and
the period from 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 $5,985, $1,026 and $13,
respectively. For the fiscal years ended November 30, 1999 and 1998 and the
period from 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 $2,873, $1,662
and $1,114, respectively. For the fiscal years ended November 30, 1999 and 1998
and the period from 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 $14,545, $25,690 and $829.
For the fiscal years ended November 30, 1999, 1998 and the period from 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 $49,827, $11,259 and $3,003. For the fiscal years
ended November 30, 1999 and 1998 and the period from 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
$99,585, $14,772 and $0. For the period from December 30, 1998 (commencement of
operations) to November 30, 1999, the Distributor received front-end sales
charges in connection with Investor A Shares of the Small Cap Equity Index
Portfolio of $515. Of these amounts, the Distributor retained $1,786, $227, and
$0, respectively, and FIRMCO
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<PAGE>
and affiliates retained $2,212, $1,206, and $310, respectively, with respect to
the U.S. Government Securities Portfolio; the Distributor retained $578, $88 and
$0, and FIRMCO and affiliates retained $1,185, $0 and $0 with respect to the
Intermediate Corporate Bond Portfolio; the Distributor retained $886, $216 and
$0, and FIRMCO and affiliates retained $3,205, $0 and $0 with respect to the
Bond Index Portfolio; the Distributor retained $907, $1,210 and $0,
respectively, and FIRMCO and affiliates retained $1,906, $2,025 and $6,721,
respectively, with respect to the Government & Corporate Bond Portfolio; the
Distributor retained $12,209, $9,050, and $23, respectively, and FIRMCO and
affiliates retained $8,866, $2,814 and $4,700, respectively, with respect to the
Missouri Tax-Exempt Bond Portfolio; the Distributor retained $1,669, $3,014 and
$45, and FIRMCO and affiliates retained $1,440, $3,396 and $466 with respect to
the Equity Income Portfolio; the Distributor retained $7,015, $1,574 and $0, and
FIRMCO and affiliates retained $13,655, $2,956 and $25 with respect to the
Equity Index Portfolio; the Distributor retained $11,414, $21,393 and $2,387,
respectively, and FIRMCO and affiliates retained $32,228, $46,623 and $56,664,
respectively, with respect to the Growth & Income Equity Portfolio; the
Distributor retained $12,735, $1,280 and $0, and FIRMCO and affiliates retained
$23,993, $3,738 and $0 with respect to the Growth Equity Portfolio; the
Distributor retained $1,347, $3,284 and $184 respectively, and FIRMCO and
affiliates retained $2,518, $8,880 and $9,915, respectively, with respect to the
Small Cap Equity Portfolio; the Distributor retained $6,158, $6,170, and $67,
respectively, and FIRMCO and affiliates retained $6,757, $5,029, and $9,419,
respectively, with respect to the Balanced Portfolio; the Distributor retained
$682, $1,014, and $0, respectively, and FIRMCO and affiliates retained $1,662,
$2,722,and $7,433, respectively, with respect to the International Equity
Portfolio; the Distributor retained $0, $0,and $0, respectively, and FIRMCO and
affiliates retained $0, $0 and $0, respectively, with respect to the Short-
Intermediate Municipal Portfolio; the Distributor retained $1,881, $940,and $0
and FIRMCO and affiliates retained $0, $0, and $0 with respect to the National
Municipal Bond Portfolio; and the Distributor retained $190, and FIRMCO and
affiliates retained $138 with respect to the Small Cap Equity Index 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, 1999, 1998 and 1997, the Distributor
received contingent deferred sales charges in connection with Investor B share
redemptions as follows: Money Market Portfolio -- $0, $0, and $0; U.S.
Government Securities Portfolio -- $6,039, $3,024 and $8,968; Government and
Corporate Bond Portfolio -- $11,981, $7,194, and $4,075; Missouri Tax-Exempt
Bond Portfolio -$56,312, $43,716 and $61,906; Growth and Income Equity
Portfolio--$56,386, $114,883 and $121,999, Small Cap Equity Portfolio -- $1,123,
$9,898 and $12,870; International Equity Portfolio -- $1,791, $2,848, $8,191;
Balanced Portfolio -- $44,689, $21,624 and $9,311; and National Municipal Bond
Portfolio--$16,367, $7,014 and $34,256. For the fiscal years ended November 30,
1999, 1998 and for the period March 7, 1997 (commencement of operations) through
November 30, 1997, the Distributor received $15,296, $15,372 and $10,382 in
contingent deferred sales charges in connection with Investor B Share
redemptions of the Equity Income Portfolio. For the fiscal years ended November
30, 1999, 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 $52,417, $8,424 and $0 in contingent deferred
sales charges in connection with Investor B Share redemptions of the Growth
Equity Portfolio. All such amounts were assigned
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<PAGE>
to FIRMCO pursuant to the financing arrangement between the Distributor and
FIRMCO 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, 1999:
<TABLE>
<CAPTION>
Brokerage
Commissions in
Net Underwriting Compensation on Connection with
Discounts and Redemption and Portfolio Other
Portfolio Commissions/(1)/ Repurchase/(2)/ Transactions Compensation/(3)/
--------- --------------------- ---------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Treasury Money Market $ 0 $ 0 $ 0 $ 550,502
Money Market $ 0 $ 0 $ 0 $2,470,906
Tax-Exempt Money $ 0 $ 0 $ 0 $ 112,579
Market
U.S. Government $ 16,850 $ 311 $10,810 $ 34,773
Securities
Intermediate Corporate $ 2,873 $ 0 $ 2,873 $ 4,116
Bond
Bond Index $ 5,985 $ 0 $ 5,985 $ 62,764
Government & $ 19,941 $ 6,029 $ 8,164 $ 40,146
Corporate Bond
Short-Intermediate $ 0 $ 0 $ 0 $ 52
Municipal
Missouri Tax- $121,876 $ 6,069 $65,564 $ 68,632
Exempt Bond
National Municipal Bond $ 29,010 $ 277 $12,643 $ 8,930
Balanced $ 95,213 $ 2,425 $50,524 $ 240,053
Equity Income $ 29,841 $ 2,838 $14,545 $ 10,127
Equity Index $ 49,827 $ 0 $49,827 $ 94,147
Growth & Income Equity $147,642 $32,201 $91,473 $ 535,009
Growth Equity $152,002 $ 4,369 $99,701 $ 33,182
Small Cap Equity $ 10,769 $ 6,749 $ 9,646 $ 60,744
Small Cap Equity Index/(4)/ $ 515 $ 0 $ 515 $ 43,018
International Equity $ 7,400 $ 2,387 $ 5,610 $ 39,387
</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.
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<PAGE>
(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 FIRMCO pursuant to the financing arrangements
between the Distributor and FIRMCO 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) Commenced Operations on December 30, 1998.
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.
-110-
<PAGE>
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 six 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 an agreement with FIRMCO pursuant
to which FIRMCO 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 FIRMCO 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.
-111-
<PAGE>
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, 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
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<PAGE>
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.
For the fiscal year or period ended November 30, 1999, pursuant to the
Distribution and Services Plan for Investor A Shares, the Portfolios 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 $ 56,520 $0 $0 $ 329
Money Market $619,648 $0 $0 $10,046
Tax-Exempt Money Market $ 31,554 $0 $0 $ 714
U.S. Government Securities $ 14,696 $0 $0 $10,587
Intermediate Corporate Bond $ 1,275 $0 $0 $ 567
Bond Index $ 3,513 $0 $0 $ 2,386
Government & Corporate Bond $ 12,711 $0 $0 $ 9,019
Short-Intermediate Municipal Bond $ 54 $0 $0 $ 33
Missouri Tax-Exempt Bond $ 46,205 $0 $0 $17,655
National Municipal Bond $ 3,504 $0 $0 $ 1,211
Balanced $ 33,982 $0 $0 $20,713
Equity Income $ 4,892 $0 $0 $ 1,664
Equity Index $ 7,192 $0 $0 $ 1,896
Growth & Income Equity $156,243 $0 $0 $78,077
Growth Equity $ 21,297 $0 $0 $ 6,817
Small Cap Equity $ 29,020 $0 $0 $14,535
Small Cap Equity Index $ 239 $0 $0 $ 4
International Equity $ 9,815 $0 $0 $ 2,656
</TABLE>
All amounts paid under the Distribution and Services Plan for Investor A
Shares for the fiscal year ended November 30, 1999 were attributable to payments
to broker-dealers. For the fiscal year ended November 30, 1999, no brokers of
record waived fees.
-113-
<PAGE>
For the fiscal year or period ended November 30, 1999, 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 $ 768 $0 $ 561 $0
U.S. Government Securities $ 2,444 $0 $ 1,788 $0
Government & Corporate Bond $ 7,555 $0 $ 5,337 $0
Missouri Tax-Exempt Bond $33,805 $0 $24,147 $0
National Municipal Bond $ 7,727 $0 $ 5,615 $0
Balanced $20,903 $0 $15,173 $0
Equity Income $ 7,649 $0 $ 5,406 $0
Growth & Income Equity $99,548 $0 $71,857 $0
Growth Equity $12,390 $0 $ 9,453 $0
Small Cap Equity $11,769 $0 $ 8,455 $0
International Equity $ 6,570 $0 $ 4,838 $0
</TABLE>
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<PAGE>
For the fiscal year or period ended November 30, 1999, pursuant to the
Administrative Services Plan for Trust Shares, the Portfolios 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 $ 503,360 $0 $0 $ 291,629
Money Market $1,788,406 $0 $0 $1,765,480
Tax-Exempt Money Market $ 81,775 $0 $0 $ 81,490
U.S. Government Securities $ 0 $0 $0 $ 0
Intermediate Corporate Bond $ 0 $0 $0 $ 0
Bond Index $ 0 $0 $0 $ 0
Government & Corporate Bond $ 0 $0 $0 $ 0
Short-Intermediate Municipal $ 0 $0 $0 $ 0
Missouri Tax-Exempt Bond $ 0 $0 $0 $ 0
National Municipal Bond $ 0 $0 $0 $ 0
Balanced $ 0 $0 $0 $ 0
Equity Income $ 0 $0 $0 $ 0
Equity Index $ 0 $0 $0 $ 0
Growth and Income Equity $ 0 $0 $0 $ 0
Growth Equity $ 0 $0 $0 $ 0
Small Cap Equity $ 0 $0 $0 $ 0
Small Cap Equity Index $ 0 $0 $0 $ 0
International Equity $ 0 $0 $0 $ 0
</TABLE>
-115-
<PAGE>
For the fiscal year ended November 30, 1999, pursuant to the Administrative
Services Plan for Institutional shares, the Portfolios 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 $ 390 $0 $0 $ 390
Money Market $ 96,113 $0 $0 $ 93,876
U.S. Government Securities $ 18,525 $0 $0 $ 18,149
Intermediate Corporate Bond $ 3,164 $0 $0 $ 3,159
Bond Index $ 59,027 $0 $0 $ 59,272
Government & Corporate Bond $ 23,382 $0 $0 $ 20,697
Balanced $191,954 $0 $0 $181,677
Equity Income $ 276 $0 $0 $ 273
Equity Index $ 86,769 $0 $0 $ 86,912
Growth and Income Equity $313,577 $0 $0 $303,645
Growth Equity $ 2,841 $0 $0 $ 2,719
Small Cap Equity $ 25,532 $0 $0 $ 23,181
Small Cap Equity Index $ 42,085 $0 $0 $ 42,752
International Equity $ 27,419 $0 $0 $ 27,139
</TABLE>
Other Plan Information. The Board of Directors has approved each Plan
----------------------
and its respective arrangements with the Distributor, Service Organizations and
broker-dealer based on information provided by the Fund's service contractors
that there is a reasonable likelihood that these Plans and arrangements will
benefit the Portfolios and their shareholders. Pursuant to each Plan, the Board
of Directors reviews, at least quarterly, a written report of the amounts of
distribution fees and servicing fees expended pursuant to each Plan and the
Service Organizations and the purposes for which the expenditures were made. So
long as the Fund has one or more of the above described Plans in effect, the
selection and nomination of the members of the Board of Directors who are not
"interested persons" (as defined in the 1940 Act) of the Fund will be committed
to the discretion of such Disinterested Directors.
Depending upon the terms governing the particular customer accounts,
Service Organizations and other institutions may also charge their customers
directly for cash management and other services provided in connection with the
accounts, including, for example, account maintenance fees, compensating balance
requirements, or fees based upon account transactions, assets, or income. An
investor should therefore read the Prospectuses and
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<PAGE>
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. 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 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.
CODE OF ETHICS
The Fund, FIRMCO, Clay Finley and the Distributor have adopted codes of
ethics under Rule 17j-1 of the 1940 Act that permit investment personnel subject
to their particular codes of ethics to invest in securities, including
securities that may be purchased or held by the Fund, for their own accounts.
The codes of ethics are on public file with, and are available from, the
Securities and Exchange Commission's Public Reference Room in Washington,
D.C.
-117-
<PAGE>
INDEPENDENT AUDITORS
For the fiscal year or period ended November 30, 1999, KPMG LLP,
certified public accountants, with offices at Two Nationwide Plaza, Columbus,
Ohio 43215, served as independent auditors for the Fund. KPMG LLP performs an
annual audit of the Fund's financial statements. Reports of its activities are
provided to the Fund's Board of Directors.
COUNSEL
Drinker Biddle & Reath LLP (of which W. Bruce McConnel, III, Secretary
of the Fund, is a partner), One Logan Square, 18th and Cherry Streets,
Philadelphia, Pennsylvania 19103-6996, is counsel to the Fund and will pass upon
certain legal matters on its behalf.
FINANCIAL STATEMENTS
The Fund's Annual Report to Shareholders for the fiscal year or period
ended November 30, 1999 has been filed with the Securities and Exchange
Commission. The financial statements in such Annual Report (the "Financial
Statements") are incorporated by reference into this Statement of Additional
Information. The Financial Statements included in such Annual Report have been
audited by the Fund's independent auditors, KPMG LLP, whose report thereon also
appears in such Annual Report and is incorporated by reference. The Financial
Statements in such Annual Report have been incorporated by reference in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
MISCELLANEOUS
As of March 3, 2000, Mercantile held of record 80.02%, 99.47% and 81.61% of
the outstanding Institutional, Trust and Trust II Shares, respectively, in the
Money Market Portfolio; 72.06% and 66.87% of the outstanding Trust and Trust II
Shares, respectively, in the Treasury Money Market Portfolio; and 100% and
98.74% of the outstanding Trust Shares and Trust II Shares, respectively, in the
Tax-Exempt Money Market Portfolio.
As of March 3, 2000, Mercantile Bank National Association and its
affiliates possessed, of record on behalf of their underlying customer accounts,
voting or investment power with respect to more than 25% of the Fund's
outstanding Shares. Therefore, Mercantile Bank National Association may be
deemed to be a controlling person of the Fund within the meaning of the 1940
Act.
As of March 3, 2000, the following institutions also owned of record
5% or more of each listed Portfolio's outstanding shares as fiduciary or agent
on behalf of their customers:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
FUND / SHARE TYPE SHAREHOLDER NAME AND ADDRESS PERCENTAGE OF FUND HELD
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Money Market Investor Public Safety Equipment Inc. 21.01%
Shares 10986 N. Warson Rd.
St. Louis, MO 63114
- -----------------------------------------------------------------------------------------------------
Clayton Corp. 17.62%
866 Horan Dr.
Fenton, MO 63026-0000
- ------------------------------------------------------------------------------------------------------
National Financial Services Corp. 13.65%
The Benefit of Our Customers
200 Liberty St. 5th Floor
New York, NY 10281
- -------------------------------------------------------------------------------------------------------
</TABLE>
-118-
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
FUND / SHARE TYPE SHAREHOLDER NAME AND ADDRESS PERCENTAGE OF FUND HELD
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
United Pentecostal Church 6.83%
8855 Dunn Rd.
Hazelwood, MO 63042
- ----------------------------------------------------------------------------------------------------
</TABLE>
-119-
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
FUND / SHARE TYPE SHAREHOLDER NAME AND ADDRESS PERCENTAGE OF FUND HELD
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Richard E. Crippa 6.28%
2948 Castleford Dr.
Florissant, MO 63033
- -----------------------------------------------------------------------------------------------------
Places for People, Inc. 5.18%
4120 Lindell Blvd.
St. Louis, MO 63108
- -----------------------------------------------------------------------------------------------------
Treasury Money Market National Financial Services Corp. 90.65%
Investor Shares The Benefit of Our Customers
200 Liberty St. 5th Floor
New York, NY 10281
- -----------------------------------------------------------------------------------------------
Dorothy B. Borgmeyer 7.34%
41 Berry Oaks Ln.
St. Louis, MO 63122
- -----------------------------------------------------------------------------------------------
Tax-Exempt Money Market Jill Kathleen Stratemeier 41.80%
Investor Shares Estate of John L. Matthews
P.O. Box 893
Parsons, KS 67357
- -----------------------------------------------------------------------------------------------
Benjamin S. Sandler 32.28%
Louise G. Sandler
14440 White Birch Valley Ln.
Chesterfield, MO 63107
- -----------------------------------------------------------------------------------------------
National Financial Services Corp. 12.43%
The Benefit of Our Customers
200 Liberty St. 5th Floor
New York, NY 10281
- -----------------------------------------------------------------------------------------------
Sisters of the Good Shepherd 11.06%
7654 Natural Bridge Rd.
St. Louis, MO 63121
- -----------------------------------------------------------------------------------------------
Balanced Investor Shares Robert W. Davis 6.22%
818 Broadway
Elsberry, MO 63343
- -----------------------------------------------------------------------------------------------
Government & Corporate Eugene F. Tucker 8.09%
Bond Investor Shares 1517 Rue Renee
St. Louis, MO 63122
- ------------------------------------------------------------------------------------------------
Shirley R. Schuepbach 5.84%
Janet Gillespie
Shirley R. Schuepbach Revoc. Liv. Trst.
13738 Michael Rd.
Highland, IL 62249
- ------------------------------------------------------------------------------------------------
</TABLE>
-120-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
FUND / SHARE TYPE SHAREHOLDER NAME AND PERCENTAGE OF FUND
ADDRESS HELD
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
International Equity Frances Dakers 14.59%
Investor Shares 200 E. 89/th/ St. 28D
New York, NY 10128
- ------------------------------------------------------------------------------------------------
Short-Intermediate George F. Richardson 55.68%
Municipal Bond Investor Amelia T. Richardson
Shares Geo. & Amelia Richardson Rev. Liv. Trst.
2120 Ingalls Cir.
O'Fallon, MO 63366
- ------------------------------------------------------------------------------------------------
NFSC FEBO M27-009204 44.29%
George Hill Goddard III
14807 Avenida Anita
Chino Hills, CA 91709
- ------------------------------------------------------------------------------------------------
National Municipal Bond NFSC FEBO M22-861910 11.24%
Investor Shares Anna Maria Bihler
3418 Oakwood
Alton, IL 62002
- ------------------------------------------------------------------------------------------------
NFSC FEBO M22-104191 6.74%
Grace Bommarito TTEE
1546 Doris Drive
St. Louis, MO 63138
- ------------------------------------------------------------------------------------------------
NFSC FEBO X11-139513 6.42%
John B. Ward
3502 Arbor Terrace Ct.
Spring, TX 77388
- ------------------------------------------------------------------------------------------------
Gail P. Ruga 6.40%
207 Aintree Rd.
Rolla, MO 65401-3760
- ------------------------------------------------------------------------------------------------
Kim P. Wheeler 6.40%
1003 S. 19/th/
Rogers, AR 72758
- ------------------------------------------------------------------------------------------------
NFSC FEBO M22-406252 6.29%
Thomas G. Smith
10214 Hobkirk Dr.
St. Louis, MO 63137
- ------------------------------------------------------------------------------------------------
George F. Richardson 5.02%
Amelia T. Richardson
Geo. & Amelia Richardson Rev. Liv. Trst.
2120 Ingalls Cir.
O'Fallon, MO 63366
- ------------------------------------------------------------------------------------------------
Intermediate Corporate David L. Otten 18.44%
Bond Investor Shares 300 Derhake Rd.
Florissant, MO 63031
- ------------------------------------------------------------------------------------------------
</TABLE>
-121-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
FUND / SHARE TYPE SHAREHOLDER NAME AND PERCENTAGE OF FUND
ADDRESS HELD
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
James A. Lynch 15.86%
915 Highmont Dr.
Ferguson, MO 63135
- ------------------------------------------------------------------------------------------------
Robert J. Barclay 11.93%
1612 Tamarack Dr.
St. Charles, MO 63301
- ------------------------------------------------------------------------------------------------
Lynn C. Prescott 10.32%
Lynn C. Prescott Trust
4180 Rincon Cir.
Palo Alto, CA 94306-3138
- ------------------------------------------------------------------------------------------------
NFSC FEBO M26-026069 6.69%
NFSC FMTC IRA
1314 Fairmont Dr.
Joplin, MO 64801
- ------------------------------------------------------------------------------------------------
NFSC FEBO M26-026077 6.35%
NFSC FMTC IRA
1314 Fairmont Dr.
Joplin, MO 64801
- ------------------------------------------------------------------------------------------------
Alice Ann Jones 6.18%
213 S. Clay # 2-S
Kirkwood, MO 63122
- ------------------------------------------------------------------------------------------------
NFSC FEBO M24-007498 5.45%
Dena M. Ver Steeg
713 Jefferson St.
Pella, IA 50219
- ------------------------------------------------------------------------------------------------
Equity Income Investor NFSC FEBO M22-898880 11.11%
Shares William Oliver Shillington II
2917 N. Kristopher Bend
St. Charles, MO 63303
- ------------------------------------------------------------------------------------------------
NFSC FEBO M22-406252 7.92%
Thomas G. Smith
10214 Hobkirk Dr.
St. Louis, MO 63137
- ------------------------------------------------------------------------------------------------
NFSC FEBO M27-901393 5.97%
Judith T. Betz
6539 Pernod
St. Louis, MO 63139
- ------------------------------------------------------------------------------------------------
NFSC FEBO M22-973912 5.20%
NFSC FMTC IRA
228 Country Club Acres
Belleville, IL 62223
- ------------------------------------------------------------------------------------------------
</TABLE>
-122-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
FUND / SHARE TYPE SHAREHOLDER NAME AND PERCENTAGE OF FUND
ADDRESS HELD
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Mori & Co. 5.07%
PO Box 13366/TBTS-2
Kansas City, MO 64199
- ------------------------------------------------------------------------------------------------
Bond Index Investor Shares David L. Otten 15.64%
300 Derhake Rd.
Florissant, MO 63031
- ------------------------------------------------------------------------------------------------
James A. Lynch 12.73%
915 Highmont Dr.
Ferguson, MO 63135
- ------------------------------------------------------------------------------------------------
NFSC FEBO M27-901393 6.96%
Judith T. Betz
6539 Pernod
St. Louis, MO 63139
- ------------------------------------------------------------------------------------------------
Wilbur R. Eaton 6.51%
804 Parkway Dr.
Benton, KY 42025
- ------------------------------------------------------------------------------------------------
Robert J. Barclay 5.06%
1612 Tamarack Dr.
St. Charles, MO 63301
- ------------------------------------------------------------------------------------------------
Equity Index Investor Wilbur R. Eaton 8.64%
Shares 804 Parkway Dr.
Benton, KY 42025
- ------------------------------------------------------------------------------------------------
NFSC FEBO M22-879770 5.46%
Sisters of St. Francis of the M.
2120 Central Ave.
Alton, IL 62002
- ------------------------------------------------------------------------------------------------
Small Cap Equity Index NFSC FEBO M22-901857 61.47%
Investor Shares NFSC FMTC IRA
14052 Agusta Dr.
Chesterfield, MO 63017
- ------------------------------------------------------------------------------------------------
NFSC FEBO M25-869970 7.32%
NFSC FMTC IRA Rollover
805 E. German Lane
Conway, AR 72032
- ------------------------------------------------------------------------------------------------
NFSC FEBO M26-072648 6.36%
NFSC FMTC IRA
2709 Princeton Blvd.
Lawrence, KS 66049
- ------------------------------------------------------------------------------------------------
</TABLE>
-123-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
FUND / SHARE TYPE SHAREHOLDER NAME AND PERCENTAGE OF FUND
ADDRESS HELD
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Growth Equity Investor NFSC FEBO M22-540196 6.28%
Shares Tiger Limited Partnership
9109 Watson Road
St. Louis, MO 63126
- ------------------------------------------------------------------------------------------------
Money Market Trust Shares Bisys Fund Services 99.47%
Mercantile EOD Sweep
3435 Stelzer Road
Columbus, OH 43219
- ------------------------------------------------------------------------------------------------
Treasury Money Market Bisys Fund Services 60.72%
Trust Shares Mercantile EOD Sweep
3435 Stelzer Road
Columbus, OH 43219
- ------------------------------------------------------------------------------------------------
Hare & Co. 27.95%
One Wall Street 2nd Floor
New York, NY 10286
- ------------------------------------------------------------------------------------------------
Mercantile Bank of Arkansas 5.68%
Treasurers Office State of AR
220 State Capitol
Little Rock, AR 72201
- ------------------------------------------------------------------------------------------------
Mercantile Bank of Arkansas 5.66%
Treasurers Office State of AR
220 State Capitol
Little Rock, AR 72201
- ------------------------------------------------------------------------------------------------
Tax-Exempt Money Market Bisys Fund Services 100.00%
Trust Shares Mercantile EOD Sweep
3435 Stelzer Road
Columbus, OH 43219
- ------------------------------------------------------------------------------------------------
Growth and Income Equity Conref & Co. 56.97%
Trust Shares P. O. Box 387
St Louis, MO 63166
- ------------------------------------------------------------------------------------------------
Roland & Company 30.30%
P. O. Box 387
St. Louis, MO 63166
- ------------------------------------------------------------------------------------------------
Washington & Company 10.97%
P. O. Box 387
St. Louis, MO 63166
- ------------------------------------------------------------------------------------------------
Small Cap Equity Trust Conref & Co. 62.62%
Shares P. O. Box 387
St Louis, MO 63166
- ------------------------------------------------------------------------------------------------
</TABLE>
-124-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
FUND / SHARE TYPE SHAREHOLDER NAME AND PERCENTAGE OF FUND
ADDRESS HELD
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Roland & Company 16.39%
P. O. Box 387
St. Louis, MO 63166
- ------------------------------------------------------------------------------------------------
Bankers Trust Co. 8.58%
Sheet Metal Local 36
648 Grassmere Park Rd.
Nashville, TN 37211
- ------------------------------------------------------------------------------------------------
U. S. Government Roland & Company 85.55%
Securities Trust Shares P. O. Box 387
St. Louis, MO 63166
- ------------------------------------------------------------------------------------------------
Conref & Co. 11.23%
P. O. Box 387
St Louis, MO 63166
- ------------------------------------------------------------------------------------------------
Balanced Trust Shares Conref & Co. 95.83%
P. O. Box 387
St Louis, MO 63166
- ------------------------------------------------------------------------------------------------
Government & Corporate Roland & Company 72.61%
Bond Trust Shares P. O. Box 387
St. Louis, MO 63166
- ------------------------------------------------------------------------------------------------
Conref & Co. 25.36%
P. O. Box 387
St Louis, MO 63166
- ------------------------------------------------------------------------------------------------
Missouri Tax-Exempt Bond Roland & Company 86.89%
Trust Shares P. O. Box 387
St. Louis, MO 63166
- ------------------------------------------------------------------------------------------------
Conref & Co. 11.14%
P. O. Box 387
St Louis, MO 63166
- ------------------------------------------------------------------------------------------------
International Equity Trust Conref & Co. 52.75%
Shares P. O. Box 387
St Louis, MO 63166
- ------------------------------------------------------------------------------------------------
Roland & Company 36.68%
P. O. Box 387
St. Louis, MO 63166
- ------------------------------------------------------------------------------------------------
Short Intermediate Roland & Company 97.79%
Municipal Bond Trust P. O. Box 387
Shares St. Louis, MO 63166
- ------------------------------------------------------------------------------------------------
National Municipal Bond Roland & Company 99.45%
Trust Shares P. O. Box 387
St. Louis, MO 63166
- ------------------------------------------------------------------------------------------------
</TABLE>
-125-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
FUND / SHARE TYPE SHAREHOLDER NAME AND PERCENTAGE OF FUND
ADDRESS HELD
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Intermediate Corporate Roland & Company 93.49%
Bond Trust Shares P. O. Box 387
St. Louis, MO 63166
- ------------------------------------------------------------------------------------------------
Equity Income Trust Shares Roland & Company 39.77%
P. O. Box 387
St. Louis, MO 63166
- ------------------------------------------------------------------------------------------------
Washington & Company 30.60%
P. O. Box 387
St. Louis, MO 63166
- ------------------------------------------------------------------------------------------------
Conref & Co. 28.94%
P. O. Box 387
St Louis, MO 63166
- ------------------------------------------------------------------------------------------------
Bond Index Trust Shares Roland & Company 94.93
P. O. Box 387
St. Louis, MO 63166
- ------------------------------------------------------------------------------------------------
Equity Index Trust Shares Conref & Co. 76.78%
P. O. Box 387
St Louis, MO 63166
- ------------------------------------------------------------------------------------------------
Roland & Company 20.67%
P. O. Box 387
St. Louis, MO 63166
- ------------------------------------------------------------------------------------------------
Small Cap Equity Index Conref & Co. 86.33%
Trust Shares P. O. Box 387
St Louis, MO 63166
- ------------------------------------------------------------------------------------------------
Capinco 7.90%
P. O. Box 1787
Milwaukee, WI 53201
- ------------------------------------------------------------------------------------------------
Growth Equity Trust Shares Roland & Company 58.79%
P. O. Box 387
St. Louis, MO 63166
- ------------------------------------------------------------------------------------------------
Conref & Co. 25.73%
P. O. Box 387
St Louis, MO 63166
- ------------------------------------------------------------------------------------------------
Washington & Company 11.51%
P. O. Box 387
St. Louis, MO 63166
- ------------------------------------------------------------------------------------------------
Money Market Institutional Mercantile Bank St. Louis NA 80.02%
Shares P. O. Box 387
St. Louis, MO 63166
- ------------------------------------------------------------------------------------------------
</TABLE>
-126-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
FUND / SHARE TYPE SHAREHOLDER NAME AND PERCENTAGE OF FUND
ADDRESS HELD
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Bisys BD Services Inc. 11.98%
P. O. Box 4054
Concord, CA 94524
- ------------------------------------------------------------------------------------------------
Treasury Money Market Bisys Fund Services OH Inc. 97.56%
Institutional Shares 3435 Stelzer Rd.
Columbus, OH 43219
- ------------------------------------------------------------------------------------------------
Growth & Income Equity Conref & Co. 90.47%
Institutional Shares P. O. Box 387
St Louis, MO 63166
- ------------------------------------------------------------------------------------------------
Bisys BD Services Inc. 7.20%
P. O. Box 4054
Concord, CA 94524
- ------------------------------------------------------------------------------------------------
Small Cap Equity Conref & Co. 41.81%
Institutional Shares P. O. Box 387
St Louis, MO 63166
- ------------------------------------------------------------------------------------------------
Capinco 22.53%
P. O. Box 1787
Milwaukee, WI 53201
- ------------------------------------------------------------------------------------------------
Bisys BD Services Inc. 17.84%
P. O. Box 4054
Concord, CA 94524
- ------------------------------------------------------------------------------------------------
Muggs & Co. 16.88%
P. O. Box 1787
Milwaukee, WI 53201
- ------------------------------------------------------------------------------------------------
U. S. Government Conref & Co. 62.00%
Securities Institutional P. O. Box 387
Shares St Louis, MO 63166
- ------------------------------------------------------------------------------------------------
Rextex & Co. 35.78%
P. O. Box 387
St Louis, MO 63166
- ------------------------------------------------------------------------------------------------
Balanced Institutional Conref & Co. 73.34%
Shares P. O. Box 387
St Louis, MO 63166
- ------------------------------------------------------------------------------------------------
Bisys BD Services Inc. 11.97%
P. O. Box 4054
Concord, CA 94524
- ------------------------------------------------------------------------------------------------
Capinco 8.75%
P. O. Box 1787
Milwaukee, WI 53201
- ------------------------------------------------------------------------------------------------
</TABLE>
-127-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
FUND / SHARE TYPE SHAREHOLDER NAME AND PERCENTAGE OF FUND
ADDRESS HELD
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Rextex & Co. 5.00%
P. O. Box 387
St Louis, MO 63166
- ------------------------------------------------------------------------------------------------
Government & Corporate Conref & Co. 57.32%
Bond Institutional Shares P. O. Box 387
St Louis, MO 63166
- ------------------------------------------------------------------------------------------------
Bisys BD Services Inc. 33.43%
P. O. Box 4054
Concord, CA 94524
- ------------------------------------------------------------------------------------------------
Rextex & Co. 9.26%
P. O. Box 387
St Louis, MO 63166
- ------------------------------------------------------------------------------------------------
International Equity Conref & Co. 91.75%
Institutional Shares P. O. Box 387
St Louis, MO 63166
- ------------------------------------------------------------------------------------------------
Intermediate Corporate Conref & Co. 99.88%
Bond Institutional Shares P. O. Box 387
St Louis, MO 63166
- ------------------------------------------------------------------------------------------------
Equity Income Bisys BD Services Inc. 81.28%
Institutional Shares P. O. Box 4054
Concord, CA 94524
- ------------------------------------------------------------------------------------------------
Capinco 15.47%
P. O. Box 1787
Milwaukee, WI 53201
- ------------------------------------------------------------------------------------------------
Bond Index Institutional Conref & Co. 99.63%
Shares P. O. Box 387
St Louis, MO 63166
- ------------------------------------------------------------------------------------------------
Equity Index Institutional Conref & Co. 99.02%
Shares P. O. Box 387
St Louis, MO 63166
- ------------------------------------------------------------------------------------------------
Small Cap Equity Index Conref & Co. 99.30%
Institutional Shares P. O. Box 387
St Louis, MO 63166
- ------------------------------------------------------------------------------------------------
Growth Equity Conref & Co. 93.89%
Institutional Shares P. O. Box 387
St Louis, MO 63166
- ------------------------------------------------------------------------------------------------
Muggs & Co. 6.10%
P. O. Box 1787
Milwaukee, WI 53201
- ------------------------------------------------------------------------------------------------
</TABLE>
-128-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
FUND / SHARE TYPE SHAREHOLDER NAME AND PERCENTAGE OF FUND
ADDRESS HELD
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Money Market CDSC Shares Lori L. Mercer 14.58%
11393 Lakeside Drive
Burlington, IA 52601
- ------------------------------------------------------------------------------------------------
</TABLE>
-129-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
FUND / SHARE TYPE SHAREHOLDER NAME AND PERCENTAGE OF FUND
ADDRESS HELD
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Homer R. Turner 11.10%
Edna M. Turner
Edna M. Turner Trust
33409 E. Pink Hill Rd.
Grain Valley, MO 64029
- ------------------------------------------------------------------------------------------------
John E. Hill 8.92%
806 Bitterfield Dr.
Ballwin, MO 63011
- ------------------------------------------------------------------------------------------------
Sandar L. Hill 8.92%
806 Bitterfield Dr.
Ballwin, MO 63011
- ------------------------------------------------------------------------------------------------
NFSC FEBO M26-015938 8.38%
NFSC FMTC IRA
185 Legion Hall Rd.
Marthasville, MO 63357
- ------------------------------------------------------------------------------------------------
Alberta Buenemann 6.77%
Ernie W. Buenemann
Alberta Buenemann Rev. Liv. Trust
1649 Sand Run Rd.
Troy, MO 63379
- ------------------------------------------------------------------------------------------------
U. S. Government NFSC FEBO M26-945293 20.76%
Securities Inv. B, CDSC NFSC FMTC IRA Rollover
Shares 17825 Hwy. 21
St. Joseph, MO 64505
- ------------------------------------------------------------------------------------------------
NFSC FEBO M22-805556 14.05%
Mary L. Allen
5514 Newport
St. Louis, MO 63116
- ------------------------------------------------------------------------------------------------
NFSC FEBO M26-044865 7.70%
June M. Swift
2823 Seneca
St. Joseph, MO 64507
- ------------------------------------------------------------------------------------------------
Richard Dell Woods 7.48%
3114 Pickett Rd.
St. Joseph, MO 64503
- ------------------------------------------------------------------------------------------------
NFSC FEBO M22-075612 7.30%
Oliver Dippold
712 Country Stone Ct.
Ballwin, MO 63021
- ------------------------------------------------------------------------------------------------
</TABLE>
-130-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
FUND / SHARE TYPE SHAREHOLDER NAME AND PERCENTAGE OF FUND
ADDRESS HELD
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
NFSC FEBO M23-025410 7.14%
Ruby D. Elsea
2229 SW. Walden Pl.
Lees Summit, MO 64081
- ------------------------------------------------------------------------------------------------
</TABLE>
-131-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
FUND / SHARE TYPE SHAREHOLDER NAME AND PERCENTAGE
ADDRESS OF FUND HELD
- ------------------------------------------------------------------------
<S> <C> <C>
NFSC FEBO M22-038326 5.41%
NFSC FMTC IRA
60 Frontenac Dr.
St. Louis, MO 63131
- ------------------------------------------------------------------------
Balanced Inv. B, CDSC NFSC FEBO M26-044423 7.38%
Shares NFSC FMTC IRA
17825 Highway 71
St. Joseph, MO 64505
- ------------------------------------------------------------------------
Government & Corporate NFSC FEBO M24-095958 7.14%
Bond Inv. B, CDSC Shares George T. Leonard
1490 223/rd/ Pl.
Boone, IA 50036
- ------------------------------------------------------------------------
Homer R. Turner 6.73%
Edna M. Turner
Edna M. Turner Trust
33409 E. Pink Hill Rd.
Grain Valley, MO 64029
- ------------------------------------------------------------------------
NFSC FEBO M22-875902 5.67%
Eugene C. Keth Sr.
1829 Spring Beauty Dr.
Florissant, MO 63031
- ------------------------------------------------------------------------
NFSC FEBO M22-050563 5.49%
Carl S. Jackson
6418 South Kingshighway
St. Louis, MO 63109
- ------------------------------------------------------------------------
National Municipal Bond NFSC FEBO M22-967220 15.70%
Inv. B, CDSC Shares Casatta Rev. Liv. Trust
5658 Tholozan
St. Louis, MO 65109
- ------------------------------------------------------------------------
NFSC FEBO M24-095958 13.28%
George T. Leonard
1490 223/rd/ Pl.
Boone, IA 50036
- ------------------------------------------------------------------------
NFSC FEBO M22-961817 12.17%
Gladine Coleman
5945 Loughborough
St. Louis, MO 63109
- ------------------------------------------------------------------------
NFSC FEBO M22-848700 10.06%
Jessica Schumacher
3204 Edwards St.
Alton, IL 62002
- ------------------------------------------------------------------------
</TABLE>
-132-
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
FUND / SHARE TYPE SHAREHOLDER NAME AND PERCENTAGE
ADDRESS OF FUND HELD
- -----------------------------------------------------------------------------
<S> <C> <C>
NFSC FEBO M22-479039 10.04%
Constance M. Mc Manus
4271 Wyoming
St. Louis, MO 63116
- -----------------------------------------------------------------------------
NFSC FEBO M22-841897 5.38%
Beatrice J. Teter
5201 Asbury Ave. Apt. 232
Godfrey, IL 62035
- -----------------------------------------------------------------------------
NFSC FEBO M22-841900 5.38%
Leona B. Teter
5201 Asbury Ave. Apt. 232
Godfrey, IL 62035
- -----------------------------------------------------------------------------
Equity Income Inv. B, CDSC NFSC FEBO M22-821691 12.81%
Shares Arlene T. Kleimeier Rev. Liv. Tr.
A13
Hollywood, FL 33020
- -----------------------------------------------------------------------------
NFSC FEBO M22-095990 7.01%
The Brown Trust Indenture
4917 Neosho
St. Louis, MO 63109
- -----------------------------------------------------------------------------
NFSC FEBO M26-820369 6.12%
Kenneth D. Johnston
2504 S. McCann Ave.
Springfield, MO 65804
- -----------------------------------------------------------------------------
NFSC FEBO M24-914932 5.36%
NFSC FMTC IRA Rollover
515 2/nd/ St.
Evansdale, IN 50707
- -----------------------------------------------------------------------------
Money Market Trust Shares Mercantile Bank NA Trust 81.61%
II P. O. Box 387 Main Post Office
St. Louis, MO 63166-0000
- -----------------------------------------------------------------------------
Pacific Century Trust 11.57%
P. O. Box 3170
Honolulu, HI 96802
- -----------------------------------------------------------------------------
Pacific Century Trust 6.37%
P. O. Box 3170
Honolulu, HI 96802
- -----------------------------------------------------------------------------
Treasury Money Market Mercantile Bank NA Trust 66.87%
Trust Shares II P. O. Box 387 Main Post Office
St. Louis, MO 63166
- -----------------------------------------------------------------------------
</TABLE>
-133-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
FUND / SHARE TYPE SHAREHOLDER NAME AND PERCENTAGE
ADDRESS OF FUND HELD
- ------------------------------------------------------------------------
<S> <C> <C>
Pacific Century Trust 28.22%
P. O. Box 3170
Honolulu, HI 96802
- ------------------------------------------------------------------------
</TABLE>
-134-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
FUND / SHARE TYPE SHAREHOLDER NAME AND PERCENTAGE
ADDRESS OF FUND HELD
- ------------------------------------------------------------------------------------
<S> <C> <C>
Tax-Exempt Money Mercantile Bank NA Trust 98.74%
Market Trust Shares II P. O. Box 387 Main Post Office
St. Louis, MO 63166
- ------------------------------------------------------------------------------------
Conning Money Market Pershing as Agent- Omnibus Account 99.99%
Portfolio Exclusive Benefit of Walnut Street
Customer Accounts
One Pershing Plaza
Jersey City, NJ 07399
- ------------------------------------------------------------------------------------
</TABLE>
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.
-135-
<PAGE>
APPENDIX A
----------
Commercial Paper Ratings
- ------------------------
A Standard & Poor's commercial paper rating is a current opinion of
the creditworthiness of an obligor with respect to financial obligations 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 commitment on the 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 Standard & Poor's believes that
such payments will be made during such grace period. The "D" rating will be used
upon the filing of a bankruptcy petition or the taking of a similar action if
payments on an obligation are jeopardized.
Local Currency and Foreign Currency Risks
Country risk considerations are a standard part of Standard & Poor's
analysis for credit ratings on any issuer or issue. Currency of repayment is a
key factor in this analysis. An obligor's capacity to repay foreign obligations
may be lower than its capacity to repay obligations in its local currency due to
the sovereign government's own relatively lower
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capacity to repay external versus domestic debt. These sovereign risk
considerations are incorporated in the debt ratings assigned to specific issues.
Foreign currency issuer ratings are also distinguished from local currency
issuer ratings to identify those instances where sovereign risks make them
different for the same issuer.
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 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.
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"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 to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is expected.
"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 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 best 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 uncertain 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
a capacity for meeting financial commitments which is highly uncertain and
solely reliant upon a sustained, favorable business and economic environment.
"D" - Securities are in actual or imminent payment default.
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Thomson Financial 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 Financial BankWatch:
"TBW-1" - This designation represents Thomson Financial 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 Financial 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."
"TBW-3" - This designation represents Thomson Financial 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 Financial 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.
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Obligations 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 nonpayment 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 nonpayment 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.
"CCC" - An obligation rated "CCC" is currently vulnerable to
nonpayment, 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
nonpayment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action taken, but payments on this
obligation are being continued.
"D" - An obligation rated "D" is 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 Standard & Poor's
believes that such payments will be made during such grace period. The "D"
rating also will be used upon the filing of a bankruptcy petition or the taking
of a 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.
"c" - The 'c' subscript is used to provide additional information to
investors that the bank may terminate its obligation to purchase tendered bonds
if the long-term credit rating of the issuer is below an investment-grade level
and/or the issuer's bonds are deemed taxable.
p - The letter 'p' indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project financed by
the debt being rated and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful, timely completion of the
project. This rating, however, while addressing credit quality subsequent to
completion of the project, makes no comment on the likelihood of or the risk of
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default upon failure of such completion. The investor should exercise his own
judgment with respect to such likelihood and risk.
* - Continuance of the ratings is contingent upon Standard & Poor's
receipt of an executed copy of the escrow agreement or closing documentation
confirming investments and cash flows.
"r" - The 'r' highlights derivative, hybrid, and certain other
obligations that Standard & Poor's believes may experience high volatility or
high variability in expected returns as a result of noncredit risks. Examples of
such obligations are securities with principal or interest return indexed to
equities, commodities, or currencies; certain swaps and options; and interest-
only and principal-only mortgage securities. The absence of an 'r' symbol should
not be taken as an indication that an obligation will exhibit no volatility or
variability in total return.
N.R. Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular obligation as a matter of policy. Debt obligations
of issuers outside the United States and its territories are rated on the same
basis as domestic corporate and municipal issues. The ratings measure the
creditworthiness of the obligor but do not take into account currency exchange
and related uncertainties.
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 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.
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"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" indicates 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 to be 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 in periods of greater 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. This is the
lowest investment grade category.
"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 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.
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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 credit 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 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
credit 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. This is the lowest
investment grade category.
"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 change 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 solely reliant
upon sustained, favorable 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. The ratings of obligations
in this category are based on their prospects for achieving partial or full
recovery in a reorganization or liquidation of the obligor. While expected
recovery values are highly speculative and cannot be estimated with any
precision, the following serve as general guidelines. "DDD" obligations have the
highest potential for recovery, around 90%-100% of outstanding amounts and
accrued
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interest. "DD" indicates potential recoveries in the range of 50%-90%, and "D"
the lowest recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all of their
obligations. Entities rated "DDD" have the highest prospect for resumption of
performance or continued operation with or without a formal reorganization
process. Entities rated "DD" and "D" are generally undergoing a formal
reorganization or liquidation process; those rated "DD" are likely to satisfy a
higher portion of their outstanding obligations, while entities rated "D" have a
poor prospect for repaying all obligations.
To provide more detailed indications of credit quality, the Fitch IBCA
ratings from and including "AA" to "CCC" may be modified by the addition of a
plus (+) or minus (-) sign to denote relative standing within these major rating
categories.
`NR' indicates the Fitch IBCA does not rate the issuer or issue in
question.
`Withdrawn': A rating is withdrawn when Fitch IBCA deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
RatingAlert: Ratings are placed on RatingAlert to notify investors
that there is a reasonable probability of a rating change and the likely
direction of such change. These are designated as "Positive", indicating a
potential upgrade, "Negative", for a potential downgrade, or "Evolving", if
ratings may be raised, lowered or maintained. RatingAlert is typically resolved
over a relatively short period.
Thomson Financial 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
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vulnerable to adverse developments (both internal and external) than obligations
with higher ratings.
"BB" - A rating of BB suggests that the likelihood of default is
considerably less than for lower-rated issues, although there are significant
uncertainties that could affect the ability to adequately service debt
obligations.
"B" - Issues rated B show a higher degree of uncertainty and therefore
greater likelihood of default than higher-rated issues. Adverse developments
could negatively affect the payment of interest and principal on a timely
basis.
"CCC" - Issues rated CCC clearly have a high likelihood of default,
with little capacity to address further adverse changes in financial
circumstances.
"CC" - This rating is applied to issues that are subordinate to other
obligations rated CCC and are afforded less protection in the event of
bankruptcy or reorganization.
"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.
Municipal Note Ratings
- ----------------------
A Standard and Poor's note rating reflects the liquidity factors and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's 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 a
very strong capacity to pay debt service 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
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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. Margins of
protection are 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 margins of protection.
Fitch IBCA and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
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APPENDIX B
----------
The U.S. Government Securities, Intermediate Corporate Bond, Bond
Index, Government & Corporate Bond, Equity Income, Equity Index, Growth & Income
Equity, Growth Equity, Small Cap Equity, Small Cap Equity Index, International
Equity and Balanced Portfolios may enter into futures contracts and options for
hedging purposes in furtherance of their respective investment objectives as
described in this Statement of Additional Information. Such transactions are
described further in this Appendix.
I. Interest Rate Futures Contracts.
--------------------------------
Use of Interest Rate Futures Contracts. Bond prices are established in
--------------------------------------
both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the future
for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, each Portfolio may use interest rate
futures as a defense, or hedge, against anticipated interest rate changes and
not for speculation. As described below, this would include the use of futures
contract sales to protect against expected increases in interest rates and
futures contract purchases to offset the impact of interest rate declines.
Each Portfolio presently could accomplish a similar result to that
which it hopes to achieve through the use of futures contracts by selling bonds
with long maturities and investing in bonds with short maturities when interest
rates are expected to increase, or conversely, selling short-term bonds and
investing in long-term bonds when interest rates are expected to decline.
However, because of the liquidity that is often available in the futures market,
the protection is more likely to be achieved, perhaps at a lower cost and
without changing the rate of interest being earned by the Portfolio, through
using futures contracts. A Portfolio would engage in an interest rate futures
contract sale to maintain the income advantage from continued holding of a long-
term bond while endeavoring to avoid part or all of the loss in market value
that would otherwise accompany a decline in long-term securities prices. A
Portfolio would engage in an interest rate futures contract purchase when it is
not fully invested in long-term bonds but wishes to defer for a time the
purchase of long-term bonds in light of the availability of advantageous interim
investments, for example, shorter-term securities whose yields are greater than
those available on long-term bonds.
Description of Interest Rate Futures Contracts. An interest rate
----------------------------------------------
futures contract sale would create an obligation by the Portfolio, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase would
create an obligation by the Portfolio, as purchaser, to take delivery of the
specific type of financial instrument at a specific future time at a specific
price. The specific securities delivered or taken, respectively, at settlement
date, would not be determined until at or
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near that date. The determination would be in accordance with the rules of the
exchange on which the futures contract sale or purchase was made.
Although interest rate futures contracts by their terms call for
actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract sale is effected by the
Portfolio's entering into a futures contract purchase for the same aggregate
amount of the specific type of financial instrument and the same delivery date.
If the price in the sale exceeds the price in the offsetting purchase, the
Portfolio is paid the difference and thus realizes a gain. If the offsetting
purchase price exceeds the sale price, the Portfolio pays the difference and
realizes a loss. Similarly, the closing out of a futures contract purchase is
effected by the Portfolio's entering into a futures contract sale. If the
offsetting sale price exceeds the purchase price, the Portfolio realizes a gain,
and if the purchase price exceeds the offsetting sale price, the Portfolio
realizes a loss.
Interest rate futures contracts are traded in an auction environment
on the floors of several exchanges - principally, the Chicago Board of Trade and
the Chicago Mercantile Exchange. A Portfolio would deal only in standardized
contracts on recognized exchanges. Each exchange guarantees performance under
contract provisions through a clearing corporation, a nonprofit organization
managed by the exchange membership.
A public market now exists in futures contracts covering various
financial instruments including long-term United States Treasury Bonds and
Notes; Government National Mortgage Association (GNMA) modified pass-through
mortgage-backed securities; three-month United States Treasury Bills; and
ninety-day commercial paper. The Portfolios may trade in any futures contract
for which there exists a public market, including, without limitation, the
foregoing instruments.
II. Stock Index Futures Contracts.
------------------------------
A stock index assigns relative values to the stocks included in the
index and the index fluctuates with changes in the market values of the stocks
included. Some stock index futures contracts are based on broad market indexes,
such as the Standard & Poor's 500 or the New York Stock Exchange Composite
Index. In contrast, certain exchanges offer futures contracts on narrower market
indexes, such as the Standard & Poor's 100 or indexes based on an industry or
market segment, such as oil and gas stocks. Futures contracts are traded on
organized exchanges regulated by the Commodity Futures Trading Commission.
Transactions on such exchanges are cleared through a clearing corporation, which
guarantees the performance of the parties to each contract.
A Portfolio will sell stock index futures contracts in order to offset
a decrease in market value of its portfolio securities that might otherwise
result from a market decline. The Portfolio may do so either to hedge the value
of its portfolio as a whole, or to protect against declines, occurring prior to
sales of securities, in the value of the securities to be sold. Conversely, the
Portfolio will purchase stock index futures contracts in anticipation of
purchases of securities. In a substantial majority of these transactions, the
Portfolio will purchase such
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securities upon termination of the long futures position, but a long futures
position may be terminated without a corresponding purchase of securities.
In addition, the Portfolio may utilize stock index futures contracts
in anticipation of changes in the composition of its portfolio holdings. For
example, in the event that the Portfolio expects to narrow the range of industry
groups represented in its holdings it may, prior to making purchases of the
actual securities, establish a long futures position based on a more restricted
index, such as an index comprised of securities of a particular industry group.
The Portfolio may also sell futures contracts in connection with this strategy,
in order to protect against the possibility that the value of the securities to
be sold as part of the restructuring of the portfolio will decline prior to the
time of sale.
III. Futures Contracts on Foreign Currencies.
----------------------------------------
A futures contract on foreign currency creates a binding obligation on
one party to deliver, and a corresponding obligation on another party to accept
delivery of, a stated quantity of a foreign currency, for an amount fixed in
U.S. dollars. Foreign currency futures may be used by a Portfolio to hedge
against exposure to fluctuations in exchange rates between the U.S. dollar and
other currencies arising from multi-national transactions.
IV. Margin Payments.
----------------
Unlike when a Portfolio purchases or sells a security, no price is
paid or received by the Portfolio upon the purchase or sale of a futures
contract. Initially, the Portfolio will be required to deposit with the broker
or in a segregated account with the Fund's custodian an amount of cash or cash
equivalents, the value of which may vary but is generally equal to 10% or less
of the value of the contract. This amount is known as initial margin. The nature
of initial margin in futures transactions is different from that of margin in
security transactions in that futures contract margin does not involve the
borrowing of funds by the customer to finance the transactions. Rather, the
initial margin is in the nature of a performance bond or good faith deposit on
the contract which is returned to the Portfolio upon termination of the futures
contract assuming all contractual obligations have been satisfied. Subsequent
payments, called variation margin, to and from the broker, will be made on a
daily basis as the price of the underlying instruments fluctuates making the
long and short positions in the futures contract more or less valuable, a
process known as marking-to-market. For example, when a Portfolio has purchased
a futures contract and the price of the contract has risen in response to a rise
in the underlying instruments, that position will have increased in value and
the Portfolio will be entitled to receive from the broker a variation margin
payment equal to that increase in value. Conversely, where a Portfolio has
purchased a futures contract and the price of the future contract has declined
in response to a decrease in the underlying instruments, the position would be
less valuable and the Portfolio would be required to make a variation margin
payment to the broker. At any time prior to expiration of the futures contract,
the adviser may elect to close the position by taking an opposite position,
subject to the availability of a secondary market, which will operate to
terminate the Portfolio's position in the futures contract. A final
determination of variation
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margin is then made, additional cash is required to be paid by or released to
the Portfolio, and the Portfolio realizes a loss or gain.
V. Other Hedging Transactions.
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Although noted above, none of the Portfolios presently intend to use
interest rate futures contracts and stock index and foreign currency futures
contracts (and related options) in connection with their hedging activities.
Nevertheless, each of these Portfolios is authorized to enter into hedging
transactions in any other futures or options contracts which are currently
traded or which may subsequently become available for trading. Such instruments
may be employed in connection with the Portfolios' hedging strategies if, in the
judgment of the adviser, transactions therein are necessary or advisable.
VI. Accounting Treatment.
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Accounting for futures contracts and options will be in accordance with
generally accepted accounting principles.
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