<PAGE>
MERCANTILE MUTUAL FUNDS
TRUST AND TRUST II SHARES
[PHOTO]
Prospectus
March 31, 2000
MONEY MARKET PORTFOLIOS
Treasury Money Market Portfolio
Money Market Portfolio
Tax-Exempt Money Market Portfolio
TAXABLE BOND PORTFOLIOS
U.S.Government Securities Portfolio
Intermediate Corporate Bond Portfolio
Bond Index Portfolio
Government & Corporate Bond Portfolio
TAX-EXEMPT BOND PORTFOLIOS
Short-Intermediate Municipal Portfolio
Missouri Tax-Exempt Bond Portfolio
National Municipal Bond Portfolio
STOCK PORTFOLIOS
Balanced Portfolio
Equity Income Portfolio
Equity Index Portfolio
Growth & Income Equity Portfolio
Growth Equity Portfolio
Small Cap Equity Portfolio
Small Cap Equity Index Portfolio
International Equity Portfolio
As with all mutual funds,the Securities and Exchange Commission has not approved
or disapproved these securities or passed upon the adequacy of this prospectus.
Any representation to the contrary is a criminal offence.
[LOGO OF FIRSTAR]
<PAGE>
Contents
<TABLE>
<CAPTION>
Introduction
- -------------------------------------------------------------
<C> <S>
3 Overview
Risk/Return Summary
- -------------------------------------------------------------
5 Treasury Money Market Portfolio
8 Money Market Portfolio
11 Tax-Exempt Money Market Portfolio
15 U.S. Government Securities Portfolio
19 Intermediate Corporate Bond Portfolio
23 Bond Index Portfolio
27 Government & Corporate Bond Portfolio
31 Short-Intermediate Municipal Portfolio
35 Missouri Tax-Exempt Bond Portfolio
39 National Municipal Bond Portfolio
43 Balanced Portfolio
47 Equity Income Portfolio
50 Equity Index Portfolio
54 Growth & Income Equity Portfolio
57 Growth Equity Portfolio
60 Small Cap Equity Portfolio
64 Small Cap Equity Index Portfolio
68 International Equity Portfolio
72 Additional Information on Risk
Your Account
- -------------------------------------------------------------
73 Explanation of Sales Price
74 How to Buy Shares
75 How to Sell Shares
76 How to Exchange Shares
76 Administrative Services Fees
76 General Transaction Policies
Distributions and Taxes
- -------------------------------------------------------------
77 Dividends and Distributions
78 Taxation
Management of the Fund
- -------------------------------------------------------------
80 The Adviser
80 The Sub-Adviser
Financial Highlights
- -------------------------------------------------------------
81 Introduction
82 Financial Highlights
</TABLE>
2
<PAGE>
Introduction Overview
This prospectus describes Trust Shares and Trust II Shares of
eighteen investment portfolios (the "Portfolios") offered by
Mercantile Mutual Funds, Inc. (the "Fund"). On the following
pages, you will find important information about each
Portfolio, including:
. A description of the Portfolio's investment objective
(sometimes referred to as its goal);
. The Portfolio's principal investment strategies (the steps
it takes to try to meet its goal);
. The principal risks associated with the Portfolio (factors
that may prevent it from meeting its goal);
. The Portfolio's past performance (how successful it's been
in meeting its goal); and
. The fees and expenses you pay as an investor in the
Portfolio.
Who May Want The Treasury Money Market Portfolio may be appropriate for
to Invest in investors who want a way to earn money market returns from
the U.S. Treasury obligations that are generally exempt from
Portfolios? state and local taxes. The Money Market Portfolio may be
appropriate for investors who want a flexible and convenient
way to manage cash while earning money market returns. The
Tax-Exempt Money Market Portfolio may be appropriate for
investors who want a way to earn money market returns that
are generally exempt from federal income tax.
The Taxable Bond Portfolios may be appropriate for investors
who seek current income from their investments greater than
that normally available from a money market fund and can
accept fluctuations in price and yield. The Portfolios may
not be appropriate for investors who are investing for long-
term capital appreciation.
The Tax-Exempt Bond Portfolios may be appropriate for
investors who are looking for income that is exempt from
federal income tax and who can accept fluctuations in price
and yield. The Missouri Tax-Exempt Bond Portfolio is best
suited to Missouri residents who are also looking for income
that is exempt from Missouri state income tax. The
Portfolios, as well as the Tax-Exempt Money Market Portfolio,
are not appropriate investments for tax-deferred retirement
accounts, such as IRAs, because their returns before taxes
are generally lower than those of taxable funds.
The Stock Portfolios may be appropriate for investors who
seek capital growth over the long term and are comfortable
with the risks of stock markets. The Portfolios may not be
appropriate for investors who are investing for short-term
goals or are mainly seeking current income.
Before investing in a Portfolio, you should carefully
consider:
. Your own investment goals
. The amount of time you are willing to leave your money
invested
. How much risk you are willing to take.
3
<PAGE>
Introduction Overview
The Firstar Investment Research & Management Company, LLC which
Investment is referred to in this prospectus as "FIRMCO" or the
Adviser "Adviser," serves as the investment adviser to each
Portfolio. FIRMCO is a subsidiary of Firstar Corporation, a
banking and financial services organization.
An investment in the Portfolios is not a deposit of Firstar
Bank, N. A. and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency.
Although each of the Money Market Portfolios seeks to
preserve the value of your investment at $1.00 per share, it
is possible to lose money by investing in the Portfolios. You
could also lose money by investing in one of the Taxable
Bond, Tax-Exempt Bond or Stock Portfolios.
4
<PAGE>
Risk/Return Summary Treasury Money Market Portfolio
- --------------------------------------------------------------------------------
Money market instruments are short-term obligations issued by banks,
corporations, the U.S. Government and state and local governments. Money market
instruments purchased by the Money Market Portfolios must meet strict
requirements as to investment quality, maturity and diversification. The Money
Market Portfolios generally do not invest in securities with maturities of more
than 397 days and the average maturity of all securities held by a particular
Money Market Portfolio must be 90 days or less. Prior to purchasing a money
market instrument for one of the Money Market Portfolios, the Adviser must
determine that the instrument carries very little credit risk.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is to seek a high level of current income
exempt from state income tax consistent with liquidity and security of
principal.
Principal Investment Strategies
The Portfolio invests substantially all (but not less than 65%) of its total
assets in money market instruments issued by the U.S. Treasury and certain U.S.
Government agencies and instrumentalities that provide income that is generally
not subject to state income tax.
Principal Risk Considerations
The yield paid by the Portfolio will vary with changes in interest rates.
During periods of rising interests rates, the Portfolio's yield will tend to be
lower than prevailing market rates, while during periods of falling interest
rates, the Portfolio's yield will tend to be higher.
Although U.S. Government securities, particularly U.S. Treasury obligations,
have historically involved little risk, if an issuer fails to pay interest or
repay principal, the value of your investment could decline.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolio and how they may advance the Portfolio's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
There's no guarantee the Portfolio will be able to preserve the value of your
investment at $1.00 per share.
5
<PAGE>
Risk/Return Summary Treasury Money Market Portfolio
Return History
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Trust Shares has varied from year to year. The table shows the Portfolio's
average annual returns for one year, five years and since inception. Both the
bar chart and table assume reinvestment of all dividends and distributions. The
Portfolio's past performance does not necessarily indicate how it will perform
in the future.
Trust Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1992 3.40%
1993 2.67%
1994 3.55%
1995 5.15%
1996 4.61%
1997 4.71%
1998 4.49%
1999 3.95%
The returns for Trust II Shares would have differed from the returns shown in
the bar chart because the two classes bear different expenses.
<TABLE>
<S> <C>
Best quarter: 1.31% for the quarter
ending June 30, 1995
Worst quarter: 0.64% for the quarter
ending June 30, 1993
</TABLE>
-------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended
December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year 5 Years Inception*
-----------------------
<S> <C> <C> <C>
Trust Shares 3.95% 4.58% 4.02%
-----------------------
Trust II Shares 4.19% N/A 4.19%
- --------------------------------------------
</TABLE>
*December 2, 1991 for Trust Shares; November 13, 1998 for Trust II Shares.
To obtain the Portfolio's current 7-day yield, please call 1-800-452-2724.
6
<PAGE>
Risk/Return Summary Treasury Money Market Portfolio
The table on the right shows the fees and expenses that you pay if you buy and
hold Trust Shares or Trust II Shares of the Treasury Money Market Portfolio.
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
Fees and Expenses
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses
(expenses that are deducted from the Trust Trust II
Portfolio's assets) Shares Shares
<S> <C> <C>
Management Fees .40%/1/ .40%/1/
----------------------------------------------------------------
Distribution (12b-1) Fees None None
----------------------------------------------------------------
Other Expenses .59%/1/ .36%/1/
----------------------------------------------------------------
Total Annual Portfolio Operating Expenses .99%/1/ .76%/1/
- -----------------------------------------------------------------
</TABLE>
/1/ Management Fees, Other Expenses and Total Annual Portfolio Operating
Expenses for the Portfolio's Trust Shares and Trust II Shares for the
current fiscal year are expected to be less than the amounts shown above
because certain of the Portfolio's service providers are voluntarily waiving
a portion of their fees and/or reimbursing the Portfolio for certain other
expenses. These fee waivers and/or reimbursements are being made in order to
keep the annual fees and expenses for the Portfolio's Trust Shares and Trust
II Shares at certain levels. Management Fees, Other Expenses and Total
Annual Portfolio Operating Expenses, after taking these fee waivers and
expense reimbursements into account, are expected to be .35%, .49% and .84%,
respectively, for Trust Shares, and .35%, .26% and .61%, respectively, for
Trust II Shares. These fee waivers and expense reimbursements may be revised
or cancelled at any time.
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Trust Shares $101 $315 $547 $1,213
-----------------------------------------
Trust II Shares $ 78 $243 $422 $ 942
- ------------------------------------------
</TABLE>
7
<PAGE>
Risk/Return Summary Money Market Portfolio
Investment Objective
The Portfolio's investment objective is to seek current
income with liquidity and stability of principal.
Principal Investment Strategies
The Portfolio invests substantially all (but not less than
80%) of its total assets in a broad range of U.S. dollar-
denominated money market instruments, including commercial
paper, notes and bonds issued by U.S. and foreign
corporations, obligations issued by the U.S. Government and
its agencies and instrumentalities, and obligations issued by
U.S. and foreign banks, such as certificates of deposit,
letters of credit, bankers' acceptances and time deposits.
The Portfolio will only buy a money market instrument if it
has the highest short-term rating from at least two
nationally recognized statistical rating organizations, such
as Standard & Poor's Ratings Group or Moody's Investors
Service, Inc., or only one such rating if only one
organization has rated the instrument. If the money market
instrument is not rated, the Adviser must determine that it
is of comparable quality to eligible rated instruments.
Principal Risk Considerations
The yield paid by the Portfolio will vary with short-term
interest rates. During periods of rising interest rates, the
Portfolio's yield will tend to be lower than prevailing
market rates, while during periods of falling interest rates,
the Portfolio's yield will tend to be higher.
Although credit risk is very low because the Portfolio only
invests in high quality obligations, if an issuer fails to
pay interest or repay principal, the value of your investment
could decline.
The Adviser evaluates the rewards and risks presented by all
securities purchased by the Portfolio and how they may
advance the Portfolio's investment objective. It is possible,
however, that these evaluations will prove to be inaccurate.
There's no guarantee the Portfolio will be able to preserve
the value of your investment at $1.00 per share.
8
<PAGE>
Risk/Return Summary Money Market Portfolio
Return History
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Trust Shares has varied from year to year. The table shows the Portfolio's
average annual returns for one year, five years and since inception. Both the
bar chart and table assume reinvestment of all dividends and distributions. The
Portfolio's past performance does not necessarily indicate how it will perform
in the future.
Trust Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1991 5.67%
1992 3.30%
1993 2.71%
1994 3.76%
1995 5.55%
1996 4.95%
1997 5.09%
1998 5.02%
1999 4.50%
The returns for Trust II Shares would have differed from the returns shown in
the bar chart because the two classes bear different expenses.
<TABLE>
<S> <C>
Best quarter: 1.63% for the quarter
ending March 31, 1991
Worst quarter: 0.66% for the quarter
ending June 30, 1993
</TABLE>
-------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended
December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year 5 Years Inception*
-----------------------
<S> <C> <C> <C>
Trust Shares 4.50% 5.02% 4.53%
-----------------------
Trust II Shares 4.75% N/A 4.76%
- --------------------------------------------
</TABLE>
*December 1, 1990 for Trust Shares; November 10, 1998 for Trust II Shares.
To obtain the Portfolio's current 7-day yield, please call 1-800-452-2724.
9
<PAGE>
Risk/Return Summary Money Market Portfolio
The table on the right shows the fees and expenses that you pay if you buy and
hold Trust Shares or Trust II Shares of the Money Market Portfolio.
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
Fees and Expenses
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses
(expenses that are deducted from the Trust Trust II
Portfolio's assets) Shares Shares
<S> <C> <C>
Management Fees .40%/1/ .40%/1/
------------------------------------------------------------
Distribution (12b-1) Fees None None
------------------------------------------------------------
Other Expenses .57%/1/ .34%/1/
------------------------------------------------------------
Total Annual Portfolio Operating Expenses .97%/1/ .74%/1/
- -------------------------------------------------------------
</TABLE>
/1/ Management Fees, Other Expenses and Total Annual Portfolio Operating
Expenses for the Portfolio's Trust Shares and Trust II Shares for the
current fiscal year are expected to be less than the amounts shown above
because certain of the Portfolio's service providers are voluntarily waiving
a portion of their fees and/or reimbursing the Portfolio for certain other
expenses. These fee waivers and/or reimbursements are being made in order to
keep the annual fees and expenses for the Portfolio's Trust Shares and Trust
II Shares at certain levels. Management Fees, Other Expenses and Total
Annual Portfolio Operating Expenses, after taking these fee waivers and
expense reimbursements into account, are expected to be .35%, .47% and .82%,
respectively, for Trust Shares and .35%, .24% and .59%, respectively, for
Trust II Shares. These fee waivers and expense reimbursements may be revised
or cancelled at any time.
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Trust Shares $99 $309 $536 $1,190
-----------------------------------------
Trust II Shares $76 $237 $411 $ 918
- ------------------------------------------
</TABLE>
10
<PAGE>
Risk/Return Summary Tax-Exempt Money Market Portfolio
- --------------------------------------------------------------------------------
What Are Municipal Securities?
State and local governments issue municipal securities to raise money to
finance public works, to repay outstanding obligations, to raise funds for
general operating expenses and to make loans to other public institutions. Some
municipal securities, known as private activity bonds, are backed by private
entities and are used to finance various non-public projects. Municipal
securities, which can be issued as bonds, notes or commercial paper, usually
have fixed interest rates, although some have interest rates that change from
time to time.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is to seek as high a level of current
interest income exempt from federal income tax as is consistent with liquidity
and stability of principal.
Principal Investment Strategies
The Portfolio normally invests at least 80% of its total assets in short-term
municipal securities that pay interest which is exempt from federal income tax.
Municipal securities purchased by the Portfolio may include general obligation
securities, revenue securities and private activity bonds. General obligation
securities are secured by the issuer's full faith, credit and taxing power.
Revenue securities are usually payable only from revenues derived from specific
facilities or revenue sources. Private activity bonds are usually revenue
obligations since they are typically payable by the private user of the
facilities financed by the bonds. The interest on private activity bonds may be
subject to the federal alternative minimum tax. Investments in private activity
bonds will not be treated as investments in municipal securities for purposes
of the 80% requirement stated above. Under normal conditions, the Portfolio's
investments in private activity bonds, together with any investments in taxable
obligations, will not exceed 20% of its total assets.
The Portfolio will only buy a municipal security if it has the highest short-
term rating from at least two nationally recognized statistical rating
organizations, such as Standard & Poor's Ratings Group or Moody's Investor
Service, Inc., or one such rating if only one organization has rated the
security. If the security is not rated, it must be determined by the Adviser to
be of comparable quality.
11
<PAGE>
Risk/Return Summary Tax-Exempt Money Market Portfolio
Principal Risk Considerations
The yield paid by the Portfolio will vary with changes in interest rates.
During periods of rising interest rates, the Portfolio's yield will tend to be
lower than prevailing market rates, while during periods of falling interest
rates, the Portfolio's yield will tend to be higher.
Although credit risk is very low because the Portfolio only invests in high
quality obligations, if an issuer fails to pay interest or repay principal, the
value of your investment could decline. The ability of a state or local
government issuer to make payments can be affected by many factors, including
economic conditions, the flow of tax revenues and changes in the level of
federal, state or local aid. Some municipal securities are payable only from
limited revenue sources or by private entities.
The Portfolio is not diversified, which means that it can invest a large
percentage of its assets in a small number of issuers. As a result, a change in
the value of any one investment held by the Portfolio may affect the overall
value of the Portfolio more than it would affect a diversified portfolio.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolio and how they may advance the Portfolio's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
There's no guarantee the Portfolio will be able to preserve the value of your
investment at $1.00 per share.
12
<PAGE>
Risk/Return Summary Tax-Exempt Money Market Portfolio
Return History+
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Trust Shares has varied from year to year. The table shows the Portfolio's
average annual returns for one year, five years and since inception. Both the
bar chart and table assume reinvestment of all dividends and distributions. The
Portfolio's past performance does not necessarily indicate how it will perform
in the future.
Trust Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1991 4.05%
1992 2.51%
1993 1.98%
1994 2.37%
1995 3.27%
1996 3.00%
1997 3.09%
1998 2.86%
1999 2.49%
The returns for Trust II Shares would have differed from the returns shown in
the bar chart because the two classes bear different expenses.
<TABLE>
<S> <C>
Best quarter: 1.06% for the quarter
ending March 31, 1991
Worst quarter: 0.45% for the quarter
ending March 31, 1994
</TABLE>
-------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended
December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year 5 Years Inception*
-----------------------
<S> <C> <C> <C>
Trust Shares 2.49% 2.94% 2.92%
-----------------------
Trust II Shares 2.74% N/A 2.73%
- --------------------------------------------
</TABLE>
+ The Portfolio commenced operations on July 10, 1986 as a separate investment
portfolio (the "Predecessor Portfolio") of The ARCH Tax-Exempt Trust. On
October 2, 1995, the Predecessor Portfolio was reorganized as a new
portfolio of the Fund. Prior to the reorganization, the Predecessor
Portfolio offered and sold shares that were similar to the Fund's Trust
Shares. Total returns for Trust Shares for periods prior to October 2, 1995
reflect the performance of Trust Shares of the Predecessor Portfolio.
* September 28, 1990 for Trust Shares; November 16, 1998 for Trust II
Shares.
To obtain the Portfolio's current 7-day yield, please call 1-800-452-2724.
13
<PAGE>
Risk/Return Summary Tax-Exempt Money Market Portfolio
The table on the right shows the fees and expenses that you pay if you buy and
hold Trust Shares or Trust II Shares of the Tax-Exempt Money Market Portfolio.
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
Fees and Expenses
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses
(expenses that are deducted from the Trust Trust II
Portfolio's assets) Shares Shares
<S> <C> <C>
Management Fees .40%/1/ .40%/1/
------------------------------------------------------------
Distribution (12b-1) Fees None None
------------------------------------------------------------
Other Expenses .45% .22%
------------------------------------------------------------
Total Annual Portfolio Operating Expenses .85%/1/ .62%/1/
- -------------------------------------------------------------
</TABLE>
/1/ Management Fees and Total Annual Portfolio Operating Expenses for the
Portfolio's Trust Shares and Trust II Shares for the current fiscal year are
expected to be less than the amounts shown above because certain of the
Portfolio's service providers are voluntarily waiving a portion of their
fees and/or reimbursing the Portfolio for certain other expenses. These fee
waivers and/or reimbursements are being made in order to keep the annual
fees and expenses for the Portfolio's Trust Shares and Trust II Shares at
certain levels. Management Fees and Total Annual Portfolio Operating
Expenses, after taking these fee waivers and expense reimbursements into
account, are expected to be .35% and .80%, respectively, for Trust Shares
and .35% and .57%, respectively, for Trust II Shares. These fee waivers and
expense reimbursements may be revised or cancelled at any time.
Example
<TABLE>
<CAPTION>
1 3 5 10
year years years years
<S> <C> <C> <C> <C>
Trust Shares $87 $271 $471 $1,049
-----------------------------------------
Trust II Shares $63 $199 $346 $ 774
- ------------------------------------------
</TABLE>
14
<PAGE>
Risk/Return Summary U.S. Government Securities Portfolio
- --------------------------------------------------------------------------------
Repurchase agreements are transactions in which a Portfolio buys securities
from a seller (usually a bank or broker-dealer) who agrees to buy them back
from the Portfolio on a certain date and at a certain price.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Mortgage-backed securities are certificates representing ownership interests in
a pool of mortgage loans, and include those issued by the Government National
Mortgage Association ("Ginnie Maes"), the Federal National Mortgage Association
("Fannie Maes") and the Federal Home Loan Mortgage Corporation ("Freddie
Macs").
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Portfolio Manager
David A. Bethke is the person primarily responsible for the day-to-day
management of the Portfolio. Mr. Bethke, Senior Associate, has been with FIRMCO
and its affiliates since 1987 and has eight years of prior investment
experience. He has managed the Portfolio since it commenced operations in 1988.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is to seek a high rate of current income
that is consistent with relative stability of principal.
Principal Investment Strategies
The Portfolio normally invests at least 65% of its total assets in debt
obligations issued or guaranteed by the U.S. Government and its agencies,
including U.S. Treasury bonds, notes and bills, as well as in repurchase
agreements backed by such obligations. The Portfolio also invests in mortgage-
backed securities issued by U.S. Government-sponsored entities such as Ginnie
Maes, Fannie Maes and Freddie Macs. The remaining maturity (i.e., length of
time until an obligation must be repaid) of the obligations held by the
Portfolio will vary from one to 30 years. Under normal conditions, however, the
Adviser does not expect the Portfolio's average weighted maturity to exceed 10
years when adjusted for the expected average life of any mortgage-backed
securities held by the Portfolio.
Principal Risk Considerations
The prices of debt securities tend to move in the opposite direction to
interest rates. When rates are rising, the prices of debt securities tend to
fall. When rates are falling, the prices of debt securities tend to rise.
Generally, the longer the time until maturity, the more sensitive the price of
a debt security is to interest rate changes.
Changes in interest rates may also cause certain debt securities held by the
Portfolio, including mortgage-backed securities, to be paid off much sooner or
later than expected. In the event that a security is paid off sooner than
expected because of a decline in interest rates, the Portfolio may be unable to
recoup all of its initial investment and may also suffer from having to
reinvest in lower-yielding securities. In the event of a later than expected
payment because of a rise in interest rates, the value of the obligation will
decrease, and the Portfolio may suffer from the inability to invest in higher-
yielding securities.
The value of debt securities also depends on the ability of issuers to make
principal and interest payments. If an issuer can't meet its payment
obligations, the value of its debt securities will fall. Securities issued or
guaranteed by the U.S. Government and its agencies have historically involved
little risk of loss of principal if held to maturity. Certain U.S. Government
securities, such as Ginnie Maes, are supported by the full faith and credit of
the U.S. Treasury. Others, such as Freddie Macs, are supported by the right of
the issuer to borrow from the U.S. Treasury.
15
<PAGE>
Risk/Return Summary U.S. Government Securities Portfolio
Other securities, such as Fannie Maes, are supported by the discretionary
authority of the U.S. Government to purchase certain obligations of the issuer,
and still others are supported by the issuer's own credit.
Repurchase agreements carry the risk that the other party may not fulfill its
obligations under the agreement.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolio and how they may advance the Portfolio's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
16
<PAGE>
Risk/Return Summary U.S. Government Securities Portfolio
Return History
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Trust Shares has varied from year to year. The table shows how the Portfolio's
average annual returns for one year, five years and since inception compare to
those of a broad-based market index. Both the bar chart and table assume
reinvestment of all dividends and distributions. The Portfolio's past
performance does not necessarily indicate how it will perform in the future.
- --------------------------------------------------------------------------------
Know your index
The Lehman Brothers Intermediate Government Bond Index is an unmanaged index
which tracks the performance of intermediate-term U.S. Government bonds.
- --------------------------------------------------------------------------------
Trust Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1992 5.79%
1993 9.10%
1994 -2.44%
1995 15.29%
1996 3.32%
1997 6.68%
1998 6.75%
1999 1.00%
<TABLE>
<S> <C>
Best quarter: 5.46% for the quarter
ending June 30, 1995
Worst quarter: -2.53% for the quarter
ending March 31, 1994
</TABLE>
-------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year 5 Years Inception*
-----------------------------------------------
<S> <C> <C> <C>
Trust Shares 1.00% 6.50% 6.36%
-----------------------------------------------
Lehman Brothers Intermediate Government Bond Index 0.49% 6.93% 6.78%
- -------------------------------------------------------------------------------
</TABLE>
* February 1, 1991 for Trust Shares; January 31, 1991 for the Lehman Brothers
Intermediate Government Bond Index.
17
<PAGE>
Risk/Return Summary U.S. Government Securities Portfolio
The table on the right shows the fees and expenses that you pay if you buy and
hold Trust Shares of the U.S. Government Securities Portfolio.
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
Fees and Expenses
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses
(expenses that are deducted
from the Portfolio's assets) Trust Shares
<S> <C>
Management Fees .45%
---------------------------------------------
Distribution (12b-1) Fees None
---------------------------------------------
Other Expenses .64%/1/
---------------------------------------------
Total Annual Portfolio
Operating Expenses 1.09%/1/
- ----------------------------------------------
</TABLE>
/1/ Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Trust Shares for the current fiscal year are expected to be less
than the amounts shown above because certain of the Portfolio's service
providers are voluntarily waiving a portion of their fees and/or reimbursing
the Portfolio for certain other expenses. These fee waivers and/or
reimbursements are being made in order to keep the annual fees and expenses
for the Portfolio's Trust Shares at a certain level. Other Expenses and
Total Annual Portfolio Operating Expenses, after taking these fee waivers
and expense reimbursements into account, are expected to be .24% and .69%,
respectively, for Trust Shares. These fee waivers and expense reimbursements
may be revised or cancelled at any time.
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Trust Shares $111 $347 $601 $1,329
- ---------------------------------------
</TABLE>
18
<PAGE>
Risk/Return Summary Intermediate Corporate Bond Portfolio
- --------------------------------------------------------------------------------
Investment grade debt securities are those of medium credit quality or better
as determined by a national rating agency, such as Standard & Poor's Ratings
Group (debt securities rated in the four highest rating categories, i.e. BBB or
better) and Moody's Investors Service, Inc. (debt securities rated in the four
highest rating categories, i.e. Baa or higher). The higher the credit rating,
the less likely it is that the issuer of the securities will default on its
principal and interest payments.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Average weighted maturity gives you the average time until all debt securities
in a Portfolio come due or mature. It is calculated by averaging the time to
maturity of all debt securities held by a Portfolio with each maturity
"weighted" according to the percentage of assets it represents.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is to seek as high a level of current
income as is consistent with preservation of capital.
Principal Investment Strategies
The Portfolio normally invests at least 65% of its total assets in corporate
debt obligations. These include obligations that are issued by U.S. and foreign
business corporations and obligations issued by agencies, instrumentalities or
authorities that are organized as corporations by the United States, by states
or political subdivisions of the United States, or by foreign governments or
political subdivisions. The Portfolio also invests in obligations issued or
guaranteed by U.S. or foreign governments, their agencies and instrumentalities
and in mortgage-backed securities, including Ginnie Maes, Fannie Maes and
Freddie Macs.
The Portfolio may only purchase investment grade debt obligations. Under normal
market conditions, however, the Portfolio intends to invest at least 65% of its
total assets in debt obligations rated in one of the three highest rating
categories. Unrated debt obligations will be purchased only if they are
determined by the Adviser to be at least comparable in quality at the time of
purchase to eligible rated securities. Occasionally, the rating of a security
held by the Portfolio may be downgraded to below investment grade. If that
happens, the Portfolio does not have to sell the security unless the Adviser
determines that under the circumstances the security is no longer an
appropriate investment for the Portfolio.
In making investment decisions, the Adviser will consider a number of factors
including current yield, maturity, yield to maturity, anticipated changes in
interest rates, and the overall quality of the investment. The Portfolio's
average weighted maturity will generally be between three and ten years.
19
<PAGE>
Risk/Return Summary Intermediate Corporate Bond Portfolio
- --------------------------------------------------------------------------------
Portfolio Manager
David A. Bethke is the person primarily responsible for the day-to-day
management of the Portfolio. Mr. Bethke, Senior Associate, has been with FIRMCO
and its affiliates since 1987 and has eight years of prior investment
experience. He has managed the Portfolio since it commenced operations in 1997.
- --------------------------------------------------------------------------------
Principal Risk Considerations
The prices of debt securities tend to move in the opposite direction to
interest rates. When rates are rising, the prices of debt securities tend to
fall. When rates are falling, the prices of debt securities tend to rise.
Generally, the longer the time until maturity, the more sensitive the price of
a debt security is to interest rate changes.
Changes in interest rates also may cause certain debt securities held by the
Portfolio, including callable securities and mortgage-backed securities, to be
paid off much sooner or later than expected. In the event that a security is
paid off sooner than expected because of a decline in interest rates, the
Portfolio may be unable to recoup all of its initial investment and may also
suffer from having to reinvest in lower-yielding securities. In the event of a
later than expected payment because of a rise in interest rates, the value of
the obligation will decrease, and the Portfolio may suffer from the inability
to invest in higher-yielding securities.
The value of debt securities also depends on the ability of issuers to make
principal and interest payments. If an issuer can't meet its payment
obligations or if its credit rating is lowered, the value of its debt
securities will fall.
Foreign investments may be riskier than U.S. investments because of currency
exchange rate volatility, government restrictions, different accounting
standards and political instability. In addition, investments in foreign
securities may involve higher costs than investments in U.S. securities,
including higher transaction and custody costs as well as the imposition of
additional taxes by foreign governments.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolio and how they may advance the Portfolio's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
20
<PAGE>
Risk/Return Summary Intermediate Corporate Bond Portfolio
Return History
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Trust Shares has varied from year to year. The table shows how the Portfolio's
average annual returns for one year and since inception compare to those of a
broad-based market index. Both the bar chart and table assume reinvestment of
all dividends and distributions. The Portfolio's past performance does not
necessarily indicate how it will perform in the future.
- --------------------------------------------------------------------------------
Know your index
The Lehman Brothers Intermediate Corporate Bond Index is an unmanaged index
which tracks the performance of intermediate-term U.S. corporate bonds.
- --------------------------------------------------------------------------------
Trust Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1998 9.01%
1999 -2.17%
<TABLE>
<S> <C>
Best quarter: 5.33% for the quarter
ending September 30, 1998
Worst quarter: -1.41% for the quarter
ending June 30, 1999
</TABLE>
-------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year Inception*
---------------------------------------
<S> <C> <C>
Trust Shares -2.17% 4.92%
---------------------------------------
Lehman Brothers Intermediate Government Bond Index 0.16% 5.55%
- -----------------------------------------------------------------------
</TABLE>
* February 10, 1997 for Trust Shares; January 31, 1997 for the Lehman
Brothers Intermediate Corporate Bond Index.
21
<PAGE>
Risk/Return Summary Intermediate Corporate Bond Portfolio
The table on the right shows the fees and expenses that you pay if you buy and
hold Trust Shares of the Intermediate Corporate Bond Portfolio.
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
Fees and Expenses
<TABLE>
<CAPTION>
Annual Portfolio Operating
Expenses
(expenses that are deducted
from the Portfolio's assets) Trust Shares
<S> <C>
Management Fees .55%
---------------------------------------------
Distribution (12b-1) Fees None
---------------------------------------------
Other Expenses .64%/1/
---------------------------------------------
Total Annual Portfolio
Operating Expenses 1.19%/1/
- ----------------------------------------------
</TABLE>
/1/ Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Trust Shares for the current fiscal year are expected to be less
than the amounts shown above because certain of the Portfolio's service
providers are voluntarily waiving a portion of their fees and/or reimbursing
the Portfolio for certain other expenses. These fee waivers and/or
reimbursements are being made in order to keep the annual fees and expenses
for the Portfolio's Trust Shares at a certain level. Other Expenses and
Total Annual Portfolio Operating Expenses, after taking these fee waivers
and expense reimbursements into account, are expected to be .24% and .79%,
respectively, for Trust Shares. These fee waivers and expense reimbursements
may be revised or cancelled at any time.
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Trust Shares $121 $378 $654 $1,443
- ---------------------------------------
</TABLE>
22
<PAGE>
Risk/Return Summary Bond Index Portfolio
- --------------------------------------------------------------------------------
Indexing is a strategy whereby a Portfolio attempts to weight its securities to
match those of a broadly-based securities index in an attempt to approximate
the index's performance.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Lehman Brothers Aggregate Bond Index is an unmanaged index made up of
Lehman Brothers' Government/Corporate Bond Index, its Mortgage Backed
Securities Index and its Asset Backed Securities Index. Lehman Brothers, Inc.
does not endorse any securities in the Lehman Brothers Aggregate Bond Index and
is not a sponsor of, or affiliated in any way with, the Portfolio.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is to seek to provide investment results
that, before deduction of operating expenses, approximate the price and yield
performance of U.S. Government, mortgage-backed, asset-backed and corporate
debt securities as represented by the Lehman Brothers Aggregate Bond Index,
which is referred to in this prospectus as the "Lehman Aggregate."
The Portfolio's investment objective can be changed by the Fund's Board of
Directors without shareholder approval. Shareholders will be given at least 30
days' written notice before any such change occurs.
Principal Investment Strategies
The Portfolio uses an "indexing" strategy through the use of computer models to
approximate the investment performance of the Lehman Aggregate. The Adviser
generally selects securities for the Portfolio on the basis of their weightings
in the Lehman Aggregate and will only purchase a security for the Portfolio
that is included in the Lehman Aggregate at the time of such purchase. Because
of the large number of securities listed in the Lehman Aggregate, the Portfolio
cannot invest in all of them. Instead, the Portfolio holds a representative
sample of approximately 100 of the securities in the Lehman Aggregate,
selecting one or two securities to represent an entire "class" or type of
security in the Lehman Aggregate. The Portfolio will invest substantially all
(but not less than 80%) of its total assets in securities listed in the Lehman
Aggregate.
The Portfolio's average weighted maturity will vary from time to time depending
on the maturity of the securities in the Lehman Aggregate. Under normal
conditions, however, the Adviser does not expect the Portfolio's average
weighted maturity to exceed nine years.
Under normal market conditions, it is expected that the quarterly performance
of the Portfolio, before expenses, will track the performance of the Lehman
Aggregate within a .95 correlation coefficient.
23
<PAGE>
Risk/Return Summary Bond Index Portfolio
Principal Risk Considerations
The prices of debt securities tend to move in the opposite direction to
interest rates. When rates are rising, the prices of debt securities tend to
fall. When rates are falling, the prices of debt securities tend to rise.
Generally, the longer the time until maturity, the more sensitive the price of
a debt security is to interest rate changes.
Changes in interest rates also may cause certain debt securities held by the
Portfolio, including callable securities and mortgage-backed securities, to be
paid off much sooner or later than expected. In the event that a security is
paid off sooner than expected because of a decline in interest rates, the
Portfolio may be unable to recoup all of its initial investment and may also
suffer from having to reinvest in lower-yielding securities. In the event of a
later than expected payment because of a rise in interest rates, the value of
the obligation will decrease, and the Portfolio may suffer from the inability
to invest in higher-yielding securities.
The value of debt securities also depends on the ability of issuers to make
principal and interest payments. If an issuer can't meet its payment
obligations or if its credit rating is lowered, the value of its debt
securities will fall.
There is the additional risk that the Portfolio will fail to match the
investment results of the Lehman Aggregate as a result of shareholder purchase
and redemption activity, transaction costs, expenses and other factors.
24
<PAGE>
Risk/Return Summary Bond Index Portfolio
Return History
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Trust Shares has varied from year to year. The table shows how the Portfolio's
average annual returns for one year and since inception compare to those of the
Lehman Aggregate. Both the bar chart and table assume reinvestment of all
dividends and distributions. The Portfolio's past performance does not
necessarily indicate how it will perform in the future.
Trust Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1998 8.93%
1999 -1.42%
<TABLE>
<S> <C>
Best quarter: 4.68% for the quarter
ending September 30, 1998
Worst quarter: -1.01% for the quarter
ending June 30, 1999
</TABLE>
--------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year Inception*
---
<S> <C> <C>
Trust Shares -1.42% 5.34%
---
Lehman Aggregate -0.82% 5.79%
- -------------------------------------
</TABLE>
* February 10, 1997 for Trust Shares; January 31, 1997 for the Lehman
Aggregate.
25
<PAGE>
Risk/Return Summary Bond Index Portfolio
The table on the right shows the fees and expenses that you pay if you buy and
hold Trust Shares of the Bond Index Portfolio.
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
Fees and Expenses
<TABLE>
<CAPTION>
Annual Portfolio Operating
Expenses
(expenses that are deducted
from the Portfolio's assets) Trust Shares
<S> <C>
Management Fees .30%
---------------------------------------------
Distribution (12b-1) Fees None
---------------------------------------------
Other Expenses .63%/1/
---------------------------------------------
Total Annual Portfolio
Operating Expenses .93%/1/
- ----------------------------------------------
</TABLE>
/1/ Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Trust Shares for the current fiscal year are expected to be less
than the amounts shown above because certain of the Portfolio's service
providers are voluntarily waiving a portion of their fees and/or reimbursing
the Portfolio for certain other expenses. These fee waivers and/or
reimbursements are being made in order to keep the annual fees and expenses
for the Portfolio's Trust Shares at a certain level. Other Expenses and
Total Annual Portfolio Operating Expenses, after taking these fee waivers
and expense reimbursements into account, are expected to be .23% and .53%,
respectively, for Trust Shares. These fee waivers and expense reimbursements
may be revised or cancelled at any time.
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Trust Shares $95 $296 $515 $1,143
- ---------------------------------------
</TABLE>
26
<PAGE>
Risk/Return Summary Government & Corporate Bond Portfolio
- --------------------------------------------------------------------------------
Portfolio Manager
George J. Schupp is the person primarily responsible for the day-to-day
management of the Portfolio. Mr. Schupp, FIRMCO's Director of Fixed Income
Management, has been with FIRMCO and its affiliates since 1983 and has 7 years
of prior investment experience. He has managed the Portfolio since February
1998.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is to seek the highest level of current
income consistent with conservation of capital.
Principal Investment Strategies
The Portfolio invests substantially all of its assets in a broad range of debt
obligations, including corporate obligations and U.S. Government obligations.
Corporate obligations may include bonds, notes and debentures. U.S. Government
obligations may include U.S. Treasury obligations and obligations of certain
U.S. Government agencies. The Portfolio also invests in mortgage-backed
securities, including Ginnie Maes, Fannie Maes and Freddie Macs. Although the
Portfolio invests primarily in the debt obligations of U.S. issuers, it may
from time to time invest up to 10% of its total assets in U.S. dollar-
denominated debt obligations of foreign corporations and governments.
The Portfolio may only purchase investment grade debt obligations, which are
those rated in one of the four highest rating categories by one or more
national rating agencies, such as Standard & Poor's Ratings Group or Moody's
Investors Service, Inc. Under normal market conditions, however, the Portfolio
intends to invest at least 65% of its total assets in debt obligations rated in
one of the three highest rating categories. Unrated debt obligations will be
purchased only if they are determined by the Adviser to be at least comparable
in quality at the time of purchase to eligible rated securities. Occasionally,
the rating of a security held by the Portfolio may be downgraded to below
investment grade. If that happens, the Portfolio does not have to sell the
security unless the Adviser determines that under the circumstances the
security is no longer an appropriate investment for the Portfolio.
In making investment decisions, the Adviser considers a number of factors
including credit quality, the price of the security relative to that of other
securities in its sector, current yield, maturity, yield to maturity,
anticipated changes in interest rates and other economic factors, liquidity and
the overall quality of the investment.
The remaining maturity (i.e., length of time until an obligation must be
repaid) of the obligations held by the Portfolio will vary from one to 30
years. The Portfolio's average weighted maturity will vary from time to time
depending on current market and economic conditions and the Adviser's
assessment of probable changes in interest rates.
27
<PAGE>
Risk/Return Summary Government & Corporate Bond Portfolio
Principal Risk Considerations
The prices of debt securities tend to move in the opposite direction to
interest rates. When rates are rising, the prices of debt securities tend to
fall. When rates are falling, the prices of debt securities tend to rise.
Generally, the longer the time until maturity, the more sensitive the price of
a debt security is to interest rate changes.
Changes in interest rates also may cause certain debt securities held by the
Portfolio, including callable securities and mortgage-backed securities, to be
paid off much sooner or later than expected. In the event that a security is
paid off sooner than expected because of a decline in interest rates, the
Portfolio may be unable to recoup all of its initial investment, and may also
suffer from having to reinvest in lower-yielding securities. In the event of a
later than expected payment because of a rise in interest rates, the value of
the obligation will decrease, and the Portfolio may suffer from the inability
to invest in higher-yielding securities.
The value of debt securities also depends on the ability of issuers to make
principal and interest payments. If an issuer can't meet its payment
obligations or if its credit rating is lowered, the value of its debt
securities will fall.
Foreign investments may be riskier than U.S. investments because of currency
exchange rate volatility, government restrictions, different accounting
standards and political instability. In addition, investments in foreign
securities may involve higher costs than investments in U.S. securities,
including higher transaction and custody costs as well as the imposition of
additional taxes by foreign governments.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolio and how they may advance the Portfolio's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
28
<PAGE>
Risk/Return Summary Government & Corporate Bond Portfolio
Return History
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Trust Shares has varied from year to year. The table shows how the Portfolio's
average annual returns for one year, five years and since inception compare to
those of a broad-based market index. Both the bar chart and table assume
reinvestment of all dividends and distributions. The Portfolio's past
performance does not necessarily indicate how it will perform in the future.
- --------------------------------------------------------------------------------
Know your index
The Lehman Brothers Aggregate Bond Index is an unmanaged index made up of
Lehman Brothers' Government/Corporate Bond Index, its Mortgage Backed
Securities Index and its Asset Backed Securities Index.
- --------------------------------------------------------------------------------
Trust Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1992 6.10%
1993 9.39%
1994 -2.52%
1995 16.93%
1996 2.14%
1997 8.56%
1998 8.99%
1999 -1.77%
<TABLE>
<S> <C>
Best quarter: 5.68% for the quarter
ending June 30, 1995
Worst quarter: -2.71% for the quarter
ending March 31, 1996
</TABLE>
--------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year 5 Years Inception*
-----------------------------------------
<S> <C> <C> <C>
Trust Shares -1.77% 6.78% 6.72%
-----------------------------------------
Lehman Brothers Aggregate Bond Index -0.82% 7.73% 7.48%
- ------------------------------------------------------------------
</TABLE>
* February 1, 1991 for Trust Shares; January 31, 1991 for the Lehman Brothers
Aggregate Bond Index.
29
<PAGE>
Risk/Return Summary Government & Corporate Bond Portfolio
The table on the right shows the fees and expenses that you pay if you buy and
hold Trust Shares of the Government & Corporate Bond Portfolio.
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
Fees and Expenses
<TABLE>
<CAPTION>
Annual Portfolio Operating
Expenses
(expenses that are deducted
from the Portfolio's assets) Trust Shares
<S> <C>
Management Fees .45%
---------------------------------------------
Distribution (12b-1) Fees None
---------------------------------------------
Other Expenses .63%/1/
---------------------------------------------
Total Annual Portfolio
Operating Expenses 1.08%/1/
- ----------------------------------------------
</TABLE>
/1/ Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Trust Shares for the current fiscal year are expected to be less
than the amounts shown above because certain of the Portfolio's service
providers are voluntarily waiving a portion of their fees and/or reimbursing
the Portfolio for certain other expenses. These fee waivers and/or
reimbursements are being made in order to keep the annual fees and expenses
for the Portfolio's Trust Shares at a certain level. Other Expenses and
Total Annual Portfolio Operating Expenses, after taking these fee waivers
and expense reimbursements into account, are expected to be .23% and .68%,
respectively, for Trust Shares. These fee waivers and expense reimbursements
may be revised or cancelled at any time.
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Trust Shares $110 $343 $595 $1,317
- ---------------------------------------
</TABLE>
30
<PAGE>
Risk/Return Summary Short-Intermediate Municipal Portfolio
- --------------------------------------------------------------------------------
What Are Municipal Securities?
State and local governments issue municipal securities to raise money to
finance public works, to repay outstanding obligations, to raise funds for
general operating expenses and to make loans to other public institutions. Some
municipal securities, known as private activity bonds, are backed by private
entities and are used to finance various non-public projects. Municipal
securities, which can be issued as bonds, notes or commercial paper, usually
have fixed interest rates, although some have interest rates that change from
time to time.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Average weighted maturity gives you the average time until all debt
obligations, including municipal securities, in a Portfolio come due or mature.
It is calculated by averaging the time to maturity of all debt obligations held
by a Portfolio with each maturity "weighted" according to the percentage of
assets which it represents.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is to seek as high a level of current
income, exempt from regular federal income tax, as is consistent with
preservation of capital.
Principal Investment Strategies
The Portfolio normally invests at least 80% of its total assets in municipal
securities that pay interest which is exempt from federal income tax. Municipal
securities purchased by the Portfolio may include general obligation
securities, revenue securities and private activity bonds. General obligation
securities are secured by the issuer's full faith, credit and taxing power.
Revenue securities are usually payable only from revenues derived from specific
facilities or revenue sources. Private activity bonds are usually revenue
obligations since they are typically payable by the private user of the
facilities financed by the bonds. The interest on private activity bonds may be
subject to the federal alternative minimum tax. Investments in private activity
bonds will not be treated as investments in municipal securities for purposes
of the 80% requirement stated above. Under normal conditions, the Portfolio's
investments in private activity bonds, together with any investments in taxable
obligations, will not exceed 20% of its total assets.
In selecting municipal securities for the Portfolio, the Adviser favors those
sectors of the municipal market that offer the most favorable returns. The
Adviser emphasizes municipal securities that offer both a high credit quality
rating and a high degree of liquidity. The Adviser also attempts to maintain a
broad geographic diversification for the Portfolio, with emphasis on no
particular state.
The Portfolio will invest only in investment grade municipal securities. These
are securities which have one of the four highest ratings assigned by a
national rating agency, such as Standard & Poor's Ratings Group or Moody's
Investors Service, Inc., or are unrated securities determined by the Adviser to
be of comparable quality. Short-term municipal securities purchased by the
Portfolio, such as municipal notes and tax-exempt commercial paper, will have
one of the two highest ratings assigned by a national rating agency or will be
unrated securities that the Adviser has determined to be of comparable quality.
Occasionally, the rating of a security held by the Portfolio may be downgraded
to below the minimum required rating. If that happens, the Portfolio does not
have to sell the security unless the Adviser determines that under the
circumstances the security is no longer an appropriate investment for the
Portfolio.
The Portfolio's average weighted maturity will generally be between two and
five years.
31
<PAGE>
Risk/Return Summary Short-Intermediate Municipal Portfolio
- --------------------------------------------------------------------------------
Portfolio Manager
Peter Merzian is the person primarily responsible for the day-to-day management
of the Portfolio. Mr. Merzian, a Senior Associate, has been with FIRMCO and its
affiliates since 1993 and has managed the Portfolio since it commenced
operations in 1995.
- --------------------------------------------------------------------------------
Principal Risk Considerations
The prices of debt securities, including municipal securities, tend to move in
the opposite direction to interest rates. When rates are rising, the prices of
debt securities tend to fall. When rates are falling, the prices of debt
securities tend to rise. Generally, the longer the time until maturity, the
more sensitive the price of a debt security is to interest rate changes.
Changes in interest rates may cause certain municipal securities held by the
Portfolio to be paid off much sooner or later than expected. In the event that
a security is paid off sooner than expected because of a decline in interest
rates, the Portfolio may be unable to recoup all of its initial investment and
may also suffer from having to reinvest in lower-yielding securities. In the
event of a later than expected payment because of a rise in interest rates, the
value of the obligation will decrease, and the Portfolio may suffer from the
inability to invest in higher-yielding securities.
The value of debt securities also depends on the ability of issuers to make
principal and interest payments. If an issuer can't meet its payment
obligations or if its credit rating is lowered, the value of its debt
securities will fall. The ability of a state or local government issuer to make
payments can be affected by many factors, including economic conditions, the
flow of tax revenues and changes in the level of federal, state or local aid.
Some municipal securities are payable only from limited revenue sources or by
private entities.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolio and how they may advance the Portfolio's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
32
<PAGE>
Risk/Return Summary Short-Intermediate Municipal Portfolio
Return History
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Trust Shares has varied from year to year. The table shows how the Portfolio's
average annual returns for one year and since inception compare to those of a
broad-based market index. Both the bar chart and table assume reinvestment of
all dividends and distributions. The Portfolio's past performance does not
necessarily indicate how it will perform in the future.
- --------------------------------------------------------------------------------
Know your index
The Lehman Brothers Municipal Bond Index--3 Year is an unmanaged index that
tracks the performance of municipal bonds with remaining maturities of three
years or less.
- --------------------------------------------------------------------------------
Trust Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1996 3.62%
1997 5.22%
1998 4.85%
1999 -0.08%
<TABLE>
<S> <C>
Best quarter: 2.31% for the quarter
ending September 30, 1998
Worst quarter: -1.15% for the quarter
ending June 30, 1999
</TABLE>
--------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year Inception*
-------------------------------------
<S> <C> <C>
Trust Shares -0.08% 3.61%
-------------------------------------
Lehman Brothers Municipal Bond Index--3 Year 1.96% 4.62%
- -----------------------------------------------------------------
</TABLE>
* July 10, 1995 for Trust Shares; June 30, 1995 for the Lehman Brothers
Municipal Bond Index--3 Year.
33
<PAGE>
Risk/Return Summary Short-Intermediate Municipal Portfolio
The table on the right shows the fees and expenses that you pay if you buy and
hold Trust Shares of the Short-Intermediate Municipal Portfolio.
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
Fees and Expenses
<TABLE>
<CAPTION>
Annual Portfolio Operating
Expenses
(expenses that are deducted
from the Portfolio's assets) Trust Shares
<S> <C>
Management Fees .55%
---------------------------------------------
Distribution (12b-1) Fees None
---------------------------------------------
Other Expenses .62%/1/
---------------------------------------------
Total Annual Portfolio
Operating Expenses 1.17%/1/
- ----------------------------------------------
</TABLE>
/1/ Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Trust Shares for the current fiscal year are expected to be less
than the amounts shown above because certain of the Portfolio's service
providers are voluntarily waiving a portion of their fees and/or reimbursing
the Portfolio for certain other expenses. These fee waivers and/or
reimbursements are being made in order to keep the annual fees and expenses
for the Portfolio's Trust Shares at a certain level. Other Expenses and
Total Annual Portfolio Operating Expenses, after taking these fee waivers
and expense reimbursements into account, are expected to be .22% and .77%,
respectively, for Trust Shares. These fee waivers and expense reimbursements
may be revised or cancelled at any time.
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Trust Shares $119 $372 $644 $1,420
- ---------------------------------------
</TABLE>
34
<PAGE>
Risk/Return Summary Missouri Tax-Exempt Bond Portfolio
- --------------------------------------------------------------------------------
What Are Municipal Securities?
State and local governments issue municipal securities to raise money to
finance public works, to repay outstanding obligations, to raise funds for
general operating expenses and to make loans to other public institutions. Some
municipal securities, known as private activity bonds, are backed by private
entities and are used to finance various non-public projects. Municipal
securities, which can be issued as bonds, notes or commercial paper, usually
have fixed interest rates, although some have interest rates that change from
time to time.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Average weighted maturity gives you the average time until all debt
obligations, including municipal securities, in a Portfolio come due or mature.
It is calculated by averaging the time to maturity of all debt obligations held
by a Portfolio with each maturity "weighted" according to the percentage of
assets which it represents.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is to seek as high a level of interest
income exempt from federal income tax as is consistent with conservation of
capital.
Principal Investment Strategies
The Portfolio normally invests at least 80% of its total assets in municipal
securities that pay interest that is exempt from federal income tax, and at
least 65% of its total assets in Missouri municipal securities issued by the
State of Missouri and other government issuers and that pay interest which is
exempt from both federal income tax and Missouri state income tax.
Municipal securities purchased by the Portfolio may include general obligation
securities, revenue securities and private activity bonds. General obligation
securities are secured by the issuer's full faith, credit and taxing power.
Revenue securities are usually payable only from revenues derived from specific
facilities or revenue sources. Private activity bonds are usually revenue
obligations since they are typically payable by the private user of the
facilities financed by the bonds. The interest on private activity bonds may be
subject to the federal alternative minimum tax. Investments in private activity
bonds will not be treated as investments in municipal securities for purposes
of the 80% requirement stated above. Under normal conditions, the Portfolio's
investments in private activity bonds, together with any investments in taxable
obligations, will not exceed 20% of its total assets.
In selecting municipal securities for the Portfolio, the Adviser favors those
sectors of the municipal market that offer the most favorable returns. The
Adviser emphasizes municipal securities that offer both a high credit quality
rating and a high degree of liquidity.
The Portfolio will invest only in investment grade municipal securities. These
are securities which have one of the four highest ratings assigned by a
national rating agency, such as Standard & Poor's Rating Group or Moody's
Investors Service, Inc., or are unrated securities determined by the Adviser to
be of comparable quality. Short-term municipal securities purchased by the
Portfolio, such as municipal notes and tax-exempt commercial paper, will have
one of the two highest ratings assigned by a national rating agency or will be
unrated securities that the Adviser has determined to be of comparable quality.
Occasionally, the rating of a security held by the Portfolio may be downgraded
to below the minimum required rating. If that happens, the Portfolio does not
have to sell the security unless the Adviser determines that under the
circumstances the security is no longer an appropriate investment for the
Portfolio.
The remaining maturity (i.e., length of time until an obligation must be
repaid) of the obligations held by the Portfolio will vary from one to 30
35
<PAGE>
Risk/Return Summary Missouri Tax-Exempt Bond Portfolio
- --------------------------------------------------------------------------------
Portfolio Manager
Peter Merzian is the person primarily responsible for the day-to-day management
of the Portfolio. Mr. Merzian, a Senior Associate, has been with FIRMCO and its
affiliates since 1993 and has managed the Portfolio since that time.
- --------------------------------------------------------------------------------
years. The Portfolio's average weighted maturity will vary from time to time
depending on current economic and market conditions and the Adviser's
assessment of probable changes in interest rates.
Principal Risk Considerations
The prices of debt securities, including municipal securities, tend to move in
the opposite direction to interest rates. When rates are rising, the prices of
debt securities tend to fall. When rates are falling, the prices of debt
securities tend to rise. Generally, the longer the time until maturity, the
more sensitive the price of a debt security is to interest rate changes.
Changes in interest rates also may cause certain municipal securities held by
the Portfolio to be paid off much sooner or later than expected. In the event
that a security is paid off sooner than expected because of a decline in
interest rates, the Portfolio may be unable to recoup all of its initial
investment and may also suffer from having to reinvest in lower-yielding
securities. In the event of a later than expected payment because of a rise in
interest rates, the value of the obligation will decrease, and the Portfolio
may suffer from the inability to invest in higher-yielding securities.
The value of debt securities also depends on the ability of issuers to make
principal and interest payments. If an issuer can't meet its payment
obligations or if its credit rating is lowered, the value of its debt
securities will fall. The ability of a state or local government issuer to make
payments can be affected by many factors, including economic conditions, the
flow of tax revenues and changes in the level of federal, state or local aid.
Some municipal securities are payable only from limited revenue sources or by
private entities.
The Portfolio is not diversified, which means that it can invest a large
percentage of its assets in a small number of issuers. As a result, a change in
the value of any one investment held by the Portfolio may affect the overall
value of the Portfolio more than it would affect a diversified portfolio that
holds more investments.
Because the Portfolio invests primarily in Missouri municipal securities, it
also is likely to be especially susceptible to economic, political and
regulatory events that affect Missouri. Missouri's economy is largely comprised
of services, manufacturing (primarily defense, transportation and other durable
goods), wholesale and retail trade, and state and local government. The
exposure to these industries leaves Missouri vulnerable to an economic slowdown
associated with the business cycles of such industries. Because defense-related
business plays an important role in Missouri's economy, declining defense
appropriations and federal downsizing also may continue to have an adverse
impact on the State. From time to time, Missouri and its political subdivisions
have encountered financial difficulties.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolio and how they may advance the Portfolio's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
36
<PAGE>
Risk/Return Summary Missouri Tax-Exempt Bond Portfolio
Return History+
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Trust Shares has varied from year to year. The table shows how the Portfolio's
average annual returns for one year, five years, ten years and since inception
compare to those of a broad-based market index. Both the bar chart and table
assume reinvestment of all dividends and distributions. The Portfolio's past
performance does not necessarily indicate how it will perform in the future.
- --------------------------------------------------------------------------------
Know your index
The Lehman Brothers Municipal Bond Index is an unmanaged index that tracks the
performance of municipal bonds.
- --------------------------------------------------------------------------------
Trust Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1990 5.94%
1991 11.66%
1992 8.93%
1993 11.86%
1994 -5.59%
1995 17.01%
1996 3.19%
1997 8.29%
1998 5.41%
1999 -2.85%
<TABLE>
<S> <C>
Best quarter: 7.58% for the quarter
ending March 31, 1995
Worst quarter: -5.57% for the quarter
ending March 31, 1994
</TABLE>
-------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended
December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year 5 Years 10 Years Inception*
-------------------------------------------------
<S> <C> <C> <C> <C>
Trust Shares -2.85% 6.01% 6.18% 6.80%
-------------------------------------------------
Lehman Brothers Municipal Bond Index -2.06% 6.91% 6.89% 7.32%
- --------------------------------------------------------------------------
</TABLE>
+ The Portfolio commenced operations on July 15, 1988 as a separate
investment portfolio (the "Predecessor Portfolio") of The ARCH Tax-Exempt
Trust. On October 2, 1995, the Predecessor Portfolio was reorganized as a
new portfolio of the Fund. Prior to the reorganization, the Predecessor
Portfolio offered and sold shares that were similar to the Fund's Trust
Shares. Total returns for periods prior to October 2, 1995 reflect the
performance of Trust Shares of the Predecessor Portfolio.
* July 15, 1988 for Trust Shares; June 30, 1988 for the Lehman Brothers
Municipal Bond Index.
37
<PAGE>
Risk/Return Summary Missouri Tax-Exempt Bond Portfolio
The table on the right shows the fees and expenses that you pay if you buy and
hold Trust Shares of the Missouri Tax-Exempt Bond Portfolio.
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
Fees and Expenses
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses
(expenses that are deducted from the Trust
Portfolio's assets) Shares
<S> <C>
Management Fees .45%
----------------------------------------------------
Distribution (12b-1) Fees None
----------------------------------------------------
Other Expenses .62%/1/
----------------------------------------------------
Total Annual Portfolio Operating Expenses 1.07%/1/
- -----------------------------------------------------
</TABLE>
/1/ Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Trust Shares for the current fiscal year are expected to be less
than the amounts shown above because certain of the Portfolio's service
providers are voluntarily waiving a portion of their fees and/or reimbursing
the Portfolio for certain other expenses. These fee waivers and/or
reimbursements are being made in order to keep the annual fees and expenses
for the Portfolio's Trust Shares at a certain level. Other Expenses and
Total Annual Portfolio Operating Expenses, after taking these fee waivers
and expense reimbursements into account, are expected to be .22% and .67%,
respectively, for Trust Shares. These fee waivers and expense reimbursements
may be revised or cancelled at any time.
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Trust Shares $109 $340 $590 $1,306
- ---------------------------------------
</TABLE>
38
<PAGE>
Risk/Return Summary National Municipal Bond Portfolio
- --------------------------------------------------------------------------------
What Are Municipal Securities?
State and local governments issue municipal securities to raise money to
finance public works, to repay outstanding obligations, to raise funds for
general operating expenses and to make loans to other public institutions. Some
municipal securities, known as private activity bonds, are backed by private
entities and are used to finance various non-public projects. Municipal
securities, which can be issued as bonds, notes or commercial paper, usually
have fixed interest rates, although some have interest rates that change from
time to time.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is to seek as high a level of current
income exempt from regular federal income tax as is consistent with
conservation of capital.
Principal Investment Strategies
The Portfolio normally invests at least 80% of its total assets in municipal
securities that pay interest which is exempt from federal income tax. Municipal
securities purchased by the Portfolio may include general obligation
securities, revenue securities and private activity bonds. General obligation
securities are secured by the issuer's full faith, credit and taxing power.
Revenue securities are usually payable only from revenues derived from specific
facilities or revenue sources. Private activity bonds are usually revenue
obligations since they are typically payable by the private user of the
facilities financed by the bonds. The interest on private activity bonds may be
subject to the federal alternative minimum tax. Investments in private activity
bonds will not be treated as investments in municipal securities for purposes
of the 80% requirement stated above. Under normal conditions, the Portfolio's
investments in private activity bonds, together with any investments in taxable
obligations, will not exceed 20% of its total assets.
In selecting municipal securities for the Portfolio, the Adviser favors those
sectors of the municipal market that offer the most favorable returns. The
Adviser emphasizes municipal securities that offer both a high credit quality
rating and a high degree of liquidity. The Adviser also attempts to maintain a
broad geographic diversification for the Portfolio, with emphasis on no
particular state.
The Portfolio will invest only in investment grade municipal securities. These
are securities which have one of the four highest ratings assigned by a
national rating agency, such as Standard & Poor's Ratings Group or Moody's
Investors Service, Inc., or are unrated securities determined by the Adviser to
be of comparable quality. Short-term municipal securities purchased by the
Portfolio, such as municipal notes and tax-exempt commercial paper, will have
one of the two highest ratings assigned by a national rating agency or will be
unrated securities that the Adviser has determined to be of comparable quality.
Occasionally, the rating of a security held by the Portfolio may be downgraded
to below the minimum required rating. If that happens, the Portfolio does not
have to sell the security unless the Adviser determines that under the
circumstances the security is no longer an appropriate investment for the
Portfolio.
The Portfolio's average weighted maturity will vary from time to time depending
on current economic and market conditions and the Adviser's assessment of
probable changes in interest rates. The Portfolio's average weighted maturity
generally will be longer (10 years or less) than that of the Short-Intermediate
Municipal Portfolio.
39
<PAGE>
Risk/Return Summary National Municipal Bond Portfolio
- --------------------------------------------------------------------------------
Portfolio Manager
Peter Merzian is the person primarily responsible for the day-to-day management
of the Portfolio. Mr. Merzian, a Senior Associate, has been with FIRMCO and its
afffiliates since 1993 and has managed the Portfolio since it commenced
operations in 1996.
- --------------------------------------------------------------------------------
Principal Risk Considerations
The prices of debt securities, including municipal securities, tend to move in
the opposite direction to interest rates. When rates are rising, the prices of
debt securities tend to fall. When rates are falling, the prices of debt
securities tend to rise. Generally, the longer the time until maturity, the
more sensitive the price of a debt security is to interest rate changes.
Changes in interest rates also may cause certain municipal securities held by
the Portfolio to be paid off much sooner or later than expected. In the event
that a security is paid off sooner than expected because of a decline in
interest rates, the Portfolio may be unable to recoup all of its initial
investment and may also suffer from having to reinvest in lower-yielding
securities. In the event of a later than expected payment because of a rise in
interest rates, the value of the obligation will decrease, and the Portfolio
may suffer from the inability to invest in higher-yielding securities.
The value of debt securities also depends on the ability of issuers to make
principal and interest payments. If an issuer can't meet its payment
obligations or if its credit rating is lowered, the value of its debt
securities will fall. The ability of a state or local government issuer to make
payments can be affected by many factors, including economic conditions, the
flow of tax revenues and changes in the level of federal, state or local aid.
Some municipal securities are payable only from limited revenue sources or by
private entities.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolio and how they may advance the Portfolio's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
40
<PAGE>
Risk/Return Summary National Municipal Bond Portfolio
Return History
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Trust Shares has varied from year to year. The table shows how the Portfolio's
average annual returns for one year and since inception compare to those of a
broad-based market index. Both the bar chart and table assume reinvestment of
all dividends and distributions. The Portfolio's past performance does not
necessarily indicate how it will perform in the future.
- --------------------------------------------------------------------------------
Know your index
The Lehman Brothers Municipal Bond Index--10 Year is an unmanaged index that
tracks the performance of municipal bonds with remaining maturities of 10 years
or less.
- --------------------------------------------------------------------------------
Trust Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1997 10.29%
1998 6.15%
1999 -4.41%
<TABLE>
<S> <C>
Best quarter: 3.77% for the quarter
ending September 30, 1997
Worst quarter: -2.71% for the quarter
ending June 30, 1999
</TABLE>
-------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended
December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year Inception*
----------------------------------
<S> <C> <C>
Trust Shares -4.41% 3.81%
----------------------------------
Lehman Brothers Municipal Bond Index--10 Year -1.25% 4.53%
- ------------------------------------------------------------------
</TABLE>
* November 18, 1996 for Trust Shares; November 30, 1996 for the Lehman
Brothers Municipal Bond Index--10 Year.
41
<PAGE>
Risk/Return Summary National Municipal Bond Portfolio
The table on the right shows the fees and expenses that you pay if you buy and
hold Trust Shares of the National Municipal Bond Portfolio.
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
Fees and Expenses
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses
(expenses that are deducted from the
Portfolio's assets) Trust Shares
<S> <C>
Management Fees .55%
--------------------------------------------------------
Distribution (12b-1) Fees None
--------------------------------------------------------
Other Expenses .61%/1/
--------------------------------------------------------
Total Annual Portfolio Operating Expenses 1.16%/1/
- ---------------------------------------------------------
</TABLE>
/1/ Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Trust Shares for the current fiscal year are expected to be less
than the amounts shown above because certain of the Portfolio's service
providers are voluntarily waiving a portion of their fees and/or reimbursing
the Portfolio for certain other expenses. These fee waivers and/or
reimbursements are being made in order to keep the annual fees and expenses
for the Portfolio's Trust Shares at a certain level. Other Expenses and
Total Annual Portfolio Operating Expenses, after taking these fee waivers
and expense reimbursements into account, are expected to be .21% and .76%,
respectively, for Trust Shares. These fee waivers and expense reimbursements
may be revised or cancelled at any time.
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Trust Shares $118 $368 $638 $1,409
- ---------------------------------------
</TABLE>
42
<PAGE>
Risk/Return Summary Balanced Portfolio
- --------------------------------------------------------------------------------
Total return consists of net income (dividend and/or interest income from
Portfolio securities, less expenses of the Portfolio) and capital gains and
losses, both realized and unrealized, from Portfolio securities.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Investment grade bonds are those of medium credit quality or better, as
determined by a national rating agency such as Standard & Poor's Ratings Group
(bonds rated BBB or higher) and Moody's Investors Service, Inc. (bonds rated
Baa or higher). The higher the credit rating, the less likely it is that the
bond issuer will default on its principal and interest payments.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is to maximize total return through a
combination of growth of capital and current income consistent with the
preservation of capital.
Principal Investment Strategies
The Portfolio invests in a combination of equity securities (such as stocks),
fixed-income securities (such as bonds) and money market instruments in
weightings the Adviser believes will offer attractive total returns over time.
In making asset allocation decisions, the Adviser evaluates forecasts for
inflation, interest rates and long-term corporate earnings growth. The Adviser
then examines the potential effect of these factors on each asset group over a
one- to three-year time period using its own dynamic computer models. These
models show the statistical impact of the Adviser's economic outlook upon the
future returns of each asset group. The Adviser periodically will increase or
decrease the Portfolio's allocations to equities and fixed-income securities
based on which class appears relatively more attractive than the other. For
example, if the Adviser expects more rapid economic growth leading to better
corporate earnings, it will increase the Portfolio's holdings of equity
securities and reduce its holdings of fixed-income securities and money market
instruments.
In selecting equity securities, the Adviser considers historical and projected
earnings, the price/earnings relationship and company growth and asset value.
In selecting fixed-income securities, the Adviser seeks those issues
representing the best value among various sectors, and also considers credit
quality, prevailing interest rates and liquidity.
Under normal market conditions, the Portfolio invests at least 25% of its total
assets in fixed-income securities and no more than 75% of its total assets in
equity securities. The actual percentages will vary from time to time based on
the Adviser's economic and market outlooks. The Portfolio's equity securities
will consist mainly of common stocks of companies with large market
capitalizations, and its fixed-income securities will consist mainly of
investment grade bonds, including U.S. Government securities. Occasionally, the
rating of a security held by the Portfolio may be downgraded to below
investment grade. If that happens, the Portfolio doesn't have to sell the
security unless the Adviser determines that under the circumstances the
security is no longer an appropriate investment for the Portfolio.
The Portfolio may emphasize, from time to time, particular companies or market
sectors, such as technology, in attempting to achieve its investment objective.
43
<PAGE>
Risk/Return Summary Balanced Portfolio
- --------------------------------------------------------------------------------
Portfolio Manager
Peter Merzian, a senior associate of FIRMCO, is responsible for the day-to-day
management of the Portfolio. He has been with FIRMCO and its affiliates since
1993 and has managed the Portfolio since May 1996. He also manages the Fund's
three municipal bond portfolios.
- --------------------------------------------------------------------------------
Principal Risk Considerations
The Portfolio invests in stocks and other equity securities, which may decline
in value over short or extended periods of time. Equity markets tend to be
cyclical; there are times when stock prices generally increase, and other times
when they generally decrease. This could cause the value of your investment in
the Portfolio to fluctuate.
The Portfolio also invests in fixed-income securities, which lose value when
interest rates increase (but increase in value when interest rates decline).
Longer-term fixed-income securities are more susceptible to these fluctuations
in interest rates than short-term fixed-income securities.
To the extent that the Portfolio emphasizes particular companies or market
sectors, such as technology, it will be especially susceptible to the risks
associated with investments in those companies or market sectors. Stocks of
technology companies may be subject to greater price volatility than stocks of
companies in other sectors. Technology companies may produce or use products or
services that prove commercially unsuccessful, become obsolete or become
adversely impacted by government regulation. Technology stocks may experience
significant price movements caused by disproportionate investor optimism or
pessimism.
Changes in interest rates may cause certain fixed-income securities such as
callable securities and mortgage-backed securities, to be paid off much sooner
or later than expected. In the event that a security is paid off sooner than
expected because of a decline in interest rates, the Portfolio may be unable to
recoup all of its initial investment and may also suffer from having to
reinvest in lower-yielding securities. In the event of a later than expected
payment because of a rise in interest rates, the value of the obligation will
decrease, and the Portfolio may suffer from the inability to invest in higher-
yielding securities.
Fixed-income securities are subject to other risks, including the risk that the
issuer will be unable to make payments of principal and interest.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolio and how they may advance the Portfolio's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
44
<PAGE>
Risk/Return Summary Balanced Portfolio
Return History
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Trust Shares has varied from year to year. The table shows how the Portfolio's
average annual returns for one year, five years and since inception compare to
those of broad-based market indexes. Both the bar chart and table assume
reinvestment of all dividends and distributions. The Portfolio's past
performance does not necessarily indicate how it will perform in the future.
- --------------------------------------------------------------------------------
Know your index
The S&P 500 Index is an unmanaged index comprised of 500 widely held common
stocks listed on the New York Stock Exchange, the American Stock Exchange and
NASDAQ.
The Lehman Brothers Aggregate Bond Index is an unmanaged index made up of
Lehman Brothers' Government/Corporate Bond Index, its Mortgage Backed
Securities Index and its Asset Backed Securities Index.
- --------------------------------------------------------------------------------
Trust Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1994 -1.25%
1995 26.28%
1996 12.29%
1997 18.47%
1998 11.67%
1999 7.98%
<TABLE>
<S> <C>
Best quarter: 11.18% for the quarter ending
December 31, 1998
Worst quarter: -7.40% for the quarter ending
September 30, 1998
</TABLE>
--------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year 5 Years Inception*
----------------------------------------
<S> <C> <C> <C>
Trust Shares 7.98% 15.16% 11.45%
----------------------------------------
S&P 500 Index 21.04% 28.56% 21.63%
----------------------------------------
Lehman Brothers Aggregate Bond Index -0.82% 7.73% 6.03%
- -----------------------------------------------------------------
</TABLE>
* April 1, 1993 for Trust Shares; March 31, 1993 for the S&P 500 Index and
the Lehman Brothers Aggregate Bond Index.
45
<PAGE>
Risk/Return Summary Balanced Portfolio
The table on the right shows the fees and expenses that you pay if you buy and
hold Trust Shares of the Balanced Portfolio.
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
Fees and Expenses
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses
(expenses that are deducted from the Trust
Portfolio's assets) Shares
<S> <C>
Management Fees .75%
--------------------------------------------------------
Distribution (12b-1) Fees None
--------------------------------------------------------
Other Expenses .63%/1/
--------------------------------------------------------
Total Annual Portfolio Operating Expenses 1.38%/1/
- ---------------------------------------------------------
</TABLE>
/1/ Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Trust Shares for the current fiscal year are expected to be less
than the amounts shown above because certain of the Portfolio's service
providers are voluntarily waiving a portion of their fees and/or reimbursing
the Portfolio for certain other expenses. These fee waivers and/or
reimbursements are being made in order to keep the annual fees and expenses
for the Portfolio's Trust Shares at a certain level. Other Expenses and
Total Annual Portfolio Operating Expenses, after taking these fee waivers
and expense reimbursements into account, are expected to be .23% and .98%,
respectively, for Trust Shares. These fee waivers and expense reimbursements
may be revised or cancelled at any time.
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Trust Shares $140 $437 $755 $1,657
- ---------------------------------------
</TABLE>
46
<PAGE>
Risk/Return Summary Equity Income Portfolio
- --------------------------------------------------------------------------------
Market capitalization is a common measure of the size of a company. It is the
market price of a share of the company's stock multiplied by the number of
outstanding shares.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Value stocks are those that appear to be underpriced based on valuation
measures, such as lower price-to-earnings and price-to-book value ratios.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Portfolio Manager
FIRMCO's Equity Committee is responsible for the day-to-day management of the
Portfolio. The Committee and its predecessor have managed the Portfolio since
1998.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is to seek to provide an above-average
level of income consistent with long-term capital appreciation.
Principal Investment Strategies
The Portfolio invests primarily in the common stocks of value companies with
large market capitalizations (generally, $5 billion or higher). In selecting
these stocks, the Adviser evaluates a number of quantitative factors, including
dividend yield, current and future earnings potential compared to stock prices
and total return potential. The Adviser also examines other measures of
valuation, including cash flow, asset value and book value.
Under normal market conditions, the Portfolio invests at least 65% of its total
assets in income-producing (dividend-paying) equity securities, primarily
common stocks. These stocks generally will be listed on a national stock
exchange or will be unlisted stocks with established over-the-counter markets.
Many such stocks may offer above-average dividend yields with corresponding
above-average levels of income, in each case as compared to the S&P 500 Index.
The Portfolio may emphasize, from time to time, particular companies or market
sectors, such as technology, in attempting to achieve its investment objective.
Principal Risk Considerations
The Portfolio invests in stocks and other equity securities, which may decline
in value over short or extended periods of time. Equity markets tend to be
cyclical; there are times when stock prices generally increase, and other times
when they generally decrease. This could cause the value of your investment in
the Portfolio to fluctuate. In addition, the Portfolio is subject to the
additional risk that the value stocks it typically holds may not perform as
well as other types of stocks, such as growth stocks.
To the extent that the Portfolio emphasizes particular companies or market
sectors, such as technology, it will be especially susceptible to the risks
associated with investments in those companies or market sectors. Stocks of
technology companies may be subject to greater price volatility than stocks of
companies in other sectors. Technology companies may produce or use products or
services that prove commercially unsuccessful, become obsolete or become
adversely impacted by government regulation. Technology stocks may experience
significant price movements caused by disproportionate investor optimism or
pessimism.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolio and how they may advance the Portfolio's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
47
<PAGE>
Risk/Return Summary Equity Income Portfolio
Return History
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Trust Shares has varied from year to year. The table shows how the Portfolio's
average annual returns for one year and since inception compare to those of a
broad-based market index. Both the bar chart and table assume reinvestment of
all dividends and distributions. The Portfolio's past performance does not
necessarily indicate how it will perform in the future.
- --------------------------------------------------------------------------------
Know your index
The Russell 1000 Value Index is an unmanaged index that measures the
performance of the stocks in the Russell 1000 Index with less than average
growth orientation. Companies in this Index generally have low price-to-book
and price-to-earnings ratios, higher dividend yields and lower forecasted
growth values. The Russell 1000 Index consists of the 1,000 largest U.S.
companies as ranked by total market capitalization.
- --------------------------------------------------------------------------------
Trust Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1998 11.12%
1999 -2.80%
<TABLE>
<S> <C>
Best quarter: 14.33% for the quarter
ending
June 30, 1997
Worst quarter: -8.70% for the quarter
ending
September 30, 1998
</TABLE>
--------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year Inception*
------------------------
<S> <C> <C>
Trust Shares -2.80% 10.11%
------------------------
Russell 1000 Value Index 7.35% 17.41%
- ---------------------------------------------
</TABLE>
* February 27, 1997 for Trust Shares; February 28, 1997 for the Russell 1000
Value Index.
48
<PAGE>
Risk/Return Summary Equity Income Portfolio
The table on the right shows the fees and expenses that you pay if you buy and
hold Trust Shares of the Equity Income Portfolio.
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
Fees and Expenses
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses
(expenses that are deducted from
the Trust
Portfolio's assets) Shares
<S> <C>
Management Fees .75%
-----------------------------------------------
Distribution (12b-1) Fees None
-----------------------------------------------
Other Expenses .63%/1/
-----------------------------------------------
Total Annual Portfolio Operating
Expenses 1.38%/1/
- ------------------------------------------------
</TABLE>
/1/ Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Trust Shares for the current fiscal year are expected to be less
than the amounts shown above because certain of the Portfolio's service
providers are voluntarily waiving a portion of their fees and/or reimbursing
the Portfolio for certain other expenses. These fee waivers and/or
reimbursements are being made in order to keep the annual fees and expenses
for the Portfolio's Trust Shares at a certain level. Other Expenses and
Total Annual Portfolio Operating Expenses, after taking these fee waivers
and expense reimbursements into account, are expected to be .23% and .98%,
respectively, for Trust Shares. These fee waivers and expense reimbursements
may be revised or cancelled at any time.
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Trust Shares $140 $437 $755 $1,657
- ---------------------------------------
</TABLE>
49
<PAGE>
Risk/Return Summary Equity Index Portfolio
- --------------------------------------------------------------------------------
Indexing is a strategy whereby a Portfolio attempts to weight its securities to
match those of a broadly-based securities index in an attempt to approximate
the index's performance.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The S&P 500 Index is an unmanaged index comprised of 500 widely held common
stocks listed on the New York Stock Exchange, the American Stock Exchange and
NASDAQ. The S&P 500 Index is heavily weighted with the stocks of large
companies. S&P does not endorse any stock in the S&P 500 Index and is not a
sponsor of, or affiliated in any way with, the Portfolio.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is to seek to provide investment results
that, before the deduction of operating expenses, approximate the price and
yield performance of U.S. publicly traded common stocks with large stock market
capitalizations, as represented by the Standard & Poor's 500 Index, which is
referred to in this prospectus as the "S&P 500 Index."
The Portfolio's investment objective can be changed by the Fund's Board of
Directors without shareholder approval. Shareholders will be given at least 30
days' written notice before any such change occurs.
Principal Investment Strategies
The Portfolio uses an "indexing" strategy through the use of sophisticated
computer models to approximate the investment performance of the S&P 500 Index.
The Portfolio invests substantially all (at least 80%) of its total assets in
securities listed in the S&P 500 Index and typically will hold all 500 stocks
represented in the Index. In general, each stock's percentage weighting in the
Portfolio is based on its weighting in the Index. When stocks are removed from
or added to the Index, those changes are reflected in the Portfolio. The
Portfolio periodically "rebalances" its holdings as dictated by changes in
shareholder purchase and redemption activity and in the composition of the S&P
500 Index.
To the extent that, from time to time, the stocks in a particular market
sector, such as technology, comprise a significant proportion of the S&P 500
Index, those stocks will be represented in substantially the same proportion in
the Portfolio.
Under normal market conditions, it is expected that the quarterly performance
of the Portfolio, before expenses, will track the performance of the S&P 500
Index within a .95 correlation coefficient.
50
<PAGE>
Risk/Return Summary Equity Index Portfolio
Principal Risk Considerations
The Portfolio invests in stocks and other equity securities, which may decline
in value over short or extended periods of time. Equity markets tend to be
cyclical; there are times when stock prices generally increase, and other times
when they generally decrease. This could cause the value of your investment in
the Portfolio to fluctuate. In addition, the Portfolio is subject to the
additional risk that the large-capitalization stocks it typically holds may not
perform as well as other types of stocks, such as small-capitalization stocks.
To the extent that the stocks in a particular market sector, such as
technology, comprise a significant portion of the S&P 500 Index and,
correspondingly, of the Portfolio's holdings, the Portfolio will be especially
susceptible to the risks associated with investments in those market sectors.
Technology companies may produce or use products or services that prove
commercially unsuccessful, become obsolete or become adversely impacted by
government regulation. Technology stocks may experience significant price
movements caused by disproportionate investor optimism or pessimism.
There is the additional risk that the Portfolio's investment results will fail
to match those of the S&P 500 Index as a result of shareholder purchase and
redemption activity, transaction costs, expenses and other factors.
51
<PAGE>
Risk/Return Summary Equity Index Portfolio
Return History
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Trust Shares has varied from year to year. The table shows how the Portfolio's
average annual returns for one year and since inception compare to those of the
S&P 500 Index. Both the bar chart and table assume reinvestment of all
dividends and distributions. The Portfolio's past performance does not
necessarily indicate how it will perform in the future.
Trust Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1998 28.25%
1999 20.53%
<TABLE>
<S> <C>
Best quarter: 21.19% for the quarter
ending December 31, 1998
Worst quarter: -9.96% for the quarter
ending September 30, 1998
</TABLE>
--------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year Inception*
--
<S> <C> <C>
Trust Shares 20.53% 27.00%
--
S&P 500 Index 21.04% 27.35%
- ----------------------------------
</TABLE>
* May 1, 1997 for Trust Shares; April 30, 1997 for the S&P 500 Index.
52
<PAGE>
Risk/Return Summary Equity Index Portfolio
The table on the right shows the fees and expenses that you pay if you buy and
hold Trust Shares of the Equity Index Portfolio.
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
Fees and Expenses
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses
(expenses that are deducted from the Trust
Portfolio's assets) Shares
<S> <C>
Management Fees .30%
---------------------------------------------------
Distribution (12b-1) Fees None
---------------------------------------------------
Other Expenses .65%/1/
---------------------------------------------------
Total Annual Portfolio Operating Expenses .95%/1/
- ----------------------------------------------------
</TABLE>
/1/ Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Trust Shares for the current fiscal year are expected to be less
than the amounts shown above because certain of the Portfolio's service
providers are voluntarily waiving a portion of their fees and/or reimbursing
the Portfolio for certain other expenses. These fee waivers and/or
reimbursements are being made in order to keep the annual fees and expenses
for the Portfolio's Trust Shares at a certain level. Other Expenses and
Total Annual Portfolio Operating Expenses, after taking these fee waivers
and expense reimbursements into account, are expected to be .25% and .55%,
respectively, for Trust Shares. These fee waivers and expense reimbursements
may be revised or cancelled at any time.
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Trust Shares $97 $303 $525 $1,166
- ---------------------------------------
</TABLE>
53
<PAGE>
Risk/Return Summary Growth & Income Equity Portfolio
- --------------------------------------------------------------------------------
Portfolio Manager
FIRMCO's Equity Committee is responsible for the day-to-day management of the
Portfolio. The Committee and its predecessor have managed the Portfolio since
1998.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is to provide long-term capital growth,
with income a secondary consideration.
Principal Investment Strategies
The Portfolio invests primarily in common stocks. The Adviser selects stocks
based on a number of factors related to historical and projected earnings and
the price/earnings relationship as well as company growth and asset value,
consistency of earnings growth and earnings quality. The Adviser favors the
stocks of those companies which are believed to have superior revenue and
earnings growth prospects relative to their peers and to their price/earnings
ratios.
Stocks purchased for the Portfolio generally will be listed on a national stock
exchange or will be unlisted securities with an established over-the-counter
market. These stocks tend to pay dividends, so many of the Portfolio's
investments may produce some income. Nevertheless, income is not a major factor
in the stock selection process.
The Portfolio may emphasize, from time to time, particular companies or market
sectors, such as technology, in attempting to achieve its investment objective.
Principal Risk Considerations
The Portfolio invests in stocks and other equity securities, which may decline
in value over short or extended periods of time. Equity markets tend to be
cyclical; there are times when stock prices generally increase, and other times
when they generally decrease. This could cause the value of your investment in
the Portfolio to fluctuate.
To the extent that the Portfolio emphasizes particular companies or market
sectors, such as technology, it will be especially susceptible to the risks
associated with investments in those companies or market sectors. Stocks of
technology companies may be subject to greater price volatility than stocks of
companies in other sectors. Technology companies may produce or use products or
services that prove commercially unsuccessful, become obsolete or become
adversely impacted by government regulation. Technology stocks may experience
significant price movements caused by disproportionate investor optimism or
pessimism.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolio and how they may advance the Portfolio's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
54
<PAGE>
Risk/Return Summary Growth & Income Equity Portfolio
Return History
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Trust Shares has varied from year to year. The table shows how the Portfolio's
average annual returns for one year, five years and since inception compare to
those of a broad-based market index. Both the bar chart and table assume
reinvestment of all dividends and distributions. The Portfolio's past
performance does not necessarily indicate how it will perform in the future.
- --------------------------------------------------------------------------------
Know your index
The S&P 500 Index is an unmanaged index comprised of 500 widely held common
stocks listed on the New York Stock Exchange, the American Stock Exchange and
NASDAQ.
- --------------------------------------------------------------------------------
Trust Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1992 10.61%
1993 9.61%
1994 -0.26%
1995 34.38%
1996 19.40%
1997 27.80%
1998 13.50%
1999 13.76%
<TABLE>
<S> <C>
Best quarter: 18.59% for the quarter
ending December 31, 1998
Worst quarter: -14.34% for the quarter
ending September 30, 1998
</TABLE>
--------------------------------------------------------------------------
Average Annual Total Returns
for periods ended December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year 5 Years Inception*
----------
<S> <C> <C> <C>
Trust Shares 13.76% 21.50% 15.92%
----------
S&P 500 Index 21.04% 28.56% 19.63%
- ------------------------------------------
</TABLE>
* April 1, 1991 for Trust Shares; March 31, 1991 for the S&P 500 Index.
55
<PAGE>
Risk/Return Summary Growth & Income Equity Portfolio
The table on the right shows the fees and expenses that you pay if you buy and
hold Trust Shares of the Growth & Income Equity Portfolio.
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
Fees and Expenses
<TABLE>
<CAPTION>
Annual Portfolio Operating
Expenses
(expenses that are deducted
from the Portfolio's assets) Trust Shares
<S> <C>
Management Fees .55%
- ----------------------------------------------
Distribution (12b-1) Fees None
- ----------------------------------------------
Other Expenses .61%/1/
- ----------------------------------------------
Total Annual Portfolio
Operating Expenses 1.16%/1/
- ----------------------------------------------
</TABLE>
/1/ Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Trust Shares for the current fiscal year are expected to be less
than the amounts shown above because certain of the Portfolio's service
providers are voluntarily waiving a portion of their fees and/or reimbursing
the Portfolio for certain other expenses. These fee waivers and/or
reimbursements are being made in order to keep the annual fees and expenses
for the Portfolio's Trust Shares at a certain level. Other Expenses and
Total Annual Portfolio Operating Expenses, after taking these fee waivers
and expense reimbursements into account, are expected to be .19% and .74%,
respectively, for Trust Shares. These fee waivers and expense reimbursements
may be revised or cancelled at any time.
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Trust Shares $118 $368 $638 $1,409
- ---------------------------------------
</TABLE>
56
<PAGE>
Risk/Return Summary Growth Equity Portfolio
- --------------------------------------------------------------------------------
Growth stocks may offer above-average revenue and earnings potential and
accompanying capital growth, typically with a lower dividend yield than value
stocks.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Portfolio Manager
Walter Dewey, Chartered Financial Analyst, is responsible for the day-to-day
management of the Portfolio. He has been with FIRMCO and its affiliates for 16
years and has managed the Portfolio since February 2000.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is capital appreciation.
Principal Investment Strategies
The Portfolio invests primarily in the common stocks of growth companies. In
selecting securities for the Portfolio, the Adviser evaluates a company's
earnings history and the risk and volatility of the company's business. The
Adviser also considers other factors, such as product position and the ability
to increase market share, but the ability to increase company earnings is the
primary consideration.
Under normal market conditions, the Portfolio invests at least 65% of its total
assets in common stocks or other equity securities, such as preferred stocks,
rights and warrants. Typically, the Portfolio's stocks are those of large- and
medium-capitalization companies that are listed on the New York Stock Exchange,
the American Stock Exchange or NASDAQ.
The Portfolio may emphasize, from time to time, particular companies or market
sectors, such as technology, in attempting to achieve its investment objective.
Principal Risk Considerations
The Portfolio invests in stocks and other equity securities, which may decline
in value over short or extended periods of time. Equity markets tend to be
cyclical; there are times when stock prices generally increase, and other times
when they generally decrease. This could cause the value of your investment in
the Portfolio to fluctuate. In addition, the Portfolio is subject to the
additional risk that the growth stocks it typically holds may not perform as
well as other types of stocks, such as value stocks.
To the extent that the Portfolio emphasizes particular companies or market
sectors, such as technology, it will be especially susceptible to the risks
associated with investments in those companies or market sectors. Stocks of
technology companies may be subject to greater price volatility than stocks of
companies in other sectors. Technology companies may produce or use products or
services that prove commercially unsuccessful, become obsolete or become
adversely impacted by government regulation. Technology stocks may experience
significant price movements caused by disproportionate investor optimism or
pessimism.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolio and how they may advance the Portfolio's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
57
<PAGE>
Risk/Return Summary Growth Equity Portfolio
Return History+
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Trust Shares has varied from year to year. The table shows how the Portfolio's
average annual returns for one year and since inception compare to those of a
broad-based market index. Both the bar chart and table assume reinvestment of
dividends and distributions. The Portfolio's past performance does not
necessarily indicate how it will perform in the future.
- --------------------------------------------------------------------------------
Know your index
The S&P 500 Index is an unmanaged index comprised of 500 widely held common
stocks listed on the New York Stock Exchange, the American Stock Exchange and
NASDAQ.
- --------------------------------------------------------------------------------
Trust Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1998 30.47%
1999 24.55%
<TABLE>
<S> <C>
Best quarter: 25.77% for the quarter ending
December 31, 1998
Worst quarter: -11.73% for the quarter ending
September 30, 1998
</TABLE>
--------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year Inception*
---
<S> <C> <C>
Trust Shares 24.55% 27.79%
---
S&P 500 Index 21.04% 24.65%
- -----------------------------------
</TABLE>
+ The Portfolio commenced operations on January 4, 1993 as the Arrow Equity
Portfolio, a separate investment portfolio (the "Predecessor Portfolio") of
Arrow Funds. On November 24, 1997, the Predecessor Portfolio was
reorganized as a new portfolio of the Fund. Prior to the reorganization,
the Predecessor Portfolio offered and sold shares that were similar to the
Fund's Investor A Shares.
* November 24, 1997 for Trust Shares; November 30, 1997 for the S&P 500
Index.
58
<PAGE>
Risk/Return Summary Growth Equity Portfolio
The table on the right shows the fees and expenses that you pay if you buy and
hold Trust Shares of the Growth Equity Portfolio.
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
Fees and Expenses
<TABLE>
<CAPTION>
Annual Portfolio Operating
Expenses
(expenses that are deducted
from the Portfolio's assets) Trust Shares
<S> <C>
Management Fees .75%
---------------------------------------------
Distribution (12b-1) Fees None
---------------------------------------------
Other Expenses .62%/1/
---------------------------------------------
Total Annual Portfolio
Operating Expenses 1.37%/1/
- ----------------------------------------------
</TABLE>
/1/ Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Trust Shares for the current fiscal year are expected to be less
than the amounts shown above because certain of the Portfolio's service
providers are voluntarily waiving a portion of their fees and/or reimbursing
the Portfolio for certain other expenses. These fee waivers and/or
reimbursements are being made in order to keep the annual fees and expenses
for the Portfolio's Trust Shares at a certain level. Other Expenses and
Total Annual Portfolio Operating Expenses, after taking these fee waivers
and expense reimbursements into account, are expected to be .22% and .97%,
respectively, for Trust Shares. These fee waivers and expense reimbursements
may be revised or cancelled at any time.
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Trust Shares $139 $434 $750 $1,646
- ---------------------------------------
</TABLE>
59
<PAGE>
Risk/Return Summary Small Cap Equity Portfolio
- --------------------------------------------------------------------------------
Portfolio Manager
Robert J. Anthony, Senior Associate at FIRMCO and Gregory Glidden, Senior
Portfolio Manager at FIRMCO, are responsible for the day-to-day management of
the Portfolio. Mr. Anthony has been with FIRMCO and its affiliates for 27 years
and has managed the Portfolio since its inception in 1992. Mr. Glidden has been
with FIRMCO and its affiliates for 17 years and has co-managed the Portfolio
since February 2000.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is capital appreciation.
Principal Investment Strategies
Under normal conditions, the Portfolio invests at least 65% of its total assets
in small- to medium-sized companies with market capitalizations from $100
million to $2 billion at the time of purchase and which the Adviser believes
have above-average prospects for capital appreciation. Stocks purchased by the
Portfolio may be listed on a national securities exchange or may be unlisted
securities with or without an established over-the-counter market.
The Portfolio also may invest a portion of its assets in larger companies that
the Adviser believes offer improved growth possibilities because of rejuvenated
management, product changes or other developments likely to stimulate earnings
or asset growth. The Portfolio also invests in stocks the Adviser believes are
undervalued or to a limited extent in initial public offerings (IPOs) of new
companies that demonstrate the potential for price appreciation. The Adviser
selects stocks based on a number of factors, including historical and projected
earnings, asset value, potential for price appreciation and earnings growth,
and quality of the products manufactured or services offered. The Adviser uses
a screening process involving a variety of quantitative techniques in
evaluating prospects for capital appreciation.
The Portfolio may emphasize, from time to time, particular companies or market
sectors, such as technology, in attempting to achieve its investment objective.
60
<PAGE>
Risk/Return Summary Small Cap Equity Portfolio
Principal Risk Considerations
The Portfolio invests in stocks and other equity securities, which may decline
in value over short or extended periods of time. Equity markets tend to be
cyclical; there are times when stock prices generally increase, and other times
when they generally decrease. This could cause the value of your investment in
the Portfolio to fluctuate.
Compared to larger-capitalization stocks, small-capitalization stocks tend to
carry greater risk and exhibit greater price volatility because their
businesses may not be well-established. In addition, some smaller companies may
have specialized or limited product lines, markets or financial resources and
may be dependent on one-person management. All of these factors increase risk
and may result in more significant losses than the other Mercantile Stock
Portfolios. In an effort to reduce the risks inherent in smaller-company
stocks, the Portfolio's holdings are diversified over a number of companies and
industry groups.
To the extent that the Portfolio emphasizes particular companies or market
sectors, such as technology, it will be especially susceptible to the risks
associated with investments in those companies or market sectors. Stocks of
technology companies may be subject to greater price volatility than stocks of
companies in other sectors. Technology companies may produce or use products or
services that prove commercially unsuccessful, become obsolete or become
adversely impacted by government regulation. Technology stocks may experience
significant price movements caused by disproportionate investor optimism or
pessimism.
The Portfolio's performance results may reflect periods of above-average
performance attributable to its investing a portion of its assets in the
securities of companies offering shares in IPOs. It is possible that the above-
average performance of such companies may not be repeated in the future.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolio and how they may advance the Portfolio's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
61
<PAGE>
Risk/Return Summary Small Cap Equity Portfolio
Return History
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Trust Shares has varied from year to year. The table shows how the Portfolio's
average annual returns for one year, five years and since inception compare to
those of a broad-based market index. Both the bar chart and the table assume
reinvestment of all dividends and distributions. The Portfolio's past
performance does not necessarily indicate how it will perform in the future.
- --------------------------------------------------------------------------------
Know your index
The Russell 2000 Index is an unmanaged index comprised of the 2,000 smallest
companies of the 3,000 largest U.S. companies based on market capitalization.
- --------------------------------------------------------------------------------
Trust Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1993 23.59%
1994 2.52%
1995 17.24%
1996 10.98%
1997 20.79%
1998 -7.77%
1999 17.10%
<TABLE>
<S> <C>
Best quarter: 17.06% for the quarter
ending June 30, 1999
Worst quarter: -24.71% for the quarter
ending September 30, 1998
</TABLE>
--------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year 5 Years inception*
---------------------------
<S> <C> <C> <C>
Trust Shares 17.10% 11.16% 12.72%
---------------------------
Russell 2000 Index 21.26% 16.69% 14.80%
- ------------------------------------------------
</TABLE>
* May 6, 1992 for Trust Shares; April 30, 1992 for the Russell 2000 Index.
62
<PAGE>
Risk/Return Summary Small Cap Equity Portfolio
The table on the right shows the fees and expenses that you pay if you buy and
hold Trust Shares of the Small Cap Equity Portfolio.
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
Fees and Expenses
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses
(expenses that are deducted from the
Portfolio's assets) Trust Shares
<S> <C>
Management Fees .75%
--------------------------------------------------------
Distribution (12b-1) Fees None
--------------------------------------------------------
Other Expenses .61%/1/
--------------------------------------------------------
Total Annual Portfolio Operating Expenses 1.36%/1/
- ---------------------------------------------------------
</TABLE>
/1/ Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Trust Shares for the current fiscal year are expected to be less
than the amounts shown above because certain of the Portfolio's service
providers are voluntarily waiving a portion of their fees and/or reimbursing
the Portfolio for certain other expenses. These fee waivers and/or
reimbursements are being made in order to keep the annual fees and expenses
for the Portfolio's Trust Shares at a certain level. Other Expenses and
Total Annual Portfolio Operating Expenses, after taking these fee waivers
and expense reimbursements into account, are expected to be .21% and .96%,
respectively, for Trust Shares. These fee waivers and expense reimbursements
may be revised or cancelled at any time.
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Trust Shares $138 $431 $745 $1,635
- ---------------------------------------
</TABLE>
63
<PAGE>
Risk/Return Summary Small Cap Equity Index Portfolio
- --------------------------------------------------------------------------------
Indexing is a strategy whereby a Portfolio attempts to weight its securities to
match those of a broadly-based securities index in an attempt to approximate
the index's performance.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The S&P SmallCap 600 Index is an unmanaged index that tracks the performance of
600 domestic companies traded on the New York Stock Exchange, the American
Stock Exchange and NASDAQ. The S&P SmallCap 600 Index is heavily weighted with
the stocks of small companies with market capitalizations that currently range
between $28 million and $4.2 billion. S&P does not endorse any stock in the S&P
SmallCap 600 Index and is not a sponsor of, or affiliated in any way with, the
Portfolio.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is to provide investment results that,
before deduction of operating expenses, approximate the price and yield
performance of U.S. common stocks with smaller stock market capitalizations, as
represented by the S&P SmallCap 600 Index.
The Portfolio's investment objective can be changed by the Fund's Board of
Directors without shareholder approval. Shareholders will be given at least 30
days' written notice before any such change occurs.
Principal Investment Strategies
The Portfolio uses an "indexing" strategy through the use of sophisticated
computer models to approximate the investment performance of the S&P SmallCap
600 Index. The Portfolio will invest at least 80% of its total assets in
securities listed in the S&P SmallCap 600 Index and typically will hold all 600
stocks represented in the Index. Under certain circumstances, however, the
Portfolio may not hold all 600 stocks in the Index because of shareholder
activity or changes in the Index. In general, each stock's percentage weighting
in the Portfolio is based on its weighting in the S&P SmallCap 600 Index. When
stocks are removed from or added to the Index, those changes are reflected in
the Portfolio. The Portfolio periodically "rebalances" its holdings as dictated
by changes in shareholder purchase and redemption activity and in the
composition of the S&P SmallCap 600 Index.
To the extent that, from time to time, the stocks in a particular market
sector, such as technology, comprise a significant portion of the S&P SmallCap
600 Index, those stocks will be represented in substantially the same
proportion in the Portfolio.
Under normal market conditions, it is expected that the quarterly performance
of the Portfolio, before expenses, will track the performance of the S&P
SmallCap 600 Index within a .95 correlation coefficient.
64
<PAGE>
Risk/Return Summary Small Cap Equity Index Portfolio
Principal Risk Considerations
The Portfolio invests in stocks and other equity securities, which may decline
in value over short or extended periods of time. Equity markets tend to be
cyclical; there are times when stock prices generally increase, and other times
when they generally decrease. This could cause the value of your investment in
the Portfolio to fluctuate.
In addition, the Portfolio is subject to the additional risk that the small-
capitalization stocks that it holds may not perform as well as other types of
stocks. Compared to larger-capitalization stocks, small-capitalization stocks
tend to carry greater risk and exhibit greater price volatility because their
businesses may not be well-established. In addition, some smaller companies may
have specialized or limited product lines, markets or financial resources and
may be dependent on one-person management. All of these factors increase risk
and may result in more significant losses than the other Mercantile Stock
Portfolios. By typically investing in all 600 stocks in the Index, the
Portfolio remains broadly diversified, which may reduce some of this risk.
To the extent that the stocks in a particular market sector, such as
technology, comprise a significant portion of the S&P SmallCap 600 Index and,
correspondingly, of the Portfolio's holdings, the Portfolio will be especially
susceptible to the risks associated with investments in those market sectors.
Technology companies may produce or use products or services that prove
commercially unsuccessful, become obsolete or become adversely impacted by
government regulation. Technology stocks may experience significant price
movements caused by disproportionate investor optimism or pessimism.
There is the additional risk that the Portfolio's investment results may fail
to match those of the S&P SmallCap 600 Index as a result of shareholder
purchase and redemption activity, transaction costs, expenses and other
factors.
65
<PAGE>
Risk/Return Summary Small Cap Equity Index Portfolio
Return History
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows the performance of the Portfolio's Trust
Shares during the last calendar year. The table shows how the Portfolio's
average annual returns for one year and since inception compare to those of the
S&P SmallCap 600 Index. Both the bar chart and table assume reinvestment of all
dividends and distributions. The Portfolio's past performance does not
necessarily indicate how it will perform in the future.
Trust Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1999 7.91%
<TABLE>
<S> <C>
Best quarter: 15.24% for the quarter
ending June 30, 1999
Worst quarter: -10.84% for the quarter
ending March 31, 1999
</TABLE>
--------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year inception*
----------------
<S> <C> <C>
Trust Shares 7.91% 10.47%
----------------
S&P SmallCap 600 Index 12.40% 12.40%
- --------------------------------------------
</TABLE>
* December 30, 1998 for Trust Shares; December 31, 1998 for the S&P SmallCap
600 Index.
66
<PAGE>
Risk/Return Summary Small Cap Equity Index Portfolio
The table on the right shows the fees and expenses that you pay if you buy and
hold Trust Shares of the Small Cap Equity Index Portfolio.
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
Fees and Expenses
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses
(expenses that are deducted from Trust
the Portfolio's assets) Shares
<S> <C>
Management Fees .40%
-----------------------------------------------
Distribution (12b-1) Fees None
-----------------------------------------------
Other Expenses .73%/1/
-----------------------------------------------
Total Annual Portfolio Operating
Expenses 1.13%/1/
- ------------------------------------------------
</TABLE>
/1/ Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Trust Shares for the current fiscal year are expected to be less
than the amounts shown above because certain of the Portfolio's service
providers are voluntarily waiving a portion of their fees and/or reimbursing
the Portfolio for certain other expenses. These fee waivers and/or
reimbursements are being made in order to keep the annual fees and expenses
for the Portfolio's Trust Shares at a certain level. Other Expenses and
Total Annual Portfolio Operating Expenses, after taking these fee waivers
and expense reimbursements into account, are expected to be .33% and .73%,
respectively, for Trust Shares. These fee waivers and expense reimbursements
may be revised or cancelled at any time.
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Trust Shares $115 $359 $622 $1,375
- ---------------------------------------
</TABLE>
67
<PAGE>
Risk/Return Summary International Equity Portfolio
- --------------------------------------------------------------------------------
Sub-Adviser/Portfolio Manager
FIRMCO has appointed Clay Finlay Inc. ("Clay Finlay" or the "Sub-Adviser") as
sub-adviser to assist in the day-to-day management of the Portfolio. Frances
Dakers, a principal and senior portfolio manager of Clay Finlay, is responsible
for the management of the Portfolio. Ms. Dakers has been with Clay Finlay since
January 1982 and has managed the Portfolio since it began operations in 1994.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is to provide capital growth consistent
with reasonable investment risk.
Principal Investment Strategies
The Portfolio invests primarily in foreign common stocks, most of which will be
denominated in foreign currencies. During normal market conditions, the
Portfolio will invest substantially all (at least 80%) of its total assets in
the securities of companies that derive more than 50% of their gross revenues
outside the United States or have more than 50% of their assets outside the
United States. Under normal market conditions, the Portfolio invests in equity
securities from at least three foreign countries. Generally, at least 50% of
the Portfolio's total assets will be invested in securities of companies
located either in the developed countries of Western Europe or in Japan. The
Portfolio also may invest in other developed countries in the Far East and in
countries with emerging markets or economies.
By investing in various foreign stocks, the Portfolio attempts to achieve broad
diversification and to take advantage of differences between economic trends
and the performance of securities markets in different countries, regions and
geographic areas. In selecting stocks, the Sub-Adviser determines which
companies represent the best values relative to their long-term growth
prospects and local markets through the use of a screening tool which focuses
on valuation ranges. The Sub-Adviser focuses on companies with steady,
sustainable earnings growth rates that sell at a multiple lower than the
average for that growth rate in the local market. The Sub-Adviser also uses
fundamental analysis by evaluating balance sheets, market share and strength of
management.
68
<PAGE>
Risk/Return Summary International Equity Portfolio
Principal Risk Considerations
Investing in foreign companies involves different risks than investing in U.S.
companies due to such factors as foreign government restrictions, different
accounting standards and political instability. Although the multinational
character of the Portfolio's investments should reduce the effect that events
in any one country or geographic area will have on overall performance,
negative results in one foreign market may offset gains in, or negatively
affect, other foreign markets.
The risks associated with foreign investments are heightened when investing in
emerging markets. The governments and economies of emerging market countries
feature greater instability than those of more developed countries. Such
investments tend to fluctuate in price more widely and to be less liquid than
other foreign investments.
The Portfolio is also subject to currency risk, which is the potential for
price fluctuations in the dollar value of the foreign securities which the
Portfolio holds because of changing currency exchange rates.
As with U.S. equity markets, foreign markets tend to be cyclical. There are
times when stock prices generally increase, and other times when they generally
decrease.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolio and how they may advance the Portfolio's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
69
<PAGE>
Risk/Return Summary International Equity Portfolio
Return History
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Trust Shares has varied from year to year. The table shows how the Portfolio's
average annual returns for one year, five years and since inception compare to
those of a broad-based market index. Both the bar chart and table assume
reinvestment of all dividends and distributions. The Portfolio's past
performance does not necessarily indicate how it will perform in the future.
- --------------------------------------------------------------------------------
Know your index
The Morgan Stanley Capital International Europe, Australasia and Far East
Index, or EAFE Index, is an unmanaged index consisting of companies in
Australia, New Zealand, Europe and the Far East.
- --------------------------------------------------------------------------------
Trust Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1995 9.59%
1996 10.36%
1997 4.88%
1998 17.91%
1999 50.93%
<TABLE>
<S> <C>
Best quarter: 27.60% for the quarter
ending December 31, 1999
Worst quarter: -16.98% for the quarter
ending September 30, 1998
</TABLE>
--------------------------------------------------------------------------
Average Annual Total Returns
for the Periods Ending December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year 5 Years Inception*
---------------------
<S> <C> <C> <C>
Trust Shares 50.93% 17.68% 15.29%
---------------------
EAFE Index 26.96% 12.83% 11.85%
- ------------------------------------------
</TABLE>
* April 4, 1994 for Trust Shares; March 31, 1994 for the EAFE Index.
70
<PAGE>
Risk/Return Summary International Equity Portfolio
The table on the right shows the fees and expenses that you pay if you buy and
hold Trust Shares of the International Equity Portfolio.
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
Fees and Expenses
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses
(expenses that are deducted from the Trust
Portfolio's assets) Shares
<S> <C>
Management Fees 1.00%
----------------------------------------------------
Distribution (12b-1) Fees None
----------------------------------------------------
Other Expenses .75%/1/
----------------------------------------------------
Total Annual Portfolio Operating Expenses 1.75%/1/
- -----------------------------------------------------
</TABLE>
/1/ Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Trust Shares for the current fiscal year are expected to be less
than the amounts shown above because certain of the Portfolio's service
providers are voluntarily waiving a portion of their fees and/or reimbursing
the Portfolio for certain other expenses. These fee waivers and/or
reimbursements are being made in order to keep the annual fees and expenses
for the Portfolio's Trust Shares at a certain level. Other Expenses and
Total Annual Portfolio Operating Expenses, after taking these fee waivers
and expense reimbursements into account, are expected to be .29% and 1.29%
respectively, for Trust Shares. These fee waivers and expense reimbursements
may be revised or cancelled at any time.
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Trust Shares $178 $551 $949 $2,062
- ---------------------------------------
</TABLE>
71
<PAGE>
Risk/Return Summary Additional Information on Risk
The principal risks of investing in each Portfolio are described on the
previous pages. The following supplements that discussion.
Securities Lending
To obtain interest income, each Portfolio (except the Tax-Exempt Money Market
and Missouri Tax-Exempt Bond Portfolios) may lend their securities to broker-
dealers, banks or institutional borrowers pursuant to agreements requiring that
the loans be continuously secured by collateral equal at all times in value to
at least the market value of the securities loaned. There is the risk that when
lending portfolio securities, the securities may not be available to the
Portfolio on a timely basis. Therefore, the Portfolio may lose the opportunity
to sell the securities at a desirable price. Additionally, in the event that a
borrower of securities would file for bankruptcy or become insolvent,
disposition of the securities may be delayed pending court action.
Temporary Defensive Positions
Each Portfolio may temporarily hold investments that are not part of its main
investment strategy to try to avoid losses during unfavorable market
conditions. These investments may include cash (which will not earn any
income). In addition, the Tax-Exempt Money Market Portfolio may hold short-term
taxable money market investments not to exceed 20% of the Portfolio's assets,
each of the Taxable Bond, Tax-Exempt Bond and Stock Portfolios may hold money
market instruments, including short-term debt securities issued or guaranteed
by the U.S. Government or its agencies, and the International Equity Portfolio
may hold debt obligations of U.S. companies having their principal business
activities in the U.S. This strategy could prevent a Portfolio from achieving
its investment objective and, if utilized by a Stock Portfolio, could reduce
the Portfolio's return and affect its performance during a market upswing.
Other Types of Investments
This prospectus describes each Portfolio's principal investment strategies and
the particular types of securities in which each Portfolio principally invests.
Each Portfolio may, from time to time, make other types of investments and
pursue other investment strategies in support of its overall investment goal.
These supplemental investment strategies--and the risks involved--are described
in detail in the Statement of Additional Information ("SAI"), which is referred
to on the back cover of this prospectus.
Year 2000 Risks
Over the past several years, the Adviser and the Portfolios' other major
service providers expended considerable time and money in addressing the
computer and technology problems associated with the transition to the Year
2000. As a result of those efforts, the Portfolios did not experience any
material disruptions in their operations as a result of the transition to the
21st century. The Adviser and the Portfolios' other major service providers are
continuing to monitor the Year 2000 or Y2K problem, however, and there can be
no assurances that there will be no adverse impact to the Portfolios as a
result of future computer-related Y2K difficulties.
72
<PAGE>
Your Account Explanation of Sales Price
- --------------------------------------------------------------------------------
Business days defined A business day with respect to the Stock Portfolios is
any day that the New York Stock Exchange is open for business. A business day
with respect to the Money Market, Taxable Bond and Tax-Exempt Bond Portfolios
is any day that both the New York Stock Exchange and the Federal Reserve Banks'
Fedline System are open. Currently, the Fund observes the following holidays:
New Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday,
Memorial Day (observed), Independence Day (observed), Labor Day, Thanksgiving,
Christmas, and, for the Money Market, Taxable Bond and Tax-Exempt Bond
Portfolios, Columbus Day and Veterans' Day.
- --------------------------------------------------------------------------------
Trust Shares and Trust II Shares of a Portfolio are sold at their net asset
value (NAV). The NAV for each class of shares of a Money Market Portfolio is
determined as of 11:00 a.m. (Central time) and as of the close of regular
trading on the New York Stock Exchange (currently 3:00 p.m., Central time) on
every business day. The NAV for each class of shares of a Taxable Bond, Tax-
Exempt Bond or Stock Portfolio is determined as of the close of regular trading
on the New York Stock Exchange (currently 3:00 p.m., Central time) on every
business day.
The NAV for a class of shares is determined by adding the value of a
Portfolio's investments, cash and other assets attributable to a particular
share class, subtracting the Portfolio's liabilities attributable that class
and then dividing the result by the total number of shares in the class that
are outstanding.
. The investments of each of the Money Market Portfolios are valued at
amortized cost, which is approximately equal to market value.
. The investments of each of the Taxable Bond, Tax-Exempt Bond and Stock
Portfolios are valued according to market value. When a market quote is not
readily available, the security's value is based on "fair value" as
determined by FIRMCO (or Clay Finlay, with respect to the International
Equity Portfolio) under the supervision of the Fund's Board of Directors.
Foreign securities acquired by the International Equity Portfolio may be
valued in foreign markets on days when the Portfolio's NAV is not calculated.
In such cases, the NAV of the Portfolio's shares may be significantly
affected on days when investors cannot buy and sell Portfolio shares.
. A properly placed purchase order (see "How to Buy Shares" on page 74) that is
delivered to the Fund by 11:00 a.m. (Central time) on any business day with
respect to the Treasury Money Market Portfolio and Tax-Exempt Money Market
Portfolio or by 2:00 p.m. (Central time) on any business day with respect to
the Money Market Portfolio receives the share price next determined if the
Fund receives payment in federal funds or other immediately available funds
by 3:00 p.m. (Central time) that day. If payment is not received by that
time, the order will be cancelled. A properly placed purchase order that is
delivered to the Fund after 11:00 a.m. (Central time) with respect to the
Treasury Money Market Portfolio and Tax-Exempt Money Market Portfolio or
after 2:00 p.m. (Central time) with respect to the Money Market Portfolio
will be placed the following business day.
. A properly placed purchase order (see "How to Buy Shares" on page 74) for one
of the Taxable Bond, Tax-Exempt Bond or Stock Portfolios that is delivered to
the Fund before 3:00 p.m. (Central time) on any business day receives the
share price determined as of 3:00 p.m. (Central time) that day. If the order
is received after 3:00 p.m. (Central time), it will receive the price
determined on the next business day. Your financial institution must forward
your payment to the Fund no later than 3:00 p.m. (Central time) the next
business day after placing the order, or the order will be cancelled.
73
<PAGE>
Your Account How to Buy Shares
Trust Shares of the Portfolios are sold to financial institutions, such as
banks, trust companies, thrift institutions and mutual funds, that are
purchasing shares on their own behalf or on behalf of discretionary and non-
discretionary accounts for which they may receive account level asset-based
management fees. Trust Shares are also sold to financial institutions that are
purchasing shares on behalf of accounts for which they provide cash management
services.
Trust II Shares of the Money Market Portfolios are sold to financial
institutions that are purchasing shares on their own behalf or on behalf of
certain qualified accounts. Contact your financial institution for information
as to which types of accounts are eligible to purchase Trust II Shares.
If you are purchasing Trust Shares or Trust II Shares through a financial
institution, you must follow the procedures established by your institution.
Your financial institution is responsible for sending your purchase order to
the Fund's distributor and wiring payment to the Fund's custodian. Your
financial institution holds the shares in your name and receives all
confirmations of purchases and sales. Financial institutions placing orders for
themselves or on behalf of their customers should call the Fund at 1-800-452-
2724.
The Fund does not have any minimum investment requirement for Trust Shares or
Trust II Shares, but your financial institution may do so. They may also charge
transaction fees and require you to maintain a minimum account balance.
74
<PAGE>
Your Account How to Sell Shares
Orders to sell or "redeem" Trust Shares or Trust II Shares should be placed
with the same financial institution that placed the original purchase order in
accordance with the procedures established by that institution. Your financial
institution is responsible for sending your order to the Fund's distributor and
for crediting your account with the proceeds. The Fund does not currently
charge for wiring the proceeds, but your financial institution may do so.
If the shares being sold are represented by share certificates, then the order
to sell must be made in writing and mailed to: Mercantile Mutual Funds, Inc.,
c/o Firstar Mutual Fund Services, LLC, P.O. Box 3011, Milwaukee, Wisconsin
53201-3011 (via overnight delivery to 615 E. Michigan Street, Milwaukee,
Wisconsin 53202). The order must be accompanied by the share certificates,
properly endorsed for transfer. Additional documents may be required for
certain types of shareholders, such as corporations, partnerships, executors,
trustees, administrators or guardians.
The Fund's transfer agent may require a signature guarantee unless the
redemption proceeds are payable to the shareholder of record and the proceeds
are either mailed to the shareholder's address of record or electronically
transferred to the account designated on the original account application. A
signature guarantee helps prevent fraud, and you may obtain one from most banks
and broker/dealers. Contact the Fund for more information on signature
guarantees.
Trust Shares and Trust II Shares will be sold at the NAV next determined after
the Fund accepts an order (see above). If the order to sell is received and
accepted by the Fund before 11:00 a.m. (Central time) on a business day with
respect to the Treasury Money Market Portfolio and Tax-Exempt Money Market
Portfolio or before 2:00 p.m. (Central time) on a business day with respect to
the Money Market Portfolio, the proceeds are sent electronically the same day
to the financial institution that placed the order. If the order to sell is
received and accepted by the Fund after 11:00 a.m. (Central time) on a business
day with respect to the Treasury Money Market Portfolio and Tax-Exempt Money
Market Portfolio or after 2:00 p.m. (Central time) on a business day with
respect to the Money Market Portfolio, or on a non-business day, the proceeds
normally are sent electronically to the financial institution on the next
business day.
Proceeds from redemptions from the Taxable Bond, Tax-Exempt Bond and Stock
Portfolios ordinarily are sent electronically to your financial institution the
next business day as long as the Fund receives your order by 3:00 a.m. (Central
time) on a business day.
75
<PAGE>
Your Account How to Exchange Shares
The exchange privilege enables shareholders to exchange Trust Shares of one
Portfolio for Trust Shares of another Portfolio, and Trust II Shares of one
Money Market Portfolio for Trust II Shares of another Money Market Portfolio.
In addition, you may be able to exchange Trust Shares of a Portfolio for
Investor A Shares of the same Portfolio if it involves the distribution of
assets from certain types of accounts held at Mercantile Trust Company National
Association or any of its affiliates. Contact your financial institution or the
Fund's distributor for additional information on the exchange privilege. The
exchange privilege may be exercised only in those states where Trust Shares or
Trust II Shares, as applicable, of the Portfolio being acquired may be legally
sold.
Trust and Trust II Shares of the Portfolios also may be exchanged for shares of
corresponding classes of the Firstar Funds and the Firstar Stellar Funds.
Please read the prospectuses for those Funds before investing.
Administrative Services Fees
Trust Shares of the Portfolios pay administrative services fees at an annual
rate of up to 0.25% of each Money Market Portfolio's and up to 0.30% of each
Taxable Bond, Tax-Exempt Bond and Stock Portfolio's Trust Share assets. These
fees are paid to financial institutions that provide certain administrative
services to their customers who own Trust Shares. No administrative services
fees are payable with respect to Trust II Shares of the Money Market
Portfolios.
General Transaction Policies
The Fund reserves the right to:
. Refuse any order to buy shares.
. Reject any exchange request.
. Redeem all shares in an account if the balance falls below $500. If,
within 60 days of the Fund's written request, the account balance has not
been increased, a shareholder may be required to redeem all shares. The
Fund will not require a shareholder to redeem shares if the value of the
account drops below $500 due to fluctuations in net asset value.
. Send redemption proceeds within seven days after receiving a request, if
an earlier payment could adversely affect a Portfolio.
. Modify or terminate the exchange privilege after 60 days' written notice
to shareholders.
. Make a "redemption in kind." Under abnormal conditions that may make
payment in cash unwise, the Fund may offer partial or complete payment in
portfolio securities rather than cash at such securities' then-market-
value equal to the redemption price. In such cases, a shareholder may
incur brokerage costs in converting these securities to cash.
Shareholders may be responsible for any fraudulent telephone orders as long as
the Fund has taken reasonable precautions to verify the shareholder's identity.
Shareholders who experience difficulty getting through to the Fund by telephone
because of unusual market conditions should consider selling or exchanging
their shares by mail.
76
<PAGE>
Distributions and Taxes Dividends and Distributions
. Money Market Portfolios
Each Money Market Portfolio declares dividends from net investment income
daily and pays them monthly. Although the Portfolios do not expect to realize
net long-term capital gains, any capital gains realized would be distributed
at least annually.
. Taxable Bond and Tax-Exempt Bond Portfolios
Each Taxable Bond and Tax-Exempt Bond Portfolio declares dividends from net
investment income daily and pays them monthly. Capital gains, if any, are
distributed at least once a year. It's expected that each Portfolio's annual
distribution will be primarily income dividends.
. Stock Portfolios
The Balanced, Equity Income, Equity Index, Growth & Income Equity and Growth
Equity Portfolios declare and pay dividends from net investment income
monthly. The Small Cap Equity, Small Cap Equity Index and International
Equity Portfolios declare and pay dividends from net investment income
quarterly. Capital gains for all of the Portfolios are distributed at least
once a year. It's expected that each Portfolio's annual distributions will
normally--but not always--consist primarily of capital gains and not ordinary
income.
. All Portfolios
Dividends on each share class of a Portfolio are determined in the same
manner and are paid in the same amount. However, each share class bears all
expenses associated with that particular class.
All of your dividends and capital gains distributions with respect to a
particular Portfolio will be reinvested in additional shares of the same
class unless you or your financial institution instruct otherwise on your
account application or have redeemed all shares you held in the Portfolio. In
such cases, dividends and distributions will be paid in cash.
77
<PAGE>
Distributions and Taxes Taxation
As with any investment, you should consider the tax implications of an
investment in the Portfolios. The following is only a brief summary of some of
the important tax considerations generally affecting the Portfolios and their
shareholders under current law, which may be subject to change in the future.
Consult your tax adviser with specific reference to your own tax situation.
. Treasury Money Market, Money Market, Taxable Bond and Stock Portfolios
Each Portfolio contemplates declaring as dividends each year all or
substantially all of its taxable income, including its net capital gain (the
excess of long-term capital gain over short-term capital loss). You will be
subject to income tax on these distributions regardless of whether they are
paid in cash or reinvested in additional shares. Distributions attributable
to the net capital gain of a Portfolio will be taxable to you as long-term
capital gain, regardless of how long you have held your shares. Other
Portfolio distributions will generally be taxable as ordinary income.
Except in the case of a Money Market Portfolio, if you purchase shares just
prior to a distribution, the purchase price will reflect the amount of the
upcoming distribution, but you will be taxed on the entire amount of the
distribution received even though, as an economic matter, the distribution
simply constitutes a return of capital. This is known as "buying into a
dividend."
Except in the case of a Money Market Portfolio, you will recognize a taxable
gain or loss on a sale, exchange or redemption of your shares, including an
exchange for shares of another Portfolio, based on the difference between
your tax basis in the shares and the amount you receive for them. Generally,
this gain or loss will be long-term or short-term depending on whether your
holding period for the shares exceeds 12 months, except that any loss
realized on shares held for six months or less will be treated as a long-term
capital loss to the extent that any capital gains distributions were received
on the shares.
A Portfolio's dividends that are paid to its corporate shareholders and are
attributable to qualifying dividends the Portfolio receives from U.S.
domestic corporations may be eligible, in the hands of the corporate
shareholders, for the corporate dividends-received deduction, subject to
certain holding period requirements and debt financing limitations.
Distributions on, and sales, exchanges and redemptions of, shares held in an
IRA or other tax-qualified plan will not be currently taxable.
The International Equity Portfolio is expected to be subject to foreign
withholding taxes with respect to dividends or interest received from sources
in foreign countries. The International Equity Portfolio may make an election
to treat a proportionate amount of such taxes as a distribution to each
shareholder. This would allow each shareholder to either (1) credit such
proportionate amount of taxes against U.S. federal income tax liability, or
(2) take such amount as an itemized deduction.
. Tax-Exempt Money Market and Tax-Exempt Bond Portfolios
It is expected that the Tax-Exempt Money Market, Short-Intermediate
Municipal, Missouri Tax-Exempt Bond and National Municipal Bond Portfolios
will distribute dividends derived from interest earned on exempt securities,
and these "exempt-interest dividends" will be exempt income for shareholders
for federal income tax purposes. However, distributions, if any, derived from
net capital gains of each Portfolio will generally be taxable to you as
capital gains. Dividends, if any, derived from short-term capital gain or
taxable interest income will be taxable to you as ordinary income.
The Tax-Exempt Portfolios, other than the Tax-Exempt Money Market Portfolio,
are likely from time to time to make taxable distributions. Distributions
derived from net long-term capital gains will generally be taxable to you as
long-term capital gains. Dividends derived from short-term capital gains
78
<PAGE>
Distributions and Taxes
- --------------------------------------------------------------------------------
You will be advised at least annually regarding the federal income tax
treatment and, if you own shares of the Missouri Tax-Exempt Bond Portfolio, the
Missouri state income tax treatment, of dividends and distributions made to
you. You should save your account statements because they contain information
you will need to calculate your capital gains or losses, if any, upon your
ultimate sale or exchange of shares in the Portfolios.
- --------------------------------------------------------------------------------
and income attributable to "market-discount" on bonds acquired by the
Portfolios will be taxable to you as ordinary income.
If you receive an exempt-interest dividend with respect to any share and the
share is held by you for six months or less, any loss on the sale or exchange
of the share will be disallowed to the extent of such dividend amount.
You should note that a portion of the exempt-interest dividends paid by each
Portfolio may constitute an item of tax preference for purposes of
determining federal alternative minimum tax liability. Exempt-interest
dividends will also be considered along with other adjusted gross income in
determining whether any Social Security or railroad retirement payments
received by you are subject to federal income taxes.
. State and Local Taxes
Shareholders may also be subject to state and local taxes on distributions
and redemptions. State income taxes may not apply however, to the portions of
each Portfolio's distributions, if any, that are attributable to interest on
U.S. Government securities.
The Treasury Money Market Portfolio is designed to provide shareholders, to
the extent permitted by federal law, with income that is exempt or excluded
from taxation at the state or local level.
The Missouri Tax-Exempt Bond Portfolio anticipates that the dividends that it
pays that are attributable to interest earned by the Portfolio will also be
exempt from Missouri state income taxes. Dividends paid by the Tax-Exempt
Money Market, Short-Intermediate Municipal and National Municipal Bond
Portfolios that are attributable to interest earned by the Portfolios may be
taxable to shareholders under state or local law.
The foregoing is only a summary of certain tax considerations under current
law, which may be subject to change in the future. Shareholders who are
nonresident aliens, foreign trusts or estates, or foreign corporations or
partnerships, may be subject to different U.S. federal income tax treatment.
For more information regarding the taxation of the Portfolios, consult the SAI
under the heading "Additional Information Concerning Taxes." You should also
consult your tax adviser for further information regarding federal, state,
local and/or foreign tax consequences relevant to your specific situation.
79
<PAGE>
Management of the Fund The Adviser
FIRMCO serves as the 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, with its main office at Firstar Center, 777 East Wisconsin Avenue,
Suite 800, Milwaukee, Wisconsin 53202, has been providing advisory services
since 1986. As of December 31, 1999, FIRMCO had approximately $35.3 billion in
assets under management.
FIRMCO, subject to the general supervision of the Fund's Board of Directors, is
responsible for the day-to-day management of the Portfolios in accordance with
each Portfolio's respective investment objective and policies. This includes
making investment decisions, buying and selling securities and overseeing the
administration and recordkeeping for each Portfolio.
In exchange for these services, FIRMCO receives an investment advisory fee,
which is calculated daily and paid monthly, according to the average daily net
assets of each Portfolio. For the fiscal year ended November 30, 1999, the
Portfolios paid MVA advisory fees as follows:
<TABLE>
<CAPTION>
Investment advisory fees
Portfolio as a % of net assets
-------------------------
<S> <C>
Treasury Money Market
Portfolio .35%
-------------------------
Money Market Portfolio .35%
-------------------------
Tax-Exept Money Market
Portfolio .35%
-------------------------
U.S. Government Securities
Portfolio .45%
-------------------------
Intermediate Corporate Bond
Portfolio .55%
-------------------------
Bond Index Portfolio .30%
-------------------------
Government & Corporate Bond
Portfolio .45%
-------------------------
Short-Intermediate Municipal
Portfolio .55%
-------------------------
Missouri Tax-Exempt Bond
Portfolio .45%
-------------------------
National Municipal Bond
Portfolio .55%
-------------------------
Balanced Portfolio .75%
-------------------------
Equity Income Portfolio .75%
-------------------------
Equity Index Portfolio .30%
-------------------------
Growth & Income Equity
Portfolio .55%
-------------------------
Growth Equity Portfolio .75%
-------------------------
Small Cap Equity Portfolio .75%
-------------------------
Small Cap Equity Index
Portfolio .32%
-------------------------
International Equity Portfolio 1.00%
- -------------------------------------------------
</TABLE>
The Sub-Adviser
Clay Finlay Inc., an experienced international investment manager, serves as
sub-adviser to the International Equity Portfolio and is responsible for the
management of the Portfolio's assets. Clay Finlay manages the Portfolio under
the guidance and direction of FIRMCO and according to its sub-advisory
agreement with FIRMCO. For its services, Clay Finlay receives from FIRMCO a
monthly fee based on a percentage of the Portfolio's average daily net assets.
Founded in 1982, Clay Finlay is a registered investment adviser and a
subsidiary of United Asset Management Corporation, a financial services holding
company. Clay Finlay's principal office is located at 200 Park Avenue, 56th
Floor, New York, NY 10166.
80
<PAGE>
Financial Highlights Introduction
The financial highlights tables presented below are intended to help you
understand the financial performance of each Portfolio's Trust Shares and/or
Trust II Shares for the past five years (or, if shorter, the period since the
Portfolio began operations or the particular shares were first offered).
Certain information reflects financial results for a single Trust Share or
Trust II Share in each Portfolio. The total returns in the tables represent the
rate that an investor would have earned (or lost) on an investment in Trust
Shares or Trust II Shares, assuming reinvestment of all dividends and
distributions. This information has been audited by KPMG LLP, independent
accountants, whose report, along with the Portfolios' financial statements, are
included in the Fund's Annual Report to Shareholders, and are incorporated by
reference into the SAI.
81
<PAGE>
Financial Highlights Treasury Money Market Portfolio
<TABLE>
<CAPTION>
Trust Shares
(For a Share outstanding throughout each period)
Year Ended November 30,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------------------------------------------------------------------------
Investment Activities
Net investment income 0.038 0.045 0.046 0.045 0.050
Net realized gains from
investments --(a) -- -- -- --
------------------------------------------------------------------------------
Total from Investment
Activities 0.038 0.045 0.046 0.045 0.050
------------------------------------------------------------------------------
Distributions
Net investment income (0.038) (0.045) (0.046) (0.045) (0.050)
Net realized gains --(a) -- -- -- --
------------------------------------------------------------------------------
Total Distributions (0.038) (0.045) (0.046) (0.045) (0.050)
------------------------------------------------------------------------------
Net Asset Value, End of
Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------------------------------------------------------------------------
Total Return 3.87% 4.56% 4.70% 4.64% 5.12%
Ratios/Supplementary
Data:
Net Assets at end of
period (000) $197,435 $245,959 $283,653 $131,322 $252,780
Ratio of expenses to
average net assets 0.81% 0.65% 0.61% 0.61% 0.60%
Ratio of net investment
income to average net
assets 3.80% 4.45% 4.60% 4.55% 5.01%
Ratio of expenses to
average net assets* 0.95% 0.96% 0.92% 0.76% 0.75%
- --------------------------------------------------------------------------------
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
(a) Net realized gain and distribution from net realized gain was less than
$0.005.
82
<PAGE>
Financial Highlights Treasury Money Market Portfolio
<TABLE>
<CAPTION>
Trust II Shares
(For a Share outstanding throughout each period)
Year Ended November 13, 1998 To
November 30, 1999 November 30, 1998(a)
<S> <C> <C>
Net Asset Value,
Beginning of Period $ 1.00 $ 1.00
----------------------------------------------------------------------------------------------
Investment Activities
Net investment income 0.040 0.002
Net realized gains from
investments --(d) --
----------------------------------------------------------------------------------------------
Total from Investment
Activities 0.040 0.002
----------------------------------------------------------------------------------------------
Distributions
Net investment income (0.040) (0.002)
Net realized gains --(d) --
----------------------------------------------------------------------------------------------
Total Distributions (0.040) (0.002)
----------------------------------------------------------------------------------------------
Net Asset Value, End of
Period $ 1.00 $ 1.00
----------------------------------------------------------------------------------------------
Total Return 4.12% 0.20%(b)
Ratios/Supplementary
Data:
Net assets at end of
period (000) $ 83,057 $ 76,995
Ratio of expenses to
average net assets 0.57% 0.55%(c)
Ratio of net investment
income to average net
assets 4.03% 4.09%(c)
Ratio of expenses to
average net assets* 0.71% 0.70%(c)
</TABLE>
- --------------------------------------------------------------------------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Net realized gain and distribution from net realized gain was less than
$0.005.
83
<PAGE>
Financial Highlights Money Market Portfolio
<TABLE>
<CAPTION>
Trust Shares
(For a Share outstanding throughout each period)
Year Ended November 30,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------------------------------------------------------------------------------
Investment Activities
Net investment income 0.043 0.050 0.050 0.049 0.054
Net realized gains from
investments -- --(a) -- -- --
--------------------------------------------------------------------------------
Total from Investment
Activities 0.043 0.050 0.050 0.049 0.054
--------------------------------------------------------------------------------
Distributions
Net investment income (0.043) (0.050) (0.050) (0.049) (0.054)
--------------------------------------------------------------------------------
Total Distributions (0.043) (0.050) (0.050) (0.049) (0.054)
--------------------------------------------------------------------------------
Net Asset Value, End of
Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------------------------------------------------------------------------------
Total Return 4.43% 5.08% 5.06% 4.99% 5.52%
Ratios/Supplementary
Data:
Net Assets at end of
period (000) $734,262 $820,923 $1,042,151 $717,265 $698,131
Ratio of expenses to
average net assets 0.80% 0.66% 0.64% 0.61% 0.59%
Ratio of net investment
income to average net
assets 4.34% 4.97% 4.96% 4.88% 5.38%
Ratio of expenses to
average net assets* 0.94% 0.93% 0.92% 0.76% 0.74%
</TABLE>
- --------------------------------------------------------------------------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
(a) Net realized gains per share were less than $0.005.
84
<PAGE>
Financial Highlights Money Market Portfolio
<TABLE>
<CAPTION>
Trust II Shares
(For a Share outstanding throughout each period)
Year Ended November 10, 1998 to
November 30, 1999 November 30, 1998(a)
<S> <C> <C>
Net Asset Value,
Beginning of Period $ 1.00 $ 1.00
- ---------------------------------------------------------------------------------------------
Investment Activities
Net investment income 0.046 0.003
- ---------------------------------------------------------------------------------------------
Total from Investment
Activities 0.046 0.003
- ---------------------------------------------------------------------------------------------
Distributions
Net investment income (0.046) (0.003)
- ---------------------------------------------------------------------------------------------
Total Distributions (0.046) (0.003)
- ---------------------------------------------------------------------------------------------
Net Asset Value, End of
Period $ 1.00 $ 1.00
- ---------------------------------------------------------------------------------------------
Total Return 4.68% 0.27%(b)
Ratios/Supplementary
Data:
Net assets at end of
period (000) $ 522,118 $ 490,020
Ratio of expenses to
average net assets 0.56% 0.56%(c)
Ratio of net investment
income to average net
assets 4.57% 4.76%(c)
Ratio of expenses to
average net assets* 0.70% 0.71%(c)
</TABLE>
- --------------------------------------------------------------------------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
85
<PAGE>
Financial Highlights Tax-Exempt Money Market Portfolio
<TABLE>
<CAPTION>
Trust Shares
(For a Share outstanding throughout each period)
Six Months
Ended Year Ended
Year Ended November 30, November 30, May 31,
1999 1998 1997 1996 1995(c) 1995
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-----------------------------------------------------------------------------------------
Investment Activities
Net investment income 0.024 0.029 0.030 0.030 0.016 0.029
-----------------------------------------------------------------------------------------
Total from Investment
Activities 0.024 0.029 0.030 0.030 0.016 0.029
-----------------------------------------------------------------------------------------
Distributions
Net investment income (0.024) (0.029) (0.030) (0.030) (0.016) (0.029)
-----------------------------------------------------------------------------------------
Total Distributions (0.024) (0.029) (0.030) (0.030) (0.016) (0.029)
-----------------------------------------------------------------------------------------
Net Asset Value, End of
Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-----------------------------------------------------------------------------------------
Total Return 2.44% 2.92% 3.08% 3.06% 1.57%(a) 2.93%
Ratios/Supplementary
Data:
Net Assets at end of
period (000) $38,415 $37,541 $143,517 $95,726 $78,031 $85,324
Ratio of expenses to
average net assets 0.79% 0.59% 0.58% 0.53% 0.70%(b) 0.61%
Ratio of net investment
income to average net
assets 2.42% 2.88% 3.04% 3.01% 3.01%(b) 2.87%
Ratio of expenses to
average net assets* 0.84% 0.84% 0.83% 0.58% 0.75%(b) 0.70%
</TABLE>
- --------------------------------------------------------------------------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
(a) Not annualized.
(b) Annualized.
(c) Upon reorganizing as a portfolio of The ARCH Fund, Inc., the Tax-Exempt
Money Market Portfolio changed its fiscal year-end from May 31 to
November 30.
86
<PAGE>
FinancialHighlights Tax-Exempt Money Market Portfolio
<TABLE>
<CAPTION>
Trust II Shares
(For a Share outstanding throughout each period)
Year Ended November 16, 1998 to
November 30, 1999 November 30, 1998(a)
<S> <C> <C>
Net Asset Value,
Beginning of Period $ 1.00 $ 1.00
--------------------------------------------------------------------------------------------
Investment Activities
Net investment income 0.026 0.001
--------------------------------------------------------------------------------------------
Total from Investment
Activities 0.026 0.001
--------------------------------------------------------------------------------------------
Distributions
Net investment income (0.026) (0.001)
--------------------------------------------------------------------------------------------
Total Distributions (0.026) (0.001)
--------------------------------------------------------------------------------------------
Net Asset Value, End of
Period $ 1.00 $ 1.00
--------------------------------------------------------------------------------------------
Total Return 2.68% 0.11%(b)
Ratios/Supplementary
Data:
Net assets at end of
period (000) $ 124,299 $ 122,110
Ratio of expenses to
average net assets 0.55% 0.57%(c)
Ratio of net investment
income to average net
assets 2.64% 2.69%(c)
Ratio of expenses to
average net assets* 0.60% 0.62%(c)
</TABLE>
- --------------------------------------------------------------------------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
87
<PAGE>
Financial Highlights U.S. Government Securities Portfolio
<TABLE>
<CAPTION>
Trust Shares
(For a Share outstanding throughout each period)
Year Ended November 30
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 10.74 $ 10.62 $ 10.67 $ 10.85 $ 10.05
---------------------------------------------------------------------------------
Investment Activities
Net investment income 0.58 0.60 0.61 0.66 0.67
Net realized and
unrealized gains
(losses) from
investments (0.41) 0.12 (0.05) (0.15) 0.80
---------------------------------------------------------------------------------
Total from Investment
Activities 0.17 0.72 0.56 0.51 1.47
---------------------------------------------------------------------------------
Distributions
Net investment income (0.57) (0.60) (0.61) (0.66) (0.67)
In excess of net
realized gains -- -- -- (0.03) --
---------------------------------------------------------------------------------
Total Distributions (0.57) (0.60) (0.61) (0.69) (0.67)
---------------------------------------------------------------------------------
Net Asset Value, End of
Period $ 10.34 $ 10.74 $ 10.62 $ 10.67 $ 10.85
---------------------------------------------------------------------------------
Total Return 1.67% 6.98% 5.51% 4.88% 15.00%
Ratios/Supplementary
Data:
Net Assets at end of
period (000) $ 72,483 $ 93,683 $ 72,753 $ 60,079 $ 45,513
Ratio of expenses to
average net assets 0.68% 0.67% 0.67% 0.67% 0.67%
Ratio of net investment
income to average net
assets 5.45% 5.64% 5.84% 6.10% 6.36%
Ratio of expenses to
average net assets* 1.09% 1.07% 1.07% 0.77% 0.77%
Portfolio turnover** 26.17% 54.57% 100.33% 53.76% 93.76%
- --------------------------------------------------------------------------------
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
88
<PAGE>
Financial Highlights Intermediate Corporate Bond Portfolio
<TABLE>
<CAPTION>
Trust Shares
(For a Share outstanding throughout each period)
February 10, 1997
Years Ended November 30 to
1999 1998 November 30, 1997(a)
<S> <C> <C> <C>
Net Asset Value, Beginning
of Period $ 10.29 $ 10.11 $ 10.00
------------------------------------------------------------------------------
Investment Activities
Net investment income 0.60 0.63 0.53
Net realized and unrealized
gains (losses) from
investments (0.73) 0.29 0.11
------------------------------------------------------------------------------
Total from Investment
Activities (0.13) 0.92 0.64
------------------------------------------------------------------------------
Distributions
Net investment income (0.60) (0.63) (0.53)
Net realized gains -- (0.11) --
In excess of net realized
gains (0.01) -- --
------------------------------------------------------------------------------
Total Distributions (0.61) (0.74) (0.53)
------------------------------------------------------------------------------
Net Asset Value, End of
Period $ 9.55 $ 10.29 $ 10.11
------------------------------------------------------------------------------
Total Return (1.26)% 9.53% 6.65%(b)
Ratios/Supplementary Data:
Net Assets at end of period
(000) $ 50,325 $ 55,337 $44,443
Ratio of expenses to
average net assets 0.79% 0.60% 0.29%(c)
Ratio of net investment
income to average net
assets 6.07% 6.23% 6.90%(c)
Ratio of expenses to
average net assets* 1.19% 1.19% 1.32%(c)
Portfolio turnover** 25.71% 9.65% 61.98%
- --------------------------------------------------------------------------------
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
89
<PAGE>
Financial Highlights Bond Index Portfolio
<TABLE>
<CAPTION>
Trust Shares
(For a Share outstanding throughout each period)
Year Ended November 30, February 10, 1997 to
1999 1998 November 30, 1997(a)
<S> <C> <C> <C>
Net Asset Value, Beginning
of Period $ 10.44 $ 10.16 $ 10.00
------------------------------------------------------------------------------
Investment Activities
Net investment income 0.60 0.65 0.53
Net realized and unrealized
gains (losses) from
investments (0.66) 0.30 0.16
------------------------------------------------------------------------------
Total from Investment
Activities (0.06) 0.95 0.69
------------------------------------------------------------------------------
Distributions
Net investment income (0.60) (0.64) (0.53)
Net realized gains (0.04) (0.03) --
In excess of net realized
gains (0.01) -- --
------------------------------------------------------------------------------
Total Distributions (0.65) (0.67) (0.53)
------------------------------------------------------------------------------
Net Asset Value, End of
Period $ 9.73 $ 10.44 $ 10.16
------------------------------------------------------------------------------
Total Return (0.61)% 9.69% 7.15%(b)
Ratios/Supplementary Data:
Net Assets at end of period
(000) $ 176,426 $ 169,388 $138,319
Ratio of expenses to
average net assets 0.53% 0.42% 0.23%(c)
Ratio of net investment
income to average net
assets 5.95% 6.20% 6.92%(c)
Ratio of expenses to
average net assets* 0.93% 0.93% 0.94%(c)
Portfolio turnover** 21.88% 33.37% 46.16%
</TABLE>
- --------------------------------------------------------------------------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
90
<PAGE>
Financial Highlights Government & Corporate Bond Portfolio
<TABLE>
<CAPTION>
Trust Shares
(For a Share outstanding throughout each period)
Year Ended November 30,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 10.74 $ 10.37 $ 10.34 $ 10.53 $ 9.64
-----------------------------------------------------------------------------
Investment Activities
Net investment income 0.60 0.60 0.59 0.67 0.64
Net realized and
unrealized gains
(losses) from
investments (0.69) 0.37 0.03 (0.19) 0.89
-----------------------------------------------------------------------------
Total from Investment
Activities (0.09) 0.97 0.62 0.48 1.53
-----------------------------------------------------------------------------
Distributions
Net investment income (0.59) (0.60) (0.59) (0.67) (0.64)
Net realized gains (0.13) -- -- -- --
In excess of net
realized gains (0.07) -- -- -- --
-----------------------------------------------------------------------------
Total Distributions (0.79) (0.60) (0.59) (0.67) (0.64)
-----------------------------------------------------------------------------
Net Asset Value, End of
Period $ 9.86 $ 10.74 $ 10.37 $ 10.34 $ 10.53
-----------------------------------------------------------------------------
Total Return (0.83)% 9.63% 6.32% 4.82% 16.31%
Ratios/Supplementary
Data:
Net Assets at end of
period (000) $126,472 $178,868 $172,637 $141,440 $127,741
Ratio of expenses to
average net assets 0.67% 0.66% 0.65% 0.65% 0.65%
Ratio of net investment
income to average net
assets 5.84% 5.71% 5.85% 6.36% 6.32%
Ratio of expenses to
average net assets* 1.08% 1.06% 1.05% 0.75% 0.75%
Portfolio turnover** 38.29% 91.14% 140.72% 149.20% 59.32%
</TABLE>
- --------------------------------------------------------------------------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
91
<PAGE>
Financial Highlights Short-Intermediate Municipal Portfolio
<TABLE>
<CAPTION>
Trust Shares
(For a Share outstanding throughout each period)
Year Ended November 30, July 10, 1995 to
1999 1998 1997 1996 November 30, 1995(a)
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 10.25 $ 10.10 $ 10.07 $ 10.07 $ 10.00
-------------------------------------------------------------------------------------
Investment Activities
Net investment income 0.37 0.38 0.40 0.41 0.14
Net realized and
unrealized gains
(losses) from
Investments (0.32) 0.15 0.03 -- 0.07
-------------------------------------------------------------------------------------
Total from Investment
Activities 0.05 0.53 0.43 0.41 0.21
-------------------------------------------------------------------------------------
Distributions
Net investment income (0.37) (0.38) (0.40) (0.41) (0.14)
Net realized gains -- (d) -- -- -- --
-------------------------------------------------------------------------------------
Total Distributions (0.37) (0.38) (0.40) (0.41) (0.14)
-------------------------------------------------------------------------------------
Net Asset Value, End of
Period $ 9.93 $ 10.25 $ 10.10 $ 10.07 $ 10.07
-------------------------------------------------------------------------------------
Total Return 0.55% 5.36% 4.39% 4.15% 2.15%(b)
Ratios/Supplementary
Data:
Net Assets at end of
period (000) $36,763 $42,862 $30,454 $29,472 $23,754
Ratio of expenses to
average net assets 0.77% 0.64% 0.38% 0.31% 0.47%(c)
Ratio of net investment
income to average net
assets 3.69% 3.75% 4.00% 4.07% 3.81%(c)
Ratio of expenses to
average net assets* 1.17% 1.20% 1.33% 0.96% 1.12%(c)
Portfolio turnover** -- 18.58% -- -- --
</TABLE>
- --------------------------------------------------------------------------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Distributions per share from net realized gain was less than $0.005.
92
<PAGE>
Financial Highlights Missouri Tax-Exempt Bond Portfolio
<TABLE>
<CAPTION>
Trust Shares
(For a Share outstanding throughout each period)
Six Months Ended
Year Ended November 30, November 30, Year Ended
1999 1998 1997 1996 1995(c) May 31, 1995
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 12.08 $ 11.87 $ 11.69 $ 11.74 $ 11.52 $ 11.13
----------------------------------------------------------------------------------------------
Investment Activities
Net investment income 0.53 0.55 0.56 0.57 0.28 0.57
Net realized and
unrealized gains
(losses) on
investments (0.74) 0.21 0.18 (0.05) 0.22 0.40
----------------------------------------------------------------------------------------------
Total from Investment
Activities (0.21) 0.76 0.74 0.52 0.50 0.97
----------------------------------------------------------------------------------------------
Distributions
Net investment income (0.53) (0.55) (0.56) (0.57) (0.28) (0.57)
Net realized gains (0.02) -- -- -- -- (0.01)
----------------------------------------------------------------------------------------------
Total Distributions (0.55) (0.55) (0.56) (0.57) (0.28) (0.58)
----------------------------------------------------------------------------------------------
Net Asset Value, End of
Period $ 11.32 $ 12.08 $ 11.87 $ 11.69 $ 11.74 $ 11.52
----------------------------------------------------------------------------------------------
Total Return (1.81)% 6.52% 6.48% 4.62% 4.41%(a) 9.12%
Ratios/Supplementary
Data:
Net Assets at end of
period (000) $111,842 $94,402 $75,431 $55,905 $47,773 $44,336
Ratio of expenses to
average net assets 0.66% 0.66% 0.66% 0.65% 0.78%(b) 0.64%
Ratio of net investment
income to average net
assets 4.51% 4.57% 4.76% 4.95% 4.83%(b) 5.22%
Ratio of expenses to
average net assets* 1.07% 1.06% 1.06% 0.75% 0.88%(b) 1.16%
Portfolio turnover** 0.76% 6.14% 3.50% 3.66% 1.55% --
- --------------------------------------------------------------------------------
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Not annualized.
(b) Annualized.
(c) Upon reorganizing as a portfolio of The ARCH Fund, Inc., the Missouri
Tax-Exempt Bond Portfolio changed its fiscal year-end from May 31 to
November 30.
93
<PAGE>
Financial Highlights National Municipal Bond Portfolio
<TABLE>
<CAPTION>
Trust Shares
(For a Share outstanding throughout each period)
November 18, 1996
Year Ended November 30, to
1999 1998 1997 November 30, 1996(a)
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 10.23 $ 10.28 $ 10.05 $ 10.00
------------------------------------------------------------------------------
Investment Activities
Net investment income 0.43 0.46 0.54 0.02
Net realized and
unrealized gains
(losses) from
investments (0.72) 0.30 0.23 0.05
------------------------------------------------------------------------------
Total from Investment
Activities (0.29) 0.76 0.77 0.07
------------------------------------------------------------------------------
Distributions
Net investment income (0.42) (0.46) (0.54) (0.02)
In excess of net
investment income (0.01) -- -- --
Net realized gains (0.09) (0.35) -- --
In excess of net
realized gains (0.01) -- -- --
------------------------------------------------------------------------------
Total Distributions (0.53) (0.81) (0.54) (0.02)
------------------------------------------------------------------------------
Net Asset Value, End of
Period $ 9.41 $ 10.23 $ 10.28 $ 10.05
------------------------------------------------------------------------------
Total Return (2.97)% 7.76% 7.97% 0.74%(b)
Ratios/Supplementary
Data:
Net Assets at end of
period (000) $326,840 $384,518 $366,889 $310,413
Ratio of expenses to
average net assets 0.76% 0.56% 0.14% 0.12%(c)
Ratio of net investment
income to average net
assets 4.33% 4.52% 5.38% 5.77%(c)
Ratio of expenses to
average net assets* 1.16% 1.16% 1.17% 0.82%(c)
Portfolio turnover** -- 18.30% 83.94% --
- --------------------------------------------------------------------------------
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
94
<PAGE>
Financial Highlights Balanced Portfolio
<TABLE>
<CAPTION>
Trust Shares
(For a Share outstanding throughout each period)
Year Ended November 30,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $ 12.64 $ 13.27 $ 12.58 $ 11.64 $ 9.62
------------------------------------------------------------------------------
Investment Activities
Net investment income 0.30 0.32 0.38 0.37 0.34
Net realized and unrealized
gains from investments 0.69 0.84 1.45 1.34 2.02
------------------------------------------------------------------------------
Total from Investment
Activities 0.99 1.16 1.83 1.71 2.36
------------------------------------------------------------------------------
Distributions
Net investment income (0.31) (0.32) (0.43) (0.35) (0.34)
Net realized gains (0.88) (1.47) (0.71) (0.42) --
------------------------------------------------------------------------------
Total Distributions (1.19) (1.79) (1.14) (0.77) (0.34)
------------------------------------------------------------------------------
Net Asset Value, End of Period $ 12.44 $ 12.64 $ 13.27 $ 12.58 $ 11.64
------------------------------------------------------------------------------
Total Return 8.53% 9.75% 15.81% 15.56% 24.97%
Ratios/Supplementary Data:
Net Assets at end of period
(000) $35,172 $43,776 $54,299 $61,821 $72,669
Ratio of expenses to average
net assets 0.98% 0.96% 0.97% 0.97% 0.98%
Ratio of net investment income
to average net assets 2.51% 2.53% 2.87% 3.08% 3.29%
Ratio of expenses to average
net assets* 1.38% 1.36% 1.37% 1.07% 1.08%
Portfolio turnover** 34.80% 47.79% 43.60% 85.16% 58.16%
</TABLE>
- --------------------------------------------------------------------------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
95
<PAGE>
Financial Highlights Equity Income Portfolio
<TABLE>
<CAPTION>
Trust Shares
(For a Share outstanding throughout each period)
Year Ended November 30, February 27, 1997 to
1999 1998 November 30, 1997(a)
<S> <C> <C> <C>
Net Asset Value, Beginning of
Period $ 10.24 $ 11.56 $ 10.00
------------------------------------------------------------------------------
Investment Activities
Net investment income 0.16 0.19 0.20
Net realized and unrealized
gains (losses) from
investments (0.18) 0.98 1.55
------------------------------------------------------------------------------
Total from Investment
Activities (0.02) 1.17 1.75
------------------------------------------------------------------------------
Distributions
Net investment income (0.16) (0.20) (0.19)
Net realized gains (2.23) (2.29) --
------------------------------------------------------------------------------
Total Distributions (2.39) (2.49) (0.19)
------------------------------------------------------------------------------
Net Asset Value, End of
Period $ 7.83 $ 10.24 $ 11.56
------------------------------------------------------------------------------
Total Return 0.23% 12.00% 17.64%(b)
Ratios/Supplementary Data:
Net Assets at end of period
(000) $ 104,762 $ 111,866 $131,919
Ratio of expenses to average
net assets 0.98% 0.71% 0.15%(c)
Ratio of net investment
income to average net
assets 1.90% 1.94% 2.51%(c)
Ratio of expenses to average
net assets* 1.38% 1.37% 1.38%(c)
Portfolio turnover** 81.84% 98.32% 48.33%
- --------------------------------------------------------------------------------
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
96
<PAGE>
Financial Highlights Equity Index Portfolio
<TABLE>
<CAPTION>
Trust Shares
(For a Share outstanding throughout each period)
Year Ended November 30 May 1, 1997 to
1999 1998 November 30, 1997(a)
<S> <C> <C> <C>
Net Asset Value, Beginning of
Period $ 14.55 $ 11.94 $ 10.00
------------------------------------------------------------------------------
Investment Activities
Net investment income 0.13 0.13 0.10
Net realized and unrealized
gains from investments 2.75 2.64 1.94
------------------------------------------------------------------------------
Total from Investment
Activities 2.88 2.77 2.04
------------------------------------------------------------------------------
Distributions
Net investment income (0.13) (0.14) (0.10)
Net realized gains (0.18) (0.02) --
------------------------------------------------------------------------------
Total Distributions (0.31) (0.16) (0.10)
------------------------------------------------------------------------------
Net Asset Value, End of
Period $ 17.12 $ 14.55 $ 11.94
------------------------------------------------------------------------------
Total Return 20.16% 23.34% 20.40%(b)
Ratios/Supplementary Data:
Net Assets at end of period
(000) $ 65,453 $ 50,232 $31,787
Ratio of expenses to average
net assets 0.55% 0.54% 0.39%(c)
Ratio of net investment
income to average net
assets 0.81% 1.02% 1.48%(c)
Ratio of expenses to average
net assets* 0.95% 1.03% 1.12%(c)
Portfolio turnover** 27.84% 14.83% 1.66%
</TABLE>
- --------------------------------------------------------------------------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
97
<PAGE>
Financial Highlights Growth & Income Equity Portfolio
<TABLE>
<CAPTION>
Trust Shares
(For a Share outstanding throughout each period)
Year Ended November 30,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 19.21 $ 21.19 $ 18.71 $ 16.32 $ 12.72
----------------------------------------------------------------------------
Investment Activities
Net investment income 0.14 0.17 0.23 0.24 0.27
Net realized and
unrealized gains from
investments 2.30 1.59 3.96 3.34 3.74
----------------------------------------------------------------------------
Total from Investment
Activities 2.44 1.76 4.19 3.58 4.01
----------------------------------------------------------------------------
Distributions
Net investment income (0.14) (0.17) (0.25) (0.24) (0.27)
In excess of net
investment income -- -- -- (0.01) --
Net realized gains (1.48) (3.57) (1.46) (0.94) (0.14)
----------------------------------------------------------------------------
Total Distributions (1.62) (3.74) (1.71) (1.19) (0.41)
----------------------------------------------------------------------------
Net Asset Value, End of
Period $ 20.03 $ 19.21 $ 21.19 $ 18.71 $ 16.32
----------------------------------------------------------------------------
Total Return 13.94% 9.67% 24.55% 23.45% 32.27%
Ratios/Supplementary
Data:
Net Assets at end of
period (000) $316,873 $299,188 $322,304 $348,183 $286,546
Ratio of expenses to
average net assets 0.74% 0.74% 0.74% 0.75% 0.75%
Ratio of net investment
income to average net
assets 0.74% 0.90% 0.91% 1.50% 1.89%
Ratio of expenses to
average net assets* 1.16% 1.14% 1.14% 0.85% 0.85%
Portfolio turnover** 60.31% 91.23% 57.11% 63.90% 58.50%
</TABLE>
- --------------------------------------------------------------------------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
98
<PAGE>
Financial Highlights Growth Equity Portfolio
<TABLE>
<CAPTION>
Trust Shares
(For a Share outstanding throughout each period)
Year Ended November 30, November 24,1997 to
1999 1998 November 30, 1997(a)
<S> <C> <C> <C>
Net Asset Value, Beginning
of Period $ 19.98 $ 16.26 $ 16.44
------------------------------------------------------------------------------
Investment Activities
Net investment income
(loss) (0.01) 0.01 (0.01)
Net realized and unrealized
gains (losses) from
investments 4.83 3.72 (0.17)
------------------------------------------------------------------------------
Total from Investment
Activities 4.82 3.73 (0.18)
------------------------------------------------------------------------------
Distributions
Net investment income (0.01) (0.01) --
Net realized gains (2.03) -- --
------------------------------------------------------------------------------
Total Distributions (2.04) (0.01) --
------------------------------------------------------------------------------
Net Asset Value, End of
Period $ 22.76 $ 19.98 $ 16.26
------------------------------------------------------------------------------
Total Return 26.97% 22.94% (1.09)%(b)
Ratios/Supplementary Data:
Net Assets at end of period
(000) $ 109,516 $ 80,830 $63,786
Ratio of expenses to
average net assets 0.97% 1.04% 1.24%(c)
Ratio of net investment
income (loss) to average
net assets (0.03)% 0.05% (0.15)%(c)
Ratio of expenses to
average net assets* 1.37% 1.44% 1.34%(c)
Portfolio turnover** 21.85% 54.33% --
- --------------------------------------------------------------------------------
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
99
<PAGE>
Financial Highlights Small Cap Equity Portfolio
<TABLE>
<CAPTION>
Trust Shares
(For a Share outstanding throughout each period)
Year Ended November 30,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 12.02 $ 15.17 $ 13.49 $ 13.49 $ 12.01
--------------------------------------------------------------------------------
Investment Activities
Net investment income
(loss) (0.03)(a) (0.02) 0.01 0.02 0.03
Net realized and
unrealized gains
(losses) from
Investments 2.13 (1.91) 2.50 1.05 2.36
--------------------------------------------------------------------------------
Total from Investment
Activities 2.10 (1.93) 2.51 1.07 2.39
--------------------------------------------------------------------------------
Distributions
Net investment income -- -- (0.01) (0.02) --
Net realized gains (0.05) (1.19) (0.82) (1.05) (0.91)
In excess of net
realized gains -- (0.03) -- -- --
--------------------------------------------------------------------------------
Total Distributions (0.05) (1.22) (0.83) (1.07) (0.91)
--------------------------------------------------------------------------------
Net Asset Value, End of
Period $ 14.07 $ 12.02 $ 15.17 $ 13.49 $ 13.49
--------------------------------------------------------------------------------
Total Return 17.57% (13.90)% 19.77% 8.72% 21.70%
Ratios/Supplementary
Data:
Net Assets at end of
period (000) $111,643 $129,591 $211,643 $171,295 $139,681
Ratio of expenses to
average net assets 0.96% 0.95% 0.95% 0.96% 0.96%
Ratio of net investment
income (loss) to
average net assets (0.26)% (0.16)% 0.01% 0.17% 0.18%
Ratio of expenses to
average net assets* 1.36% 1.35% 1.35% 1.06% 1.06%
Portfolio turnover** 72.08% 69.72% 80.23% 65.85% 83.13%
- --------------------------------------------------------------------------------
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Per share net investment loss has been calculated using the daily
average share method.
100
<PAGE>
Financial Highlights Small Cap Equity Index Portfolio
<TABLE>
<CAPTION>
Trust Shares
(For a Share outstanding throughout the period)
December 30, 1998 to
November 30, 1999(a)
<S> <C>
Net Asset Value, Beginning
of Period $ 10.00
------------------------------------------------------------------------------
Investment Activities
Net investment income 0.01
Net realized and unrealized
gains from investments 0.19
------------------------------------------------------------------------------
Total from Investment
Activities 0.20
------------------------------------------------------------------------------
Distributions
Net investment income (0.01)
------------------------------------------------------------------------------
Total Distributions (0.01)
------------------------------------------------------------------------------
Net Asset Value, End of
Period $ 10.19
------------------------------------------------------------------------------
Total Return 2.01%(b)
Ratios/Supplementary Data:
Net Assets at end of period
(000) $45,331
Ratio of expenses to
average net assets 0.68%(c)
Ratio of net investment
income to average net
assets 0.18%(c)
Ratio of expenses to
average net assets * 1.13%(c)
Portfolio turnover** 35.27%
- --------------------------------------------------------------------------------
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
101
<PAGE>
Financial Highlights International Equity Portfolio
<TABLE>
<CAPTION>
Trust Shares
(For a Share outstanding throughout each period)
Year Ended November 30,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $ 13.40 $ 12.09 $ 12.12 $ 10.79 $ 9.92
------------------------------------------------------------------------------
Investment Activities
Net investment income 0.06 0.04 0.01 0.06 0.03
Net realized and unrealized
gains from investments and
foreign currency 4.58 1.80 0.33 1.27 0.86
------------------------------------------------------------------------------
Total from Investment
Activities 4.64 1.84 0.34 1.33 (0.89)
------------------------------------------------------------------------------
Distributions
Net investment income (0.05) (0.03) (0.04) -- --
In excess of net investment
income (0.02) (0.07) (0.02) -- --
Net realized gains (0.75) (0.43) (0.31) -- (0.01)
Tax return of capital -- -- -- -- (0.01)
------------------------------------------------------------------------------
Total Distributions (0.82) (0.53) (0.37) -- (0.02)
------------------------------------------------------------------------------
Net Asset Value, End of Period $ 17.22 $ 13.40 $ 12.09 $ 12.12 $ 10.79
------------------------------------------------------------------------------
Total Return 36.98% 15.73% 2.91% 12.33% 8.97%
Ratios/Supplementary Data:
Net Assets at end of period
(000) $92,778 $60,647 $55,038 $52,181 $36,096
Ratio of expenses to average
net assets 1.26% 1.28% 1.29% 1.14% 1.16%
Ratio of net investment income
to average net assets 0.28% 0.34% 0.09% 0.51% 0.39%
Ratio of expenses to average
net assets* 1.75% 1.75% 1.75% 1.45% 1.46%
Portfolio turnover** 93.73% 88.95% 75.18% 77.63% 62.78%
- --------------------------------------------------------------------------------
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
102
<PAGE>
Where to find more information
You'll find more information about the Portfolios in the following documents:
Annual and semi-annual reports
The Fund's annual and semi-annual reports contain information about each
Portfolio and a discussion about the market conditions and investment strategies
that had a significant effect on each Portfolio's performance during the last
fiscal year.
Statement of Additional Information (SAI)
The SAI contains detailed information about the Portfolios and their policies.
By law, it's incorporated by reference into (considered to be part of) this
prospectus.
You can get a free copy of these documents, request other information about the
Portfolios and make shareholder inquiries by calling the Fund at 1-800-452-2724
or by writing to:
Mercantile Mutual Funds, Inc.
c/o Firstar Mutual Fund Services, LLC
615 E. Michigan Street
P.O. Box 3011
Milwaukee, WI 53201-3011
If you buy your shares through a broker-dealer or other financial institution,
you may contact your institution for more information.
You can write to the Securities and Exchange Commission (SEC) Public Reference
Section and ask them to mail you information about the Portfolios, including the
SAI. They'll charge you a fee for this service. You can also visit the SEC
Public Reference Room and copy the documents while you're there. For more
information about the operation of the Public Reference Room, call the SEC.
Public Reference Section of the SEC
Washington, D.C. 20549-0102
1-202-942-8090
Reports and other information about the Portfolios are also available on the
EDGAR database on the SEC's website at http://www.sec.gov. Copies of this
-------------------
information may also be obtained, after paying a duplicating fee, by electronic
request to the SEC's e-mail address at [email protected].
-------------------
The Fund's Investment Company Act File No. is 811-3567
Form #MFTRP-00
<PAGE>
MERCANTILE MUTUAL FUNDS
TRUST SHARES
[PHOTO] Prospectus
March 31, 2000
MONEY MARKET PORTFOLIOS
Treasury Money Market Portfolio
Money Market Portfolio
Tax-Exempt Money Market Portfolio
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved these securities or passed upon the adequacy of this
prospectus. Any representation to the contrary is a criminal offense.
[LOGO OF FIRSTAR]
<PAGE>
Contents
<TABLE>
<CAPTION>
Introduction
- --------------------------------------------------------
<C> <S>
3 Overview
Risk/Return Summary
- --------------------------------------------------------
4 Treasury Money Market Portfolio
7 Money Market Portfolio
10 Tax-Exempt Money Market Portfolio
14 Additional Information on Risk
Your Account
- --------------------------------------------------------
15 Explanation of Sales Price
15 How to Buy Shares
16 How to Sell Shares
17 How to Exchange Shares
17 Administrative Services Fees
17 General Transaction Policies
Distributions and Taxes
- --------------------------------------------------------
18 Dividends and Distributions
18 Taxation
Management of the Fund
- --------------------------------------------------------
20 The Adviser
Financial Highlights
- --------------------------------------------------------
21 Introduction
22 Treasury Money Market Portfolio
23 Money Market Portfolio
24 Tax-Exempt Money Market Portfolio
</TABLE>
2
<PAGE>
Introduction Overview
This prospectus describes the Money Market Portfolios of
Mercantile Mutual Funds, Inc. (the "Fund"). On the following
pages, you will find important information about each
Portfolio, including:
. A description of the Portfolio's investment objective
(sometimes referred to as its goal);
. The Portfolio's principal investment strategies (the steps
it takes to try to meet its goal);
. The principal risks associated with the Portfolio (factors
that may prevent it from meeting its goal);
. The Portfolio's past performance (how successful it's been
in meeting its goal); and
. The fees and expenses you pay as an investor in the
Portfolio.
Who May Want The Treasury Money Market Portfolio may be appropriate for
to Invest in investors who want a way to earn money market returns from
the U.S. Treasury obligations that are generally exempt from
Mercantile state and local taxes. The Money Market Portfolio may be
Money Market appropriate for investors who want a flexible and convenient
Portfolios? way to manage cash while earning money market returns. The
Tax-Exempt Money Market Portfolio may be appropriate for
investors who want a way to earn money market returns that
are generally exempt from federal income tax; however, the
Portfolio is not an appropriate investment for tax-deferred
retirement accounts, such as IRAs, because its return before
taxes is generally lower than that of a taxable fund.
Before investing in a Portfolio, you should carefully
consider:
. Your own investment goals
. The amount of time you are willing to leave your money
invested
. How much risk you are willing to take.
The Firstar Investment Research & Management Company, LLC, which
Investment is referred to in this prospectus as "FIRMCO" or the
Adviser "Adviser," serves as the investment adviser to each
Portfolio. FIRMCO is a subsidiary of Firstar Corporation, a
banking and financial services organization.
An investment in the Portfolios is not a deposit of Firstar
Bank, N.A. and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency.
Although the Money Market Portfolios seek to preserve the
value of your investment at $1.00 per share, it is possible
to lose money by investing in the Portfolios.
3
<PAGE>
Risk/Return Summary Treasury Money Market Portfolio
- --------------------------------------------------------------------------------
Money market instruments are short-term obligations issued by banks,
corporations, the U.S. Government and state and local governments. Money market
instruments purchased by the Portfolios must meet strict requirements as to
investment quality, maturity and diversification. The Portfolios generally do
not invest in securities with maturities of more than 397 days and the average
maturity of all securities held by a particular Portfolio must be 90 days or
less. Prior to purchasing a money market instrument for one of the Portfolios,
the Adviser must determine that the instrument carries very little credit risk.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is to seek a high level of current income
exempt from state income tax consistent with liquidity and security of
principal.
Principal Investment Strategies
The Portfolio invests substantially all (but not less than 65%) of its total
assets in money market instruments issued by the U.S. Treasury and certain U.S.
Government agencies and instrumentalities that provide income that is generally
not subject to state income tax.
Principal Risk Considerations
The yield paid by the Portfolio will vary with changes in interest rates.
During periods of rising interest rates, the Portfolio's yield will tend to be
lower than prevailing market rates, while during periods of falling interest
rates, the Portfolio's yield will tend to be higher.
Although U.S. Government securities, particularly U.S. Treasury obligations,
have historically involved little risk, if an issuer fails to pay interest or
repay principal, the value of your investment could decline.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolio and how they may advance the Portfolio's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
There's no guarantee the Portfolio will be able to preserve the value of your
investment at $1.00 per share.
4
<PAGE>
Risk/Return Summary Treasury Money Market Portfolio
Return History
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Trust Shares has varied from year to year. The table shows the Portfolio's
average annual returns for one year, five years and since inception. Both the
bar chart and table assume reinvestment of all dividends and distributions. The
Portfolio's past performance does not necessarily indicate how it will perform
in the future.
Trust Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1992 3.40%
1993 2.67%
1994 3.55%
1995 5.15%
1996 4.61%
1997 4.71%
1998 4.49%
1999 3.95%
<TABLE>
<S> <C>
Best quarter: 1.31% for the quarter ending June 30, 1995
Worst quarter: 0.64% for the quarter ending June 30, 1993
</TABLE>
-------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year 5 Years Inception*
-------------------------
<S> <C> <C> <C>
Trust Shares 3.95% 4.58% 4.02%
- -----------------------------------------
</TABLE>
* December 2, 1991.
To obtain the Portfolio's current 7-day yield, please call 1-800-452-2724.
5
<PAGE>
Risk/Return Summary Treasury Money Market Portfolio
The table on the right shows the fees and expenses that you pay if you buy and
hold Trust Shares of the Treasury Money Market Portfolio.
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
Fees and Expenses
<TABLE>
<CAPTION>
Annual Portfolio Operating
Expenses
(expenses that are deducted
from the
Portfolio's assets) Trust Shares
<S> <C>
Management Fees .40%/1/
---------------------------------------------
Distribution (12b-1) Fees None
---------------------------------------------
Other Expenses .59%/1/
---------------------------------------------
Total Annual Portfolio
Operating Expenses .99%/1/
- ----------------------------------------------
</TABLE>
/1/ Management Fees, Other Expenses and Total Annual Portfolio Operating
Expenses for the Portfolio's Trust Shares for the current fiscal year are
expected to be less than the amounts shown above because certain of the
Portfolio's service providers are voluntarily waiving a portion of their
fees and/or reimbursing the Portfolio for certain other expenses. These
fee waivers and/or reimbursements are being made in order to keep the
annual fees and expenses for the Portfolio's Trust Shares at a certain
level. Management Fees, Other Expenses and Total Annual Portfolio
Operating Expenses, after taking these fee waivers and expense
reimbursements into account, are expected to be .35%, .49% and .84%,
respectively, for Trust Shares. These fee waivers and expense
reimbursements may be revised or cancelled at any time.
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Trust Shares $101 $315 $547 $1,213
- ---------------------------------------
</TABLE>
6
<PAGE>
Risk/Return Summary Money Market Portfolio
Investment Objective
The Portfolio's investment objective is to seek current income with liquidity
and stability of principal.
Principal Investment Strategies
The Portfolio invests substantially all (but not less than 80%) of its total
assets in a broad range of U.S. dollar-denominated money market instruments,
including commercial paper, notes and bonds issued by U.S. and foreign
corporations, obligations issued by the U.S. Government and its agencies and
instrumentalities, and obligations issued by U.S. and foreign banks, such as
certificates of deposit, letters of credit, bankers' acceptances and time
deposits.
The Portfolio will only buy a money market instrument if it has the highest
short-term rating from at least two nationally recognized statistical rating
organizations, such as Standard & Poor's Ratings Group or Moody's Investors
Service, Inc., or only one such rating if only one organization has rated the
instrument. If the money market instrument is not rated, the Adviser must
determine that it is of comparable quality to eligible rated instruments.
Principal Risk Considerations
The yield paid by the Portfolio will vary with short-term interest rates.
During periods of rising interest rates, the Portfolio's yield will tend to be
lower than prevailing market rates, while during periods of falling interest
rates, the Portfolio's yield will tend to be higher.
Although credit risk is very low because the Portfolio only invests in high
quality obligations, if an issuer fails to pay interest or repay principal, the
value of your investment could decline.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolio and how they may advance the Portfolio's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
There's no guarantee the Portfolio will be able to preserve the value of your
investment at $1.00 per share.
7
<PAGE>
Risk/Return Summary Money Market Portfolio
Return History
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Trust Shares has varied from year to year. The table shows the Portfolio's
average annual returns for one year, five years and since inception. Both the
bar chart and table assume reinvestment of all dividends and distributions. The
Portfolio's past performance does not necessarily indicate how it will perform
in the future.
Trust Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1991 5.67%
1992 3.30%
1993 2.71%
1994 3.76%
1995 5.55%
1996 4.95%
1997 5.09%
1998 5.02%
1999 4.50%
<TABLE>
<S> <C>
Best quarter: 1.63% for the quarter ending March 31, 1991
Worst quarter: 0.66% for the quarter ending June 30, 1993
</TABLE>
-------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year 5 Years Inception*
-------------------------
<S> <C> <C> <C>
Trust Shares 4.50% 5.02% 4.53%
- -----------------------------------------
</TABLE>
* December 1, 1990.
To obtain the Portfolio's current 7-day yield, please call 1-800-452-2724.
8
<PAGE>
Risk/Return Summary Money Market Portfolio
The table on the right shows the fees and expenses that you pay if you buy and
hold Trust Shares of the Money Market Portfolio.
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
Fees and Expenses
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses
(expenses that are deducted from the
Portfolio's assets) Trust Shares
<S> <C>
Management Fees .40%/1/
---------------------------------------------
Distribution (12b-1) Fees None
---------------------------------------------
Other Expenses .57%/1/
---------------------------------------------
Total Annual Portfolio
Operating Expenses .97%/1/
- ----------------------------------------------
</TABLE>
/1/ Management Fees, Other Expenses and Total Annual Portfolio Operating
Expenses for the Portfolio's Trust Shares for the current fiscal year are
expected to be less than the amounts shown above because certain of the
Portfolio's service providers are voluntarily waiving a portion of their
fees and/or reimbursing the Portfolio for certain other expenses. These
fee waivers and/or reimbursements are being made in order to keep the
annual fees and expenses for the Portfolio's Trust Shares at a certain
level. Management Fees, Other Expenses and Total Annual Portfolio
Operating Expenses, after taking these fee waivers and expense
reimbursements into account, are expected to be .35%, .47% and .82%,
respectively, for Trust Shares. These fee waivers and expense
reimbursements may be revised or cancelled at any time.
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Trust Shares $99 $309 $536 $1,190
- ---------------------------------------
</TABLE>
9
<PAGE>
Risk/Return Summary Tax-Exempt Money Market Portfolio
- --------------------------------------------------------------------------------
What are Municipal Securities? State and local governments issue municipal
securities to raise money to finance public works, to repay outstanding
obligations, to raise funds for general operating expenses and to make loans to
other public institutions. Some municipal securities, known as private activity
bonds, are backed by private entities and are used to finance various non-
public projects. Municipal securities, which can be issued as bonds, notes or
commercial paper, usually have fixed interest rates, although some have
interest rates that change from time to time.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is to seek as high a level of current
interest income exempt from federal income tax as is consistent with liquidity
and stability of principal.
Principal Investment Strategies
The Portfolio normally invests at least 80% of its total assets in short-term
municipal securities that pay interest which is exempt from federal income tax.
Municipal securities purchased by the Portfolio may include general obligation
securities, revenue securities and private activity bonds. General obligation
securities are secured by the issuer's full faith, credit and taxing power.
Revenue obligation securities are usually payable only from revenues derived
from specific facilities or revenue sources. Private activity bonds are usually
revenue obligations since they are typically payable by the private user of the
facilities financed by the bonds. The interest on private activity bonds may be
subject to the federal alternative minimum tax. Investments in private activity
bonds will not be treated as investments in municipal securities for purposes
of the 80% requirement stated above. Under normal market conditions, the
Portfolio's investments in private activity bonds, together with any
investments in taxable obligations, will not exceed 20% of its total assets.
The Portfolio will only buy a municipal security if it has the highest short-
term rating from at least two nationally recognized statistical rating
organizations, such as Standard & Poor's Ratings Group or Moody's Investors
Service, Inc., or one such rating if only one organization has rated the
security. If the security is not rated, the Adviser must determine that it is
of comparable quality to eligible rated securities.
10
<PAGE>
Risk/Return Summary Tax-Exempt Money Market Portfolio
Principal Risk Considerations
The yield paid by the Portfolio will vary with changes in interest rates.
During periods of rising interest rates, the Portfolio's yield will tend to be
lower than prevailing market rates, while during periods of falling interest
rates, the Portfolio's yield will tend to be higher.
Although credit risk is very low because the Portfolio only invests in high
quality obligations, if an issuer fails to pay interest or repay principal, the
value of your investment could decline. The ability of a state or local
government issuer to make payments can be affected by many factors, including
economic conditions, the flow of tax revenues and changes in the level of
federal, state or local aid. Some municipal securities are payable only from
limited revenue sources or by private entities.
The Portfolio is not diversified, which means that it can invest a large
percentage of its assets in a small number of issuers. As a result, a change in
the value of any one investment held by the Portfolio may affect the overall
value of the Portfolio more than it would affect a diversified portfolio.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolio and how they may advance the Portfolio's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
There's no guarantee the Portfolio will be able to preserve the value of your
investment at $1.00 per share.
11
<PAGE>
Risk/Return Summary Tax-Exempt Money Market Portfolio
Return History+
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Trust Shares has varied from year to year. The table shows the Portfolio's
average annual returns for one year, five years and since inception. Both the
bar chart and table assume reinvestment of all dividends and distributions. The
Portfolio's past performance does not necessarily indicate how it will perform
in the future.
Trust Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1991 4.05%
1992 2.51%
1993 1.98%
1994 2.37%
1995 3.27%
1996 3.00%
1997 3.09%
1998 2.86%
1999 2.49%
<TABLE>
<S> <C>
Best quarter: 1.06% for the quarter ending March 31, 1991
Worst quarter: 0.45% for the quarter ending March 31, 1994
</TABLE>
-------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended December 31, 1998
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year 5 Years Inception*
-------------------------
<S> <C> <C> <C>
Trust Shares 2.49% 2.94% 2.92%
</TABLE>
- --------------------------------------------------------------------------------
+ The Portfolio commenced operations on July 10, 1986 as a separate
investment portfolio (the "Predecessor Portfolio") of The ARCH Tax-Exempt
Trust. On October 2, 1995, the Predecessor Portfolio was reorganized as a
new portfolio of the Fund. Prior to the reorganization, the Predecessor
Portfolio offered and sold shares that were similar to the Fund's Trust
Shares. Total returns for Trust Shares for periods prior to October 2, 1995
reflect the performance of Trust Shares of the Predecessor Portfolio.
* September 28, 1990.
To obtain the Portfolio's current 7-day yield, please call 1-800-452-2724.
12
<PAGE>
Risk/Return Summary Tax-Exempt Money Market Portfolio
The table on the right shows the fees and expenses that you pay if you buy and
hold Trust Shares of the Tax-Exempt Money Market Portfolio.
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
Fees and Expenses
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses
(expenses that are deducted from the Trust
Portfolio's assets) Shares
<S> <C>
Management Fees .40%/1/
---------------------------------------------------
Distribution (12b-1) Fees None
---------------------------------------------------
Other Expenses .45%
---------------------------------------------------
Total Annual Portfolio Operating Expenses .85%/1/
- ----------------------------------------------------
</TABLE>
/1/ Management Fees and Total Annual Portfolio Operating Expenses for the
Portfolio's Trust Shares for the current fiscal year are expected to be
less than the amounts shown above because the Adviser is voluntarily
waiving a portion of its advisory fee. This fee waiver is being made in
order to keep the annual fees and expenses for the Portfolio's Trust
Shares at a certain level. Management Fees and Total Annual Portfolio
Operating Expenses, after taking this fee waiver into account, are
expected to be .35% and .80%, respectively, for Trust Shares. This fee
waiver may be revised or cancelled at any time.
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Trust Shares $87 $271 $471 $1,049
- ---------------------------------------
</TABLE>
13
<PAGE>
Risk/Return Summary Additional Information on Risk
The principal risks of investing in each Portfolio are described on the
previous pages. The following supplements that discussion.
Securities Lending
To obtain interest income, the Treasury Money Market Portfolio and Money Market
Portfolio may lend their securities to broker-dealers, banks or institutional
borrowers pursuant to agreements requiring that the loans be continuously
secured by collateral equal at all times in value to at least the market value
of the securities loaned. There is the risk that when lending portfolio
securities, the securities may not be available to the Portfolio on a timely
basis. Therefore, the Portfolio may lose the opportunity to sell the securities
at a desirable price. Additionally, in the event that a borrower of securities
would file for bankruptcy or become insolvent, disposition of the securities
may be delayed pending court action.
Temporary Defensive Positions
Each Portfolio may temporarily hold investments that are not part of its main
investment strategy during unfavorable market conditions. These investments may
include cash (which will not earn any income) and, in the case of the Tax-
Exempt Money Market Portfolio, short-term taxable money market instruments not
to exceed 20% of the Portfolio's total assets. This strategy could prevent a
Portfolio from achieving its investment objective.
Other Types of Investments
This prospectus describes each Portfolio's principal investment strategies and
the particular types of securities in which each Portfolio principally invests.
Each Portfolio may, from time to time, make other types of investments and
pursue other investment strategies in support of its overall investment goal.
These supplemental investment strategies--and the risks involved--are described
in detail in the Statement of Additional Information ("SAI"), which is referred
to on the back cover of this prospectus.
Year 2000 Risks
Over the past several years, the Adviser and the Portfolios' other major
service providers expended considerable time and money in addressing the
computer and technology problems associated with the transition to the Year
2000. As a result of those efforts, the Portfolios did not experience any
material disruptions in their operations as a result of the transition to the
21st century. The Adviser and the Portfolios' other major service providers are
continuing to monitor the Year 2000 or Y2K problem, however, and there can be
no assurances that there will be no adverse impact to the Portfolios as a
result of future computer-related Y2K difficulties.
14
<PAGE>
Your Account
- --------------------------------------------------------------------------------
Business days defined A business day is any day that both the New York Stock
Exchange and the Federal Reserve Banks' Fedline System are open for business.
Currently, the Fund observes the following holidays: New Year's Day, Martin
Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day (observed),
Independence Day (observed), Labor Day, Columbus Day, Veterans' Day,
Thanksgiving and Christmas.
- --------------------------------------------------------------------------------
Explanation of Sales Price
Trust Shares of each Portfolio are sold at their net asset value (NAV). The NAV
for each class of shares of a Portfolio is determined as of 11:00 a.m. (Central
time) and as of the close of regular trading on the New York Stock Exchange
(currently 3:00 p.m. Central time) on every business day. The NAV for a class
of shares is determined by adding the value of a Portfolio's investments, cash
and other assets attributable to a particular share class, subtracting the
Portfolio's liabilities attributable to that class and then dividing the result
by the total number of shares in the class that are outstanding.
. Each Portfolio's investments are valued at amortized cost, which is
approximately equal to market value.
. A properly placed purchase order (see "How to Buy Shares" below) that is
delivered to the Fund by 11 a.m. (Central time) on any business day with
respect to the Treasury Money Market Portfolio and Tax-Exempt Money Market
Portfolio or by 2:00 p.m. (Central time) on any business day with respect to
the Money Market Portfolio receives the share price next determined if the
Fund receives payment in federal funds or other immediately available funds
by 3:00 p.m. (Central time) that day. If payment is not received by that
time, the order will be cancelled. A properly placed purchase order that is
delivered to the Fund after 11:00 a.m. (Central time) with respect to the
Treasury Money Market Portfolio and Tax-Exempt Money Market Portfolio or
after 2:00 p.m. (Central time) with respect to the Money Market Portfolio
will be placed the following business day.
How to Buy Shares
Trust Shares of the Portfolios are sold to financial institutions, such as
banks, trust companies, thrift institutions and mutual funds, that are
purchasing shares on their own behalf or on behalf of discretionary and non-
discretionary accounts for which they receive account-level asset-based
management fees. Trust Shares are also sold to financial institutions that are
purchasing shares on behalf of accounts for which they provide cash management
services.
If you are purchasing Trust Shares through a financial institution, you must
follow the procedures established by your institution. Your financial
institution is responsible for sending your purchase order to the Fund's
distributor and wiring payment to the Fund's custodian. Your financial
institution holds the shares in your name and receives all confirmations of
purchases and sales. Financial institutions placing orders for themselves or on
behalf of their customers should call the Fund at 1-800-452-2724.
The Fund does not have any minimum investment requirements for Trust Shares but
your financial institution may do so. They may also charge transaction fees and
require you to maintain a minimum account balance.
15
<PAGE>
Your Account
How to Sell Shares
Orders to sell or "redeem" Trust Shares should be placed with the same
financial institution that placed the original purchase order in accordance
with the procedures established by that institution. Your financial institution
is responsible for sending your order to the Fund's distributor and for
crediting your account with the proceeds. The Fund does not currently charge
for wiring the proceeds, but your financial institution may do so.
If the shares being sold are represented by share certificates, then the order
to sell must be made in writing and mailed to: Mercantile Mutual Funds, Inc.,
c/o Firstar Mutual Fund Services, LLC, P.O. Box 3011, Milwaukee, Wisconsin
53201-3011 (via overnight delivery to 615 E. Michigan Street, Milwaukee,
Wisconsin 53202). The order must be accompanied by the share certificates,
properly endorsed for transfer. Additional documents may be required for
certain types of shareholders, such as corporations, partnerships, executors,
trustees, administrators or guardians.
The Fund's transfer agent may require a signature guarantee unless the
redemption proceeds are payable to the shareholder of record and the proceeds
are either mailed to the shareholder's address of record or electronically
transferred to the account designated on the original account application. A
signature guarantee helps prevent fraud, and you may obtain one from most banks
and broker-dealers. Contact the Fund for more information on signature
guarantees.
Trust Shares will be sold at the NAV next determined after the Fund accepts an
order (see above). If the order to sell is received and accepted by the Fund
before 11:00 a.m. (Central time) on a business day with respect to the Treasury
Money Market Portfolio and Tax-Exempt Money Market Portfolio or before
2:00 p.m. (Central time) on a business day with respect to the Money Market
Portfolio, the proceeds are sent electronically the same day to the financial
institution that placed the order. If the order to sell is received and
accepted by the Fund after 11:00 a.m. (Central time) on a business day with
respect to the Treasury Money Market Portfolio and Tax-Exempt Money Market
Portfolio or after 2:00 p.m. (Central time) on a business day with respect to
the Money Market Portfolio, or on a non-business day, the proceeds normally are
sent electronically to the financial institution on the next business day.
16
<PAGE>
Your Account
How to Exchange Shares
The exchange privilege enables shareholders to exchange Trust Shares of one
Portfolio for Trust Shares of another Portfolio. In addition, Trust Shares of a
Portfolio may also be exchanged for Investor A Shares of the same Portfolio in
connection with the distribution of assets from certain types of accounts held
at Mercantile Trust Company National Association or any of its affiliates.
Contact your financial institution or the Fund's distributor for additional
information on the exchange privilege. The exchange privilege may be exercised
only in those states where Trust Shares of the Portfolio being acquired may be
legally sold.
Trust Shares of the Portfolio also may be exchanged for shares of corresponding
classes of the Firstar Funds and the Firstar Stellar Funds. Please read the
prospectuses for those Funds before investing.
Administrative Service Fees
Trust Shares of the Portfolios pay administrative services fees at an annual
rate of up to 0.25% of each Portfolio's Trust Share assets. These fees are paid
to financial institutions that provide certain administrative services to their
customers who own Trust Shares.
General Transaction Policies
The Fund reserves the right to:
. Refuse any order to buy shares.
. Reject any exchange request.
. Redeem all shares in an account if the balance falls below $500. If,
within 60 days of the Fund's written request, the account balance has not
been increased, a shareholder may be required to redeem all shares. The
Fund will not require a shareholder to redeem shares if the value of the
account drops below $500 due to fluctuations in net asset value.
. Send redemption proceeds within seven days after receiving a request, if
an earlier payment could adversely affect a Portfolio.
. Modify or terminate the exchange privilege after 60 days' written notice
to shareholders.
. Make a "redemption in kind." Under abnormal conditions that may make
payment in cash unwise, the Fund may offer partial or complete payment in
portfolio securities rather than cash at such securities' then-market-
value equal to the redemption price. In such cases, a shareholder may
incur brokerage costs in converting these securities to cash.
Shareholders may be responsible for any fraudulent telephone orders as long as
the Fund has taken reasonable precautions to verify the shareholder's identity.
Shareholders who experience difficulty getting through to the Fund by telephone
because of unusual market conditions should consider selling or exchanging
their shares by mail.
17
<PAGE>
Distributions and Taxes
Dividends and Distributions
Each Portfolio declares dividends from net investment income daily and pays
them monthly. Although the Portfolios do not expect to realize net long-term
capital gains, any capital gains realized would be distributed at least
annually.
Dividends on each share class of the Portfolios are determined in the same
manner and are paid in the same amount. However, each share class bears all
expenses associated with that particular class.
All of your dividends and capital gains distribution with respect to a
particular Portfolio will be reinvested in additional shares of the same class
unless you instruct otherwise on your account application or have redeemed all
shares you held in the Portfolio. In such cases, dividends and distributions
will be paid in cash.
Taxation
As with any investment, you should consider the tax implications of an
investment in the Portfolios. The following is only a brief summary of some of
the important tax considerations generally affecting the Portfolios and their
shareholders under current law, which may be subject to change in the future.
Consult your tax adviser with specific reference to your own tax situation.
. Treasury Money Market and Money Market Portfolios
Distributions from these Portfolios will generally be taxable to
shareholders. It is expected that all or substantially all of these
distributions will consist of ordinary income and not capital gains. You will
be subject to income tax on these distributions regardless of whether they
are paid in cash or reinvested in additional shares. The one major exception
to these tax principles is that distributions on shares held in an IRA (or
other tax-qualified plan) will not be currently taxable.
. Tax-Exempt Money Market Portfolio
The Portfolio anticipates that substantially all of its income dividends will
be "exempt interest dividends," which are exempt from federal income taxes.
However, some dividends may be taxable, such as dividends that are derived
from occasional taxable investments, and distributions of short and long-term
capital gains.
Interest on indebtedness incurred by a shareholder to purchase or carry
shares of the Portfolio generally will not be deductible for federal income
tax purposes.
You should note that a portion of the exempt-interest dividends paid by the
Portfolio may constitute an item of tax preference for purposes of
determining federal alternative minimum tax liability. Exempt-interest
dividends will also be considered along with other adjusted gross income in
determining whether any Social Security or railroad retirement payments
received by you are subject to federal income taxes.
18
<PAGE>
Distributions and Taxes
- --------------------------------------------------------------------------------
You will be advised at least annually regarding the federal income tax
treatment of dividends and distributions made to you. You should save your
account statements because they contain information you will need to calculate
your capital gains or losses, if any, upon your ultimate sale or exchange of
shares in the Portfolios.
- --------------------------------------------------------------------------------
. State and Local Taxes
Shareholders may also be subject to state and local taxes on distributions
and redemptions. State income taxes may not apply however, to the portions of
each Portfolio's distributions, if any, that are attributable to interest on
U.S. Government securities or interest on securities of a particular state or
localities within the state.
Dividends paid by a Portfolio may be taxable to investors under state or
local law as dividend income even though all or a portion of such dividends
may be derived from interest on obligations which, if realized directly,
would be exempt from such taxes.
The Treasury Money Market Portfolio is designed to provide shareholders, to
the extent permitted by federal law, with income that is exempt or excluded
from taxation at the state or local level.
The foregoing is only a summary of certain tax considerations under current
law, which may be subject to change in the future. Shareholders who are
nonresident aliens, foreign trusts or estates, or foreign corporations or
partnerships, may be subject to different U.S. federal income tax treatment.
For more information regarding the taxation of the Portfolios, consult the SAI
under the heading "Additional Information Concerning Taxes." You should also
consult your tax adviser for further information regarding federal, state,
local and/or foreign tax consequences relevant to your specific situation.
19
<PAGE>
Management of the Fund
The Adviser
FIRMCO serves as the 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, with its main office at Firstar Center, 777 East Wisconsin Avenue,
Suite 800, Milwaukee, Wisconsin 53202, has been providing advisory services
since 1986. As of December 31, 1999, FIRMCO had approximately $35.3 billion in
assets under management.
FIRMCO, subject to the general supervision of the Fund's Board of Directors, is
responsible for the day-to-day management of the Portfolios in accordance with
each Portfolio's respective investment objective and policies. This includes
making investment decisions, buying and selling securities and overseeing the
administration and recordkeeping for each Portfolio.
In exchange for these services, FIRMCO receives an investment advisory fee,
which is calculated daily and paid monthly, according to the average daily net
assets of each Portfolio. For the fiscal year ended November 30, 1999, the
Money Market Portfolios paid MVA advisory fees as follows:
<TABLE>
<CAPTION>
Investment advisory fees
Portfolio as a % of net assets
-------------------------
<S> <C>
Treasury Money Market
Portfolio .35%
-------------------------
Money Market Portfolio .35%
-------------------------
Tax-Exempt Money Market
Portfolio .35%
</TABLE>
- -------------------------------------------------
20
<PAGE>
Financial Highlights
Introduction
The financial highlights tables presented below are intended to help you
understand the financial performance of each Portfolio's Trust Shares for the
past five years. Certain information reflects financial results for a single
Trust Share in each Portfolio. The total returns in the tables represent the
rate that an investor would have earned on an investment in Trust Shares
assuming reinvestment of all dividends and distributions. This information has
been audited by KPMG LLP, independent auditors, whose report, along with the
Portfolios' financial statements, are included in the Fund's Annual Report to
Shareholders, and are incorporated by reference into the SAI.
21
<PAGE>
Financial Highlights Treasury Money Market Portfolio
<TABLE>
<CAPTION>
Trust Shares
(For a Share outstanding throughout each period)
Year Ended November 30,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------------------------------------------------------------------------
Investment Activities
Net investment income 0.038 0.045 0.046 0.045 0.050
Net realized gains from
investments --(a) -- -- -- --
------------------------------------------------------------------------------
Total from Investment
Activities 0.038 0.045 0.046 0.045 0.050
------------------------------------------------------------------------------
Distributions
Net investment income (0.038) (0.045) (0.046) (0.045) (0.050)
Net realized gains --(a) -- -- -- --
------------------------------------------------------------------------------
Total Distributions (0.038) (0.045) (0.046) (0.045) (0.050)
------------------------------------------------------------------------------
Net Asset Value, End of
Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------------------------------------------------------------------------
Total Return 3.87% 4.56% 4.70% 4.64% 5.12%
Ratios/Supplementary
Data:
Net Assets at end of
period (000) $197,435 $245,959 $283,653 $131,322 $252,780
Ratio of expenses to
average net assets 0.81% 0.65% 0.61% 0.61% 0.60%
Ratio of net investment
income to average net
assets 3.80% 4.45% 4.60% 4.55% 5.01%
Ratio of expenses to
average net assets* 0.95% 0.96% 0.92% 0.76% 0.75%
</TABLE>
- --------------------------------------------------------------------------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
(a) Net realized gain and distribution from net realized gain was less than
$0.005.
22
<PAGE>
Financial Highlights Money Market Portfolio
<TABLE>
<CAPTION>
Trust Shares
(For a Share outstanding throughout each period)
Year Ended November 30,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------------------------------------------------------------------------------------------
Investment Activities
Net investment income 0.043 0.050 0.050 0.049 0.054
Net realized gains from investments -- --(a) -- -- --
--------------------------------------------------------------------------------------------
Total from Investment Activities 0.043 0.050 0.050 0.049 0.054
--------------------------------------------------------------------------------------------
Distributions
Net investment income (0.043) (0.050) (0.050) (0.049) (0.054)
--------------------------------------------------------------------------------------------
Total Distributions (0.043) (0.050) (0.050) (0.049) (0.054)
--------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------------------------------------------------------------------------------------------
Total Return 4.43% 5.08% 5.06% 4.99% 5.52%
Ratios/Supplementary Data:
Net Assets at end of period (000) $734,262 $820,923 $1,042,151 $717,265 $698,131
Ratio of expenses to average net
assets 0.80% 0.66% 0.64% 0.61% 0.59%
Ratio of net investment income to
average net assets 4.34% 4.97% 4.96% 4.88% 5.38%
Ratio of expenses to average net
assets* 0.94% 0.93% 0.92% 0.76% 0.74%
- ---------------------------------------------------------------------------------------------
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
(a) Net realized gain per share was less than $0.005.
23
<PAGE>
Financial Highlights Tax-Exempt Money Market Portfolio
<TABLE>
<CAPTION>
Trust Shares
(For a Share outstanding throughout each period)
Six Months
Ended Year Ended
Year Ended November 30, November 30, May 31,
1999 1998 1997 1996 1995(a) 1995
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-----------------------------------------------------------------------------------------
Investment Activities
Net investment income 0.024 0.029 0.030 0.030 0.016 0.029
-----------------------------------------------------------------------------------------
Total from Investment
Activities 0.024 0.029 0.030 0.030 0.016 0.029
-----------------------------------------------------------------------------------------
Distributions
Net investment income (0.024) (0.029) (0.030) (0.030) (0.016) (0.029)
-----------------------------------------------------------------------------------------
Total Distributions (0.024) (0.029) (0.030) (0.030) (0.016) (0.029)
-----------------------------------------------------------------------------------------
Net Asset Value, End of
Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-----------------------------------------------------------------------------------------
Total Return 2.44% 2.92% 3.08% 3.06% 1.57%(b) 2.93%
Ratios/Supplementary
Data:
Net Assets at end of
period (000) $38,415 $37,541 $143,517 $95,726 $78,031 $85,324
Ratio of expenses to
average net assets 0.79% 0.59% 0.58% 0.53% 0.70%(c) 0.61%
Ratio of net investment
income to average net
assets 2.42% 2.88% 3.04% 3.01% 3.10%(c) 2.87%
Ratio of expenses to
average net assets* 0.84% 0.84% 0.83% 0.58% 0.75%(c) 0.70%
- -----------------------------------------------------------------------------------------
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
(a) Upon its reorganization as a portfolio of The ARCH Fund, Inc. on October
2, 1995, the Tax-Exempt Money Market Portfolio changed its fiscal year-
end from May 31 to November 30.
(b) Not annualized.
(c) Annualized.
24
<PAGE>
Where to find more information
You'll find more information about the Portfolios in the following documents:
Annual and semi-annual reports
The Fund's annual and semi-annual reports contain information about each
Portfolio and a discussion about the market conditions and investment strategies
that had a significant effect on each Portfolio's performance during the last
fiscal year.
Statement of Additional Information (SAI)
The SAI contains detailed information about the Portfolios and their policies.
By law, it's incorporated by reference into (considered to be part of) this
prospectus.
You can get a free copy of these documents, request other information about the
Portfolios and make shareholder inquiries by calling the Fund at 1-800-452-2724
or by writing to:
Mercantile Mutual Funds, Inc.
c/o Firstar Mutual Fund Services, LLC
615 E. Michigan Street
P.O. Box 3011
Milwaukee, WI 53201-3011
If you buy your shares through a broker-dealer or other financial institution,
you may contact your institution for more information.
You can write to the Securities and Exchange Commission (SEC) Public Reference
Section and ask them to mail you information about the Portfolios, including the
SAI. They'll charge you a fee for this service. You can also visit the SEC
Public Reference Room and copy the documents while you're there. For more
information about the operation of the Public Reference Room, call the SEC.
Public Reference Section of the SEC
Washington, D.C. 20549-0102
1-202-942-8090
Reports and other information about the Portfolios are also available on the
EDGAR database on the SEC's website at http://www.sec.gov. Copies of this
-------------------
information may also be obtained, after paying a duplicating fee, by electronic
request to the SEC's e-mail address at [email protected].
-------------------
The Fund's Investment Company Act File No. is 811-3567
<PAGE>
MERCANTILE MUTUAL FUNDS
INSTITUTIONAL SHARES
[PHOTO]
Prospectus
March 31, 2000
MONEY MARKET PORTFOLIOS
Treasury Money Market Portfolio
Money Market Portfolio
TAXABLE BOND PORTFOLIOS
U.S.Government Securities Portfolio
Intermediate Corporate Bond Portfolio
Bond Index Portfolio
Government & Corporate Bond Portfolio
STOCK PORTFOLIOS
Balanced Portfolio
Equity Income Portfolio
Equity Index Portfolio
Growth & Income Equity Portfolio
Growth Equity Portfolio
Small Cap Equity Portfolio
Small Cap Equity Index Portfolio
International Equity Portfolio
As with all mutual funds,the Securities and Exchange Commission has not approved
or disapproved these securities or passed upon the adequacy of this prospectus.
Any representation to the contrary is a criminal offense.
[LOGO OF FIRSTAR]
<PAGE>
Contents
<TABLE>
<CAPTION>
Introduction
- ------------------------------------------------------------
<C> <S>
3 Overview
Risk/Return Summary
- ------------------------------------------------------------
4 Treasury Money Market Portfolio
7 Money Market Portfolio
10 U.S. Government Securities Portfolio
14 Intermediate Corporate Bond Portfolio
18 Bond Index Portfolio
22 Government & Corporate Bond Portfolio
26 Balanced Portfolio
30 Equity Income Portfolio
33 Equity Index Portfolio
37 Growth & Income Equity Portfolio
40 Growth Equity Portfolio
43 Small Cap Equity Portfolio
47 Small Cap Equity Index Portfolio
51 International Equity Portfolio
55 Additional Information on Risk
Your Account
- ------------------------------------------------------------
56 Explanation of Sales Price
57 How to Buy Shares
58 How to Sell Shares
59 How to Exchange Shares
59 Administrative Services Fees
59 General Transaction Policies
Distributions and Taxes
- ------------------------------------------------------------
60 Dividends and Distributions
61 Taxation
Management of the Fund
- ------------------------------------------------------------
63 The Adviser
63 The Sub-Adviser
Financial Highlights
- ------------------------------------------------------------
64 Introduction
65 Financial Highlights
</TABLE>
2
<PAGE>
Introduction Overview
This prospectus describes the Institutional Shares of
fourteen investment portfolios (the "Portfolios") offered by
Mercantile Mutual Funds, Inc. (the "Fund"). On the following
pages, you will find important information about each
Portfolio, including:
. A description of the Portfolio's investment objective
(sometimes referred to as its goal);
. The Portfolio's principal investment strategies (the steps
it takes to try to meet its goal);
. The principal risks associated with the Portfolio (factors
that may prevent it from meeting its goal);
. The Portfolio's past performance (how successful it's been
in meeting its goal); and
. The fees and expenses you pay as an investor in the
Portfolio.
Who may want The Treasury Money Market Portfolio may be appropriate for
to invest in investors who want a way to earn money market returns from
the U.S. Treasury obligations that are generally exempt from
Portfolios? state and local taxes. The Money Market Portfolio may be
appropriate for investors who want a flexible and convenient
way to manage cash while earning money market returns.
The Taxable Bond Portfolios may be appropriate for investors
who seek current income from their investments greater than
that normally available from a money market fund and can
accept fluctuations in price and yield. The Portfolios may
not be appropriate for investors who are investing for long-
term capital appreciation.
The Stock Portfolios may be appropriate for investors who
seek capital growth over the long term and are comfortable
with the risks of stock markets. The Portfolios may not be
appropriate for investors who are investing for short-term
goals or are mainly seeking current income.
Before investing in a Portfolio, you should carefully
consider:
. Your own investment goals
. The amount of time you are willing to leave your money
invested
. How much risk you are willing to take.
The Firstar Investment Research & Management Company, LLC, which
Investment is referred to in this prospectus as "FIRMCO" or the
Adviser "Adviser," serves as the investment adviser to each
Portfolio. FIRMCO is a subsidiary of Firstar Corporation, a
banking and financial services organization.
An investment in the Portfolios is not a deposit of Firstar
Bank, N.A. and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency.
Although each of the Money Market Portfolios seeks to
preserve the value of your investment at $1.00 per share, it
is possible to lose money by investing in the Portfolios. You
could also lose money by investing in one of the Taxable Bond
or Stock Portfolios.
3
<PAGE>
Risk/Return Summary Treasury Money Market Portfolio
- --------------------------------------------------------------------------------
Money market instruments are short-term obligations issued by banks,
corporations, the U.S. Government and state and local governments. Money market
instruments purchased by the Money Market Portfolios must meet strict
requirements as to investment quality, maturity and diversification. The Money
Market Portfolios generally do not invest in securities with maturities of more
than 397 days and the average maturity of all securities held by a particular
Money Market Portfolio must be 90 days or less. Prior to purchasing a money
market instrument for one of the Money Market Portfolios, the Adviser must
determine that the instrument carries very little credit risk.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is to seek a high level of current income
exempt from state income tax consistent with liquidity and security of
principal.
Principal Investment Strategies
The Portfolio invests substantially all (but not less than 65%) of its total
assets in money market instruments issued by the U.S. Treasury and certain U.S.
Government agencies and instrumentalities that provide income that is generally
not subject to state income tax.
Principal Risk Considerations
The yield paid by the Portfolio will vary with changes in interest rates.
During periods of rising interest rates, the Portfolio's yield will tend to be
lower than prevailing market rates, while during periods of falling interest
rates, the Portfolio's yield will tend to be higher.
Although U.S. Government securities, particularly U.S. Treasury obligations,
have historically involved little risk, if an issuer fails to pay interest or
repay principal, the value of your investment could decline.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolio and how they may advance the Portfolio's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
There's no guarantee the Portfolio will be able to preserve the value of your
investment at $1.00 per share.
4
<PAGE>
Risk/Return Summary Treasury Money Market Portfolio
Return History
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Institutional Shares has varied from year to year. The table shows the
Portfolio's average annual returns for one year and since inception. Both the
bar chart and table assume reinvestment of all dividends and distributions. The
Portfolio's past performance does not necessarily indicate how it will perform
in the future.
Institutional Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1996 1997 1998 1999
4.43% 4.54% 4.34% 3.93%
<TABLE>
<S> <C>
Best quarter: 1.14% for the quarter ending September 30, 1997
Worst quarter: 0.92% for the quarter ending March 31, 1999
</TABLE>
-------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year Inception*
-----------------
<S> <C> <C>
Institutional Shares 3.93% 4.44%
- -----------------------------------------
</TABLE>
*January 26, 1995.
To obtain the Portfolio's current 7-day yield, please call 1-800-452-2724.
5
<PAGE>
Risk/Return Summary Treasury Money Market Portfolio
The table on the right shows the fees and expenses that you pay if you buy and
hold Institutional Shares of the Treasury Money Market Portfolio.
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
Fees and Expenses
<TABLE>
<CAPTION>
Annual Portfolio Operating
Expenses
(expenses that are deducted
from the Institutional
Portfolio's assets) Shares
<S> <C>
Management Fees .40%/1/
---------------------------------------------
Distribution (12b-1) Fees None
---------------------------------------------
Other Expenses .55%/1/
---------------------------------------------
Total Annual Portfolio
Operating Expenses .95%/1/
- ----------------------------------------------
</TABLE>
/1/ Management Fees, Other Expenses and Total Annual Portfolio Operating
Expenses for the Portfolio's Institutional Shares for the current fiscal
year are expected to be less than the amounts shown above because certain
of the Portfolio's service providers are voluntarily waiving a portion of
their fees and/or reimbursing the Portfolio for certain other expenses.
These fee waivers and/or reimbursements are being made in order to keep the
annual fees and expenses for the Portfolio's Institutional Shares at a
certain level. Management Fees, Other Expenses and Total Annual Portfolio
Operating Expenses, after taking these fee waivers and expense
reimbursements into account, are expected to be .35%, .45% and .80%,
respectively, for Institutional Shares. These fee waivers and expense
reimbursements may be revised or cancelled at any time.
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Institutional Shares $97 $303 $525 $1,166
- -----------------------------------------------
</TABLE>
6
<PAGE>
Risk/Return Summary Money Market Portfolio
Investment Objective
The Portfolio's investment objective is to seek current income with liquidity
and stability of principal.
Principal Investment Strategies
The Portfolio invests substantially all (but not less than 80%) of its total
assets in a broad range of U.S. dollar-denominated money market instruments,
including commercial paper, notes and bonds issued by U.S. and foreign
corporations, obligations issued by the U.S. Government and its agencies and
instrumentalities, and obligations issued by U.S. and foreign banks, such as
certificates of deposit, letters of credit, bankers' acceptances and time
deposits.
The Portfolio will only buy a money market instrument if it has the highest
short-term rating from at least two nationally recognized statistical rating
organizations, such as Standard & Poor's Ratings Group or Moody's Investors
Service, Inc. or only one such rating if only one organization has rated the
instrument. If the money market instrument is not rated, the Adviser must
determine that it is of comparable quality to eligible rated instruments.
Principal Risk Considerations
The yield paid by the Portfolio will vary with short-term interest rates.
During periods of rising interest rates, the Portfolio's yield will tend to be
lower than prevailing market rates, while during periods of falling interest
rates, the Portfolio's yield will tend to be higher.
Although credit risk is very low because the Portfolio only invests in high
quality obligations, if an issuer fails to pay interest or repay principal, the
value of your investment could decline.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolio and how they may advance the Portfolio's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
There's no guarantee the Portfolio will be able to preserve the value of your
investment at $1.00 per share.
7
<PAGE>
Risk/Return Summary Money Market Portfolio
Return History
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Institutional Shares has varied from year to year. The table shows the
Portfolio's average annual returns for one year, five years and since
inception. Both the bar chart and table assume reinvestment of all dividends
and distributions. The Portfolio's past performance does not necessarily
indicate how it will perform in the future.
Institutional Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1995 1996 1997 1998 1999
5.36% 4.77% 4.96% 4.90% 4.50%
<TABLE>
<S> <C>
Best quarter: 1.34% for the quarter ending June 30, 1995
Worst quarter: 1.04% for the quarter ending June 30, 1999
</TABLE>
-------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year 5 Years Inception*
----------------------------
<S> <C> <C> <C>
Institutional Shares 4.50% 4.90% 4.67%
- -------------------------------------------------
</TABLE>
* January 3, 1994.
To obtain the Portfolio's current 7-day yield, please call 1-800-452-2724.
8
<PAGE>
Risk/Return Summary Money Market Portfolio
The table on the right shows the fees and expenses that you pay if you buy and
hold Institutional Shares of the Money Market Portfolio.
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
Fees and Expenses
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses
(expenses that are deducted from the Institutional
Portfolio's assets) Shares
<S> <C>
Management Fees .40%/1/
---------------------------------------------------------
Distribution (12b-1) Fees None
---------------------------------------------------------
Other Expenses .57%/1/
---------------------------------------------------------
Total Annual Portfolio Operating Expenses .97%/1/
- ----------------------------------------------------------
</TABLE>
/1/ Management Fees, Other Expenses and Total Annual Portfolio Operating
Expenses for the Portfolio's Institutional Shares for the current fiscal
year are expected to be less than the amounts shown above because certain
of the Portfolio's service providers are voluntarily waiving a portion of
their fees and/or reimbursing the Portfolio for certain other expenses.
These fee waivers and/or reimbursements are being made in order to keep the
annual fees and expenses for the Portfolio's Institutional Shares at a
certain level. Management Fees, Other Expenses and Total Annual Portfolio
Operating Expenses, after taking these fee waivers and expense
reimbursements into account, are expected to be .35%, .47% and .82%,
respectively, for Institutional Shares. These fee waivers and expense
reimbursements may be revised or cancelled at any time.
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Institutional Shares $99 $309 $536 $1,190
- -----------------------------------------------
</TABLE>
9
<PAGE>
Risk/Return Summary U.S. Government Securities Portfolio
- --------------------------------------------------------------------------------
Repurchase agreements are transactions in which a Portfolio buys securities
from a seller (usually a bank or broker-dealer) who agrees to buy them back
from the Portfolio on a certain date and at a certain price.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Mortgage-backed securities are certificates representing ownership interests in
a pool of mortgage loans, and include those issued by the Government National
Mortgage Association ("Ginnie Maes"), the Federal National Mortgage Association
("Fannie Maes") and the Federal Home Loan Mortgage Corporation ("Freddie
Macs").
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Portfolio Manager
David A. Bethke is the person primarily responsible for the day-to-day
management of the Portfolio. Mr. Bethke, Senior Associate, has been with FIRMCO
and its affiliates since 1987 and has eight years of prior investment
experience. He has managed the Portfolio since it commenced operations in 1988.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is to seek a high rate of current income
that is consistent with relative stability of principal.
Principal Investment Strategies
The Portfolio normally invests at least 65% of its total assets in debt
obligations issued or guaranteed by the U.S. Government and its agencies,
including U.S. Treasury bonds, notes and bills, as well as in repurchase
agreements backed by such obligations. The Portfolio also invests in mortgage-
backed securities issued by U.S. Government-sponsored entities such as Ginnie
Maes, Fannie Maes and Freddie Macs. The remaining maturity (i.e., length of
time until an obligation must be repaid) of the obligations held by the
Portfolio will vary from one to 30 years. Under normal conditions, however, the
Adviser does not expect the Portfolio's average weighted maturity to exceed 10
years when adjusted for the expected average life of any mortgage-backed
securities held by the Portfolio.
Principal Risk Considerations
The prices of debt securities tend to move in the opposite direction to
interest rates. When rates are rising, the prices of debt securities tend to
fall. When rates are falling, the prices of debt securities tend to rise.
Generally, the longer the time until maturity, the more sensitive the price of
a debt security is to interest rate changes.
Changes in interest rates may also cause certain debt securities held by the
Portfolio, including mortgage-backed securities, to be paid off much sooner or
later than expected. In the event that a security is paid off sooner than
expected because of a decline in interest rates, the Portfolio may be unable to
recoup all of its initial investment and may also suffer from having to
reinvest in lower-yielding securities. In the event of a later than expected
payment because of a rise in interest rates, the value of the obligation will
decrease, and the Portfolio may suffer from the inability to invest in higher-
yielding securities.
The value of debt securities also depends on the ability of issuers to make
principal and interest payments. If an issuer can't meet its payment
obligations, the value of its debt securities will fall. Securities issued or
guaranteed by the U.S. Government and its agencies have historically involved
little risk of loss of principal if held to maturity. Certain U.S. Government
securities, such as Ginnie Maes, are supported by the full faith and credit of
the U.S. Treasury. Others, such as Freddie Macs, are supported by the right of
the issuer to borrow from the U.S. Treasury.
10
<PAGE>
Risk/Return Summary U.S. Government Securities Portfolio
Other securities, such as Fannie Maes, are supported by the discretionary
authority of the U.S. Government to purchase certain obligations of the
issuers, and still others are supported by the issuer's own credit.
Repurchase agreements carry the risk that the other party may not fulfill its
obligations under the agreement.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolio and how they may advance the Portfolio's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
11
<PAGE>
Risk/Return Summary U.S. Government Securities Portfolio
Return History
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Institutional Shares has varied from year to year. The table shows how the
Portfolio's average annual returns for one year, five years and since inception
compare to those of a broad-based market index. Both the bar chart and table
assume reinvestment of all dividends and distributions. The Portfolio's past
performance does not necessarily indicate how it will perform in the future.
- --------------------------------------------------------------------------------
Know your index
The Lehman Brothers Intermediate Government Bond Index is an unmanaged index
which tracks the performance of intermediate-term U.S. Government bonds.
- --------------------------------------------------------------------------------
Institutional Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1995 1996 1997 1998 1999
14.87% 3.09% 6.27% 6.44% 0.77%
<TABLE>
<S> <C>
Best quarter: 5.39% for the quarter ending June 30, 1995
Worst quarter: -0.93% for the quarter ending March 31, 1996
</TABLE>
-------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year 5 Years Inception*
-----------------------------------------------
<S> <C> <C> <C>
Institutional Shares 0.77% 6.18% 5.42%
-----------------------------------------------
Lehman Brothers Intermediate Government Bond Index 0.49% 6.93% 6.31%
- -------------------------------------------------------------------------------
</TABLE>
* June 7, 1994 for Institutional Shares; May 31, 1994 for the Lehman Brothers
Intermediate Government Bond Index.
12
<PAGE>
Risk/Return Summary U.S. Government Securities Portfolio
The table on the right shows the fees and expenses that you pay if you buy and
hold Institutional Shares of the U.S. Government Securities Portfolio.
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
Fees and Expenses
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses
(expenses that are deducted from the Institutional
Portfolio's assets) Shares
<S> <C>
Management Fees .45%
---------------------------------------------------------
Distribution (12b-1) Fees None
---------------------------------------------------------
Other Expenses .64%/1/
---------------------------------------------------------
Total Annual Portfolio Operating Expenses 1.09%/1/
- ----------------------------------------------------------
</TABLE>
/1/ Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Institutional Shares for the current fiscal year are expected
to be less than the amounts shown above because certain of the Portfolio's
service providers are voluntarily waiving a portion of their fees and/or
reimbursing the Portfolio for certain other expenses. These fee waivers
and/or reimbursements are being made in order to keep the annual fees and
expenses for the Portfolio's Institutional Shares at a certain level. Other
Expenses and Total Annual Portfolio Operating Expenses, after taking these
fee waivers and expense reimbursements into account, are expected to be
.53% and .98%, respectively, for Institutional Shares. These fee waivers
and expenses reimbursements may be revised or cancelled at any time.
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Institutional Shares $111 $347 $601 $1,329
- -----------------------------------------------
</TABLE>
13
<PAGE>
Risk/Return Summary Intermediate Corporate Bond Portfolio
- --------------------------------------------------------------------------------
Investment grade debt securities are those of medium credit quality or better
as determined by a national rating agency, such as Standard & Poor's Ratings
Group (debt securities rated in the four highest rating categories, i.e. BBB or
higher) and Moody's Investors Service, Inc. (debt securities rated in the four
highest rating categories, i.e. Baa or higher). The higher the credit rating,
the less likely it is that the issuer of the securities will default on its
principal and interest payments.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Average weighted maturity gives you the average time until all debt securities
in a Portfolio come due or mature. It is calculated by averaging the time to
maturity of all debt securities held by a Portfolio with each maturity
"weighted" according to the percentage of assets it represents.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is to seek as high a level of current
income as is consistent with preservation of capital.
Principal Investment Strategies
The Portfolio normally invests at least 65% of its total assets in corporate
debt obligations. These include obligations that are issued by U.S. and foreign
business corporations and obligations issued by agencies, instrumentalities or
authorities that are organized as corporations by the United States, by states
or political subdivisions of the United States, or by foreign governments or
political subdivisions. The Portfolio also invests in obligations issued or
guaranteed by U.S. or foreign governments, their agencies and instrumentalities
and in mortgage-backed securities, including Ginnie Maes, Fannie Maes and
Freddie Macs.
The Portfolio may only purchase investment grade debt obligations. Under normal
market conditions, however, the Portfolio intends to invest at least 65% of its
total assets in debt obligations rated in one of the three highest rating
categories. Unrated debt obligations will be purchased only if they are
determined by the Adviser to be at least comparable in quality at the time of
purchase to eligible rated securities. Occasionally, the rating of a security
held by the Portfolio may be downgraded to below investment grade. If that
happens, the Portfolio does not have to sell the security unless the Adviser
determines that under the circumstances the security is no longer an
appropriate investment for the Portfolio.
In making investment decisions, the Adviser will consider a number of factors
including current yield, maturity, yield to maturity, anticipated changes in
interest rates, and the overall quality of the investment. The Portfolio's
average weighted maturity will generally be between three and ten years.
14
<PAGE>
Risk/Return Summary Intermediate Corporate Bond Portfolio
- --------------------------------------------------------------------------------
Portfolio Manager
David A. Bethke is the person primarily responsible for the day-to-day
management of the Portfolio. Mr. Bethke, Senior Associate, has been with FIRMCO
and its affiliates since 1987 and has eight years of prior investment
experience. He has managed the Portfolio since it commenced operations in 1997.
- --------------------------------------------------------------------------------
Principal Risk Considerations
The prices of debt securities tend to move in the opposite direction to
interest rates. When rates are rising, the prices of debt securities tend to
fall. When rates are falling, the prices of debt securities tend to rise.
Generally, the longer the time until maturity, the more sensitive the price of
a debt security is to interest rate changes.
Changes in interest rates also may cause certain debt securities held by the
Portfolio, including callable securities and mortgage-backed securities, to be
paid off much sooner or later than expected. In the event that a security is
paid off sooner than expected because of a decline in interest rates, the
Portfolio may be unable to recoup all of its initial investment and may also
suffer from having to reinvest in lower-yielding securities. In the event of a
later than expected payment because of a rise in interest rates, the value of
the obligation will decrease, and the Portfolio may suffer from the inability
to invest in higher-yielding securities.
The value of debt securities also depends on the ability of issuers to make
principal and interest payments. If an issuer can't meet its payment
obligations or if its credit rating is lowered, the value of its debt
securities will fall.
Foreign investments may be riskier than U.S. investments because of currency
exchange rate volatility, government restrictions, different accounting
standards and political instability. In addition, investments in foreign
securities may involve higher costs than investments in U.S. securities,
including higher transaction and custody costs as well as the imposition of
additional taxes by foreign governments.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolio and how they may advance the Portfolio's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
15
<PAGE>
Risk/Return Summary Intermediate Corporate Bond Portfolio
Return History
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Institutional Shares has varied from year to year. The table shows how the
Portfolio's average annual returns for one year and since inception compare to
those of a broad-based market index. Both the bar chart and table assume
reinvestment of all dividends and distributions. The Portfolio's past
performance does not necessarily indicate how it will perform in the future.
- --------------------------------------------------------------------------------
Know your index
The Lehman Brothers Intermediate Corporate Bond Index is an unmanaged index
which tracks the performance of intermediate-term U.S. corporate bonds.
- --------------------------------------------------------------------------------
Institutional Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1998 1999
8.77% -2.47%
<TABLE>
<S> <C>
Best quarter: 5.25% for the quarter ending September 30, 1998
Worst quarter: -1.49% for the quarter ending June 30, 1999
</TABLE>
-------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year Inception*
--------------------------------------
<S> <C> <C>
Institutional Shares -2.47% 4.71%
--------------------------------------
Lehman Brothers Intermediate Corporate Bond Index 0.16% 5.52%
- ----------------------------------------------------------------------
</TABLE>
* February 10, 1997 for Institutional Shares; January 31, 1997 for the Lehman
Brothers Intermediate Corporate Bond Index.
16
<PAGE>
Risk/Return Summary Intermediate Corporate Bond Portfolio
The table on the right shows the fees and expenses that you pay if you buy and
hold Institutional Shares of the Intermediate Corporate Bond Portfolio.
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
Fees and Expenses
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses
(expenses that are deducted from the Institutional
Portfolio's assets) Shares
<S> <C>
Management Fees .55%
---------------------------------------------------------
Distribution (12b-1) Fees None
---------------------------------------------------------
Other Expenses .64%/1/
---------------------------------------------------------
Total Annual Portfolio Operating Expenses 1.19%/1/
- ----------------------------------------------------------
</TABLE>
/1/ Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Institutional Shares for the current fiscal year are expected
to be less than the amounts shown above because certain of the Portfolio's
service providers are voluntarily waiving a portion of their fees and/or
reimbursing the Portfolio for certain other expenses. These fee waivers
and/or reimbursements are being made in order to keep the annual fees and
expenses for the Portfolio's Institutional Shares at a certain level. Other
Expenses and Total Annual Portfolio Operating Expenses, after taking these
fee waivers and expense reimbursements into account, are expected to be
.54% and 1.09%, respectively, for Institutional Shares. These fee waivers
and expense reimbursements may be revised or cancelled at any time.
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Institutional Shares $121 $378 $654 $1,443
- -----------------------------------------------
</TABLE>
17
<PAGE>
Risk/Return Summary Bond Index Portfolio
- --------------------------------------------------------------------------------
Indexing is a strategy whereby a Portfolio attempts to weight its securities to
match those of a broadly-based securities index in an attempt to approximate
the index's performance.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Lehman Brothers Aggregate Bond Index is an unmanaged index made up of
Lehman Brothers' Government/Corporate Bond Index, its Mortgage Backed
Securities Index and its Asset Backed Securities Index. Lehman Brothers, Inc.
does not endorse any securities in the Lehman Brothers Aggregate Bond Index and
is not a sponsor of, or affiliated in any way with, the Portfolio.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is to seek to provide investment results
that, before deduction of operating expenses, approximate the price and yield
performance of U.S. Government, mortgage-backed, asset-backed and corporate
debt securities as represented by the Lehman Brothers Aggregate Bond Index,
which is referred to in this prospectus as the "Lehman Aggregate."
The Portfolio's investment objective can be changed by the Fund's Board of
Directors without shareholder approval. Shareholders will be given at least 30
days' written notice before any such change occurs.
Principal Investment Strategies
The Portfolio uses an "indexing" strategy through the use of computer models to
approximate the investment performance of the Lehman Aggregate. The Adviser
generally selects securities for the Portfolio on the basis of their weightings
in the Lehman Aggregate and will only purchase a security for the Portfolio
that is included in the Lehman Aggregate at the time of such purchase. Because
of the large number of securities listed in the Lehman Aggregate, the Portfolio
cannot invest in all of them. Instead, the Portfolio holds a representative
sample of approximately 100 of the securities in the Lehman Aggregate,
selecting one or two securities to represent an entire "class" or type of
security in the Lehman Aggregate. The Portfolio will invest substantially all
(but not less than 80%) of its total assets in securities listed in the Lehman
Aggregate.
The Portfolio's average weighted maturity will vary from time to time depending
on the maturity of the securities in the Lehman Aggregate. Under normal
conditions, however, the Adviser does not expect the Portfolio's average
weighted maturity to exceed nine years.
Under normal market conditions, it is expected that the quarterly performance
of the Portfolio, before expenses, will track the performance of the Lehman
Aggregate within a .95 correlation coefficient.
18
<PAGE>
Risk/Return Summary Bond Index Portfolio
Principal Risk Considerations
The prices of debt securities tend to move in the opposite direction to
interest rates. When rates are rising, the prices of debt securities tend to
fall. When rates are falling, the prices of debt securities tend to rise.
Generally, the longer the time until maturity, the more sensitive the price of
a debt security is to interest rate changes.
Changes in interest rates also may cause certain debt securities held by the
Portfolio, including callable securities and mortgage-backed securities, to be
paid off much sooner or later than expected. In the event that a security is
paid off sooner than expected because of a decline in interest rates, the
Portfolio may be unable to recoup all of its initial investment and may also
suffer from having to reinvest in lower-yielding securities. In the event of a
later than expected payment because of a rise in interest rates, the value of
the obligation will decrease, and the Portfolio may suffer from the inability
to invest in higher-yielding securities.
The value of debt securities also depends on the ability of issuers to make
principal and interest payments. If an issuer can't meet its payment
obligations or if its credit rating is lowered, the value of its debt
securities will fall.
There is the additional risk that the Portfolio will fail to match the
investment results of the Lehman Aggregate as a result of shareholder purchase
and redemption activity, transaction costs, expenses and other factors.
19
<PAGE>
Risk/Return Summary Bond Index Portfolio
Return History
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Institutional Shares has varied from year to year. The table shows how the
Portfolio's average annual returns for one year and since inception compare to
those of the Lehman Aggregate. Both the bar chart and table assume reinvestment
of all dividends and distributions. The Portfolio's past performance does not
necessarily indicate how it will perform in the future.
Institutional Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1998 1999
8.68% -1.81%
<TABLE>
<S> <C>
Best quarter: 4.60% for the quarter ending September 30, 1998
Worst quarter: -1.08% for the quarter ending June 30, 1999
</TABLE>
-------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year Inception*
-----------------
<S> <C> <C>
Institutional Shares -1.81% 5.13%
-----------------
Lehman Aggregate 0.82% 5.79%
- -----------------------------------------
</TABLE>
* February 10, 1997 for Institutional Shares; January 31, 1997 for the Lehman
Aggregate.
20
<PAGE>
Risk/Return Summary Bond Index Portfolio
The table on the right shows the fees and expenses that you pay if you buy and
hold Institutional Shares of the Bond Index Portfolio.
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
Fees and Expenses
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses
(expenses that are deducted from the Institutional
Portfolio's assets) Shares
<S> <C>
Management Fees .30%
---------------------------------------------------------
Distribution (12b-1) Fees None
---------------------------------------------------------
Other Expenses .63%/1/
---------------------------------------------------------
Total Annual Portfolio Operating Expenses .93%/1/
- ----------------------------------------------------------
</TABLE>
/1/ Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Institutional Shares for the current fiscal year are expected to
be less than the amounts shown above because certain of the Portfolio's
service providers are voluntarily waiving a portion of their fees and/or
reimbursing the Portfolio for certain other expenses. These fee waivers
and/or reimbursements are being made in order to keep the annual fees and
expenses for the Portfolio's Institutional Shares at a certain level. Other
Expenses and Total Annual Portfolio Operating Expenses, after taking these
fee waivers and expense reimbursements into account, are expected to be .53%
and .83%, respectively, for Institutional Shares. These fee waivers and
expense reimbursements may be revised or cancelled at any time.
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Institutional Shares $95 $296 $515 $1,143
- -----------------------------------------------
</TABLE>
21
<PAGE>
Risk/Return Summary Government & Corporate Bond Portfolio
- --------------------------------------------------------------------------------
Portfolio Manager
George J. Schupp is the person primarily responsible for the day-to-day
management of the Portfolio. Mr. Schupp, FIRMCO's Director of Fixed-Income
Management, has been with FIRMCO and its affiliates since 1983 and has 7 years
of prior investment experience. He has managed the Portfolio since February
1998.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is to seek the highest level of current
income consistent with conservation of capital.
Principal Investment Strategies
The Portfolio invests substantially all of its assets in a broad range of debt
obligations, including corporate obligations and U.S. Government obligations.
Corporate obligations may include bonds, notes and debentures. U.S. Government
obligations may include U.S. Treasury obligations and obligations of certain
U.S. Government agencies. The Portfolio also invests in mortgage-backed
securities, including Ginnie Maes, Fannie Maes and Freddie Macs. Although the
Portfolio invests primarily in the debt obligations of U.S. issuers, it may
from time to time invest up to 10% of its total assets in U.S. dollar-
denominated debt obligations of foreign corporations and governments.
The Portfolio may only purchase investment grade debt obligations, which are
those rated in one of the four highest rating categories by one or more
national rating agencies, such as Standard & Poor's Ratings Group or Moody's
Investors Service Inc. Under normal market conditions, however, the Portfolio
intends to invest at least 65% of its total assets in debt obligations rated in
one of the three highest rating categories. Unrated debt obligations will be
purchased only if they are determined by the Adviser to be at least comparable
in quality at the time of purchase to eligible rated securities. Occasionally,
the rating of a security held by the Portfolio may be downgraded to below
investment grade. If that happens, the Portfolio does not have to sell the
security unless the Adviser determines that under the circumstances the
security is no longer an appropriate investment for the Portfolio.
In making investment decisions, the Adviser considers a number of factors
including credit quality, the price of the security relative to that of other
securities in its sector, current yield, maturity, yield to maturity,
anticipated changes in interest rates and other economic factors, liquidity,
and the overall quality of the investment.
The remaining maturity (i.e., length of time until an obligation must be
repaid) of the obligations held by the Portfolio will vary from one to 30
years. The Portfolio's average weighted maturity will vary from time to time
depending on current market and economic conditions and the Adviser's
assessment of probable changes in interest rates.
22
<PAGE>
Risk/Return Summary Government & Corporate Bond Portfolio
Principal Risk Considerations
The prices of debt securities tend to move in the opposite direction to
interest rates. When rates are rising, the prices of debt securities tend to
fall. When rates are falling, the prices of debt securities tend to rise.
Generally, the longer the time until maturity, the more sensitive the price of
a debt security is to interest rate changes.
Changes in interest rates also may cause certain debt securities held by the
Portfolio, including callable securities and mortgage-backed securities, to be
paid off much sooner or later than expected. In the event that a security is
paid off sooner than expected because of a decline in interest rates, the
Portfolio may be unable to recoup all of its initial investment and may also
suffer from having to reinvest in lower-yielding securities. In the event of a
later than expected payment because of a rise in interest rates, the value of
the obligation will decrease, and the Portfolio may suffer from the inability
to invest in higher-yielding securities.
The value of debt securities also depends on the ability of issuers to make
principal and interest payments. If an issuer can't meet its payment
obligations or if its credit rating is lowered, the value of its debt
securities will fall.
Foreign investments may be riskier than U.S. investments because of currency
exchange rate volatility, government restrictions, different accounting
standards and political instability. In addition, investments in foreign
securities may involve higher costs than investments in U.S. securities,
including higher transaction and custody costs as well as the imposition of
additional taxes by foreign governments.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolio and how they may advance the Portfolio's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
23
<PAGE>
Risk/Return Summary Government & Corporate Bond Portfolio
Institutional Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1995 1996 1997 1998 1999
16.61% 1.83% 8.24% 8.67% -2.06%
<TABLE>
<S> <C>
Best quarter: 5.60% for the quarter ending June 30, 1995
Worst quarter: -2.79% for the quarter ending March 31, 1996
</TABLE>
-------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended
December 31, 1999
-----------------------------------------------------------------
Return History
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Institutional Shares has varied from year to year. The table shows how the
Portfolio's average annual returns for one year, five years and since inception
compare to those of a broad-based market index. Both the bar chart and table
assume reinvestment of all dividends and distributions. The Portfolio's past
performance does not necessarily indicate how it will perform in the future.
- --------------------------------------------------------------------------------
Know your index
The Lehman Brother Aggregate Bond Index is an unmanaged index made up of Lehman
Brothers' Government/Corporate Bond Index, its Mortgage Backed Securities Index
and its Asset Backed Securities Index.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year 5 Years Inception*
----------------------------------
<S> <C> <C> <C>
Institutional Shares -2.06% 6.47% 4.86%
----------------------------------
Lehman Brothers Aggregate Bond Index -0.82% 7.73% 5.88%
- ------------------------------------------------------------------
</TABLE>
* January 3, 1994 for Institutional Shares; December 31, 1993 for the Lehman
Brothers Aggregate Bond Index.
24
<PAGE>
Risk/Return Summary Government & Corporate Bond Portfolio
The table on the right shows the fees and expenses that you pay if you buy and
hold Institutional Shares of the Government & Corporate Bond Portfolio.
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
Fees and Expenses
<TABLE>
<CAPTION>
Annual Portfolio Operating
Expenses
(expenses that are deducted
from the Institutional
Portfolio's assets) Shares
<S> <C>
Management Fees .45%
---------------------------------------------
Distribution (12b-1) Fees None
---------------------------------------------
Other Expenses .63%/1/
---------------------------------------------
Total Annual Portfolio
Operating Expenses 1.08%/1/
- ----------------------------------------------
</TABLE>
/1/ Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Institutional Shares for the current fiscal year are expected to
be less than the amounts shown above because certain of the Portfolio's
service providers are voluntarily waiving a portion of their fees and/or
reimbursing the Portfolio for certain other expenses. These fee waivers
and/or reimbursements are being made in order to keep the annual fees and
expenses for the Portfolio's Institutional Shares at a certain level. Other
Expenses and Total Annual Portfolio Operating Expenses, after taking these
fee waivers and expense reimbursements into account, are expected to be .52%
and .97%, respectively, for Institutional Shares. These fee waivers and
expense reimbursements may be revised or cancelled at any time.
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Institutional Shares $110 $343 $595 $1,317
- -----------------------------------------------
</TABLE>
25
<PAGE>
Risk/Return Summary Balanced Portfolio
- --------------------------------------------------------------------------------
Total return consists of net income (dividend and/or interest income from
Portfolio securities, less expenses of the Portfolio) and capital gains and
losses, both realized and unrealized, from Portfolio securities.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Investment grade bonds are those of medium credit quality or better as
determined by a national rating agency, such as Standard & Poor's Ratings Group
(bonds rated BBB or higher) and Moody's Investors Service, Inc. (bonds rated
Baa or higher). The higher the credit rating, the less likely it is that the
bond issuer will default on its principal and interest payments.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is to maximize total return through a
combination of growth of capital and current income consistent with the
preservation of capital.
Principal Investment Strategies
The Portfolio invests in a combination of equity securities (such as stocks),
fixed-income securities (such as bonds) and money market instruments in
weightings the Adviser believes will offer attractive total returns over time.
In making asset allocation decisions, the Adviser evaluates forecasts for
inflation, interest rates and long-term corporate earnings growth. The Adviser
then examines the potential effect of these factors on each asset group over a
one- to three-year time period using its own dynamic computer models. These
models show the statistical impact of the Adviser's economic outlook upon the
future returns of each asset group. The Adviser periodically will increase or
decrease the Portfolio's allocations to equities and fixed-income securities
based on which class appears relatively more attractive than the other. For
example, if the Adviser expects more rapid economic growth leading to better
corporate earnings, it will increase the Portfolio's holdings of equity
securities and reduce its holdings of fixed-income securities and money market
instruments.
In selecting equity securities, the Adviser considers historical and projected
earnings, the price/earnings relationship and company growth and asset value.
In selecting fixed income securities, the Adviser seeks those issues
representing the best value among various sectors, and also considers credit
quality, prevailing interest rates and liquidity.
Under normal market conditions, the Portfolio invests at least 25% of its total
assets in fixed-income securities and no more than 75% of its total assets in
equity securities. The actual percentages will vary from time to time based on
the Adviser's economic and market outlooks. The Portfolio's equity securities
will consist mainly of common stocks of companies with large market
capitalizations, and its fixed-income securities will consist mainly of
investment grade bonds, including U.S. Government securities. Occasionally, the
rating of a fixed-income security held by the Portfolio may be downgraded to
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 Portfolio may emphasize, from time to time, particular companies or market
sectors, such as technology, in attempting to achieve its investment objective.
26
<PAGE>
Risk/Return Summary Balanced Portfolio
- --------------------------------------------------------------------------------
Portfolio Manager
Peter Merzian, a Senior Associate of FIRMCO, is responsible for the day-to-day
management of the Portfolio. He has been with FIRMCO and its affiliates since
1993 and has managed the Portfolio since May 1996. He also manages the Fund's
three municipal bond portfolios.
- --------------------------------------------------------------------------------
Principal Risk Considerations
The Portfolio invests in stocks and other equity securities, which may decline
in value over short or extended periods of time. Equity markets tend to be
cyclical; there are times when stock prices generally increase, and other times
when they generally decrease. This could cause the value of your investment in
the Portfolio to fluctuate.
The Portfolio also invests in fixed-income securities, which lose value when
interest rates increase (but increase in value when interest rates decline).
Longer-term fixed-income securities are more susceptible to these fluctuations
in interest rates than short-term fixed-income securities.
To the extent that the Portfolio emphasizes particular companies or market
sectors, such as technology, it will be especially susceptible to the risks
associated with investments in those companies or market sectors. Stocks of
technology companies may be subject to greater price volatility than stocks of
companies in other sectors. Technology companies may produce or use products or
services that prove commercially unsuccessful, become obsolete or become
adversely impacted by government regulation. Technology stocks may experience
significant price movements caused by disproportionate investor optimism or
pessimism.
Changes in interest rates may cause certain fixed-income securities, such as
callable securities and mortgage-backed securities, to be paid off much sooner
or later than expected. In the event that a security is paid off sooner than
expected because of a decline in interest rates, the Portfolio may be unable to
recoup all of its initial investment and may also suffer from having to
reinvest in lower-yielding securities. In the event of a later than expected
payment because of a rise in interest rates, the value of the obligation will
decrease, and the Portfolio may suffer from the inability to invest in higher-
yielding securities.
Fixed-income securities are subject to other risks, including the risk that the
issuer will be unable to make payments of principal and interest.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolio and how they may advance the Portfolio's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
27
<PAGE>
Risk/Return Summary Balanced Portfolio
Return History
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Institutional Shares has varied from year to year. The table shows how the
Portfolio's average annual returns for one year, five years and since inception
compare to those of broad-based market indexes. Both the bar chart and table
assume reinvestment of all dividends and distributions. The Portfolio's past
performance does not necessarily indicate how it will perform in the future.
- --------------------------------------------------------------------------------
Know your index
The S&P 500 Index is an unmanaged index comprised of 500 widely held common
stocks listed on the New York Stock Exchange, the American Stock Exchange and
NASDAQ.
The Lehman Brothers Aggregate Bond Index is an unmanaged index made up of
Lehman Brothers' Government/ Corporate Bond Index, its Mortgage Backed
Securities Index and its Asset Backed Securities Index.
- --------------------------------------------------------------------------------
Institutional Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1995 1996 1997 1998 1999
25.99% 11.99% 18.08% 11.29% 7.79%
<TABLE>
<S> <C>
Best quarter: 11.05% for the quarter ending December 31, 1998
Worst quarter: -7.49% for the quarter ending September 30, 1998
</TABLE>
-------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended
December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
1 5 Since
Year Years Inception*
-----------------------------------------
<S> <C> <C> <C>
Institutional Shares 7.79% 14.85% 11.84%
-----------------------------------------
S&P 500 Index 21.04% 28.56% 23.55%
-----------------------------------------
Lehman Brothers Aggregate Bond Index -0.82% 7.73% 5.88%
- ----------------------------------------------------------------
</TABLE>
* January 3, 1994 for Institutional Shares; December 31, 1993 for the S&P 500
Index and the Lehman Brothers Aggregate Bond Index.
28
<PAGE>
Risk/Return Summary Balanced Portfolio
The table on the right shows the fees and expenses that you pay if you buy and
hold Institutional Shares of the Balanced Portfolio.
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
Fees and Expenses
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses
(expenses that are deducted from the Institutional
Portfolio's assets) Shares
<S> <C>
Management Fees .75%
---------------------------------------------------------
Distribution (12b-1) Fees None
---------------------------------------------------------
Other Expenses .63%/1/
---------------------------------------------------------
Total Annual Portfolio Operating Expenses 1.38%/1/
- ----------------------------------------------------------
</TABLE>
/1/ Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Institutional Shares for the current fiscal year are expected
to be less than the amounts shown above because certain of the Portfolio's
service providers are voluntarily waiving a portion of their fees and/or
reimbursing the Portfolio for certain other expenses. These fee waivers
and/or reimbursements are being made in order to keep the annual fees and
expenses for the Portfolio's Institutional Shares at a certain level. Other
Expenses and Total Annual Portfolio Operating Expenses, after taking these
fee waivers and expense reimbursements into account, are expected to be
.53% and 1.28%, respectively, for Institutional Shares. These fee waivers
and expense reimbursements may be revised or cancelled at any time.
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Institutional Shares $140 $437 $755 $1,657
- -----------------------------------------------
</TABLE>
29
<PAGE>
Risk/Return Summary Equity Income Portfolio
- --------------------------------------------------------------------------------
Market capitalization is a common measure of the size of a company. It is the
market price of a share of the company's stock multiplied by the number of
outstanding shares.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Value stocks are those that appear to be underpriced based on valuation
measures, such as lower price-to-earnings and price-to-book value ratios.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Portfolio Manager
FIRMCO's Equity Committee is responsible for the day-to-day management of the
Portfolio. The Committee and its predecessor have managed the Portfolio since
1998.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is to seek to provide an above-average
level of income consistent with long-term capital appreciation.
Principal Investment Strategies
The Portfolio invests primarily in the common stocks of value companies with
large market capitalizations (generally, $5 billion or higher). In selecting
these stocks, the Adviser evaluates a number of quantitative factors, including
dividend yield, current and future earnings potential compared to stock prices
and total return potential. The Adviser also examines other measures of
valuation, including cash flow, asset value and book value.
Under normal market conditions, the Portfolio invests at least 65% of its total
assets in income-producing (dividend-paying) equity securities, primarily
common stocks. These stocks generally will be listed on a national stock
exchange or will be unlisted stocks with established over-the-counter markets.
Many such stocks may offer above-average dividend yields, with corresponding
above-average levels of income, in each case as compared to the S&P 500 Index.
The Portfolio may emphasize, from time to time, particular companies or market
sectors, such as technology, in attempting to achieve its investment objective.
Principal Risk Considerations
The Portfolio invests in stocks and other equity securities, which may decline
in value over short or extended periods of time. Equity markets tend to be
cyclical; there are times when stock prices generally increase, and other times
when they generally decrease. This could cause the value of your investment in
the Portfolio to fluctuate. In addition, the Portfolio is subject to the
additional risk that the value stocks it typically holds may not perform as
well as other types of stocks, such as growth stocks.
To the extent that the Portfolio emphasizes particular companies or market
sectors, such as technology, it will be especially susceptible to the risks
associated with investments in those companies or market sectors. Stocks of
technology companies may be subject to greater price volatility than stocks of
companies in other sectors. Technology companies may produce or use products or
services that prove commercially unsuccessful, become obsolete or become
adversely impacted by government regulation. Technology stocks may experience
significant price movements caused by disproportionate investor optimism or
pessimism.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolio and how they may advance the Portfolio's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
30
<PAGE>
Risk/Return Summary Equity Income Portfolio
Return History
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Institutional Shares has varied from year to year. The table shows how the
Portfolio's average annual returns for one year and since inception compare to
those of a broad-based market index. Both the bar chart and table assume
reinvestment of all dividends and distributions. The Portfolio's past
performance does not necessarily indicate how it will perform in the future.
- --------------------------------------------------------------------------------
Know your index
The Russell 1000 Value Index is an unmanaged index that measures the
performance of the stocks in the Russell 1000 Index with less than average
growth orientation. Companies in this Index generally have low price-to-book
and price-to-earnings ratios, higher dividend yields and lower forecasted
growth values. The Russell 1000 Index consists of the 1,000 largest U.S.
companies as ranked by total market capitalization.
- --------------------------------------------------------------------------------
Institutional Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1998 1999
10.82% -2.85%
<TABLE>
<S> <C>
Best quarter: 11.90% for the quarter ending March 31, 1998
Worst quarter: -8.75% for the quarter ending September 30, 1998
</TABLE>
-------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year Inception*
-----------------
<S> <C> <C>
Institutional Shares -2.85% 9.99%
-----------------
Russell 1000 Value Index 7.35% 17.41%
- ---------------------------------------------
</TABLE>
* February 27, 1997 for Institutional Shares; February 28, 1997 for the
Russell 1000 Value Index.
31
<PAGE>
Risk/Return Summary Equity Income Portfolio
The table on the right shows the fees and expenses that you pay if you buy and
hold Institutional Shares of the Equity Income Portfolio.
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
Fees and Expenses
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses
(expenses that are deducted from the Institutional
Portfolio's assets) Shares
<S> <C>
Management Fees .75%
---------------------------------------------------------
Distribution (12b-1) Fees None
---------------------------------------------------------
Other Expenses .63%/1/
---------------------------------------------------------
Total Annual Portfolio Operating Expenses 1.38%/1/
- ----------------------------------------------------------
</TABLE>
/1/ Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Institutional Shares for the current fiscal year are expected to
be less than the amounts shown above because certain of the Portfolio's
service providers are voluntarily waiving a portion of their fees and/or
reimbursing the Portfolio for certain other expenses. These fee waivers
and/or reimbursements are being made in order to keep the annual fees and
expenses for the Portfolio's Institutional Shares at a certain level. Other
Expenses and Total Annual Portfolio Operating Expenses, after taking these
fee waivers and expense reimbursements into account, are expected to be .53%
and 1.28% respectively, for Institutional Shares. These fee waivers and
expense reimbursements may be revised or cancelled at any time.
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Institutional Shares $140 $437 $755 $1,657
- -----------------------------------------------
</TABLE>
32
<PAGE>
Risk/Return Summary Equity Index Portfolio
- --------------------------------------------------------------------------------
Indexing is a strategy whereby a Portfolio attempts to weight its securities to
match those of a broadly-based securities index in an attempt to approximate
the index's performance.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The S&P 500 Index is an unmanaged index comprised of 500 widely held common
stocks listed on the New York Stock Exchange, the American Stock Exchange and
NASDAQ. The S&P 500 Index is heavily weighted with the stocks of large
companies. S&P does not endorse any stock in the S&P 500 Index and is not a
sponsor of, or affiliated in any way with, the Portfolio.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is to seek to provide investment results
that, before the deduction of operating expenses, approximate the price and
yield performance of U.S. publicly traded common stocks with large stock market
capitalizations, as represented by the Standard & Poor's 500 Index, which is
referred to in this prospectus as the "S&P 500 Index."
The Portfolio's investment objective can be changed by the Fund's Board of
Directors without shareholder approval. Shareholders will be given at least 30
days' written notice before any such change occurs.
Principal Investment Strategies
The Portfolio uses an "indexing" strategy through the use of computer models to
approximate the investment performance of the S&P 500 Index. The Portfolio
invests substantially all (at least 80%) of its total assets in securities
listed in the S&P 500 Index and typically will hold all 500 stocks represented
in the Index. In general, each stock's percentage weighting in the Portfolio is
based on its weighting in the Index. When stocks are removed from or added to
the Index, those changes are reflected in the Portfolio. The Portfolio
periodically "rebalances" its holdings as dictated by changes in shareholder
purchase and redemption activity and in the composition of the S&P 500 Index.
To the extent that, from time to time, the stocks in a particular market
sector, such as technology, comprise a significant proportion of the S&P 500
Index, those stocks will be represented in substantially the same proportion in
the Portfolio.
Under normal market conditions, it is expected that the quarterly performance
of the Portfolio, before expenses, will track the performance of the S&P 500
Index within a .95 correlation coefficient.
33
<PAGE>
Risk/Return Summary Equity Index Portfolio
Principal Risk Considerations
The Portfolio invests in stocks and other equity securities, which may decline
in value over short or extended periods of time. Equity markets tend to be
cyclical; there are times when stock prices generally increase, and other times
when they generally decrease. This could cause the value of your investment in
the Portfolio to fluctuate. In addition, the Portfolio is subject to the
additional risk that the large-capitalization stocks it typically holds may not
perform as well as other types of stocks, such as small-capitalization stocks.
To the extent that the stocks in a particular market sector, such as
technology, comprise a significant portion of the S&P 500 Index and,
correspondingly, of the Portfolio's holdings, the Portfolio will be especially
susceptible to the risks associated with investments in those market sectors.
Technology companies may produce or use products or services that prove
commercially unsuccessful, become obsolete or become adversely impacted by
government regulation. Technology stocks may experience significant price
movements caused by disproportionate investor optimism or pessimism.
There is the additional risk that the Portfolio's investment results may fail
to match those of the S&P 500 Index as a result of shareholder purchase and
redemption activity, transaction costs, expenses and other factors.
34
<PAGE>
Risk/Return Summary Equity Index Portfolio
Return History
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Institutional Shares has varied from year to year. The table shows how the
Portfolio's average annual returns for one year and since inception compare to
those of the S&P 500 Index. Both the bar chart and table assume reinvestment of
all dividends and distributions. The Portfolio's past performance does not
necessarily indicate how it will perform in the future.
Institutional Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1998 1999
27.98% 20.12%
<TABLE>
<S> <C>
Best quarter: 21.10% for the quarter ending December 31, 1998
Worst quarter: -9.96% for the quarter ending September 30, 1998
</TABLE>
-------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year Inception*
-----------------
<S> <C> <C>
Institutional Shares 20.12% 26.73%
-----------------
S&P 500 Index 21.04% 27.35%
- -----------------------------------------
</TABLE>
* May 1, 1997 for Institutional Shares; April 30, 1997 for the S&P 500 Index.
35
<PAGE>
Risk/Return Summary Equity Index Portfolio
The table on the right shows the fees and expenses that you pay if you buy and
hold Institutional Shares of the Equity Index Portfolio.
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
Fees and Expenses
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses
(expenses that are deducted from the Institutional
Portfolio's assets) Shares
<S> <C>
Management Fees .30%
---------------------------------------------------------
Distribution (12b-1) Fees None
---------------------------------------------------------
Other Expenses .65%/1/
---------------------------------------------------------
Total Annual Portfolio Operating Expenses .95%/1/
- ----------------------------------------------------------
</TABLE>
/1/ Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Institutional Shares for the current fiscal year are expected to
be less than the amounts shown above because certain of the Portfolio's
service providers are voluntarily waiving a portion of their fees and/or
reimbursing the Portfolio for certain other expenses. These fee waivers
and/or reimbursements are being made in order to keep the annual fees and
expenses for the Portfolio's Institutional Shares at a certain level. Other
Expenses and Total Annual Portfolio Operating Expenses, after taking these
fee waivers and expense reimbursements into account, are expected to be .55%
and .85%, respectively, for Institutional Shares. These fee waivers and
expense reimbursements may be revised or cancelled at any time.
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Institutional Shares $97 $303 $525 $1,166
- -----------------------------------------------
</TABLE>
36
<PAGE>
Risk/Return Summary Growth & Income Equity Portfolio
- --------------------------------------------------------------------------------
Portfolio Manager
FIRMCO's Equity Committee is responsible for the day-to-day management of the
Portfolio. The Committee and its predecessor have managed the Portfolio since
1998.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is to provide long-term capital growth,
with income a secondary consideration.
Principal Investment Strategies
The Portfolio invests primarily in common stocks. The Adviser selects stocks
based on a number of factors related to historical and projected earnings and
the price/earnings relationship as well as company growth and asset value,
consistency of earnings growth and earnings quality. The Adviser favors the
stocks of those companies which are believed to have superior revenue and
earnings growth prospects relative to their peers and to their price/earnings
ratios.
Stocks purchased for the Portfolio generally will be listed on a national stock
exchange or will be unlisted securities with an established over-the-counter
market. These stocks tend to pay dividends, so many of the Portfolio's
investments may produce some income. Nevertheless, income is not a primary
factor in the stock selection process.
The Portfolio may emphasize, from time to time, particular companies or market
sectors, such as technology, in attempting to achieve its investment objective.
Principal Risk Considerations
The Portfolio invests in stocks and other equity securities, which may decline
in value over short or extended periods of time. Equity markets tend to be
cyclical; there are times when stock prices generally increase, and other times
when they generally decrease. This could cause the value of your investment in
the Portfolio to fluctuate.
To the extent that the Portfolio emphasizes particular companies or market
sectors, such as technology, it will be especially susceptible to the risks
associated with investments in those companies or market sectors. Stocks of
technology companies may be subject to greater price volatility than stocks of
companies in other sectors. Technology companies may produce or use products or
services that prove commercially unsuccessful, become obsolete or become
adversely impacted by government regulation. Technology stocks may experience
significant price movements caused by disproportionate investor optimism or
pessimism.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolio and how they may advance the Portfolio's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
37
<PAGE>
Risk/Return Summary Growth & Income Equity Portfolio
Return History
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Institutional Shares has varied from year to year. The table shows how the
Portfolio's average annual returns for one year, five years and since inception
compare to those of a broad-based market index. Both the bar chart and table
assume reinvestment of all dividends and distributions. The Portfolio's past
performance does not necessarily indicate how it will perform in the future.
- --------------------------------------------------------------------------------
Know your index
The S&P 500 Index is an unmanaged index comprised of 500 widely held common
stocks listed on the New York Stock Exchange, the American Stock Exchange and
NASDAQ.
- --------------------------------------------------------------------------------
Institutional Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1995 1996 1997 1998 1999
33.98% 19.04% 27.22% 13.12% 13.50%
<TABLE>
<S> <C>
Best quarter: 18.51% for the quarter ending December 31, 1998
Worst quarter: -14.41% for the quarter ending September 30, 1998
</TABLE>
-------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
5 Since
1 Year Years Inception*
------------------------
<S> <C> <C> <C>
Institutional Shares 13.50% 21.10% 17.21%
------------------------
S&P 500 Index 21.04% 28.56% 23.55%
- ------------------------------------------------
</TABLE>
* January 3, 1994 for Institutional Shares; December 31, 1993 for the S&P 500
Index.
38
<PAGE>
Risk/Return Summary Growth & Income Equity Portfolio
The table on the right shows the fees and expenses that you pay if you buy and
hold Institutional Shares of the Growth & Income Equity Portfolio.
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
Fees and Expenses
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses
(expenses that are deducted from the Institutional
Portfolio's assets) Shares
<S> <C>
Management Fees .55%
---------------------------------------------------------
Distribution (12b-1) Fees None
---------------------------------------------------------
Other Expenses .61%/1/
---------------------------------------------------------
Total Annual Portfolio Operating Expenses 1.16%/1/
- ----------------------------------------------------------
</TABLE>
/1/ Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Institutional Shares for the current fiscal year are expected to
be less than the amounts shown above because certain of the Portfolio's
service providers are voluntarily waiving a portion of their fees and/or
reimbursing the Portfolio for certain other expenses. These fee waivers
and/or reimbursements are being made in order to keep the annual fees and
expenses for the Portfolio's Institutional Shares at a certain level. Other
Expenses and Total Annual Portfolio Operating Expenses, after taking these
fee waivers and expense reimbursements into account, are expected to be .49%
and 1.04%, respectively, for Institutional Shares. These fee waivers and
expense reimbursements may be revised or cancelled at any time.
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Institutional Shares $118 $368 $638 $1,409
- -----------------------------------------------
</TABLE>
39
<PAGE>
Risk/Return Summary Growth Equity Portfolio
- --------------------------------------------------------------------------------
Growth stocks may offer above-average revenue and earnings potential and
accompanying capital growth, typically with a lower dividend yield than value
stocks.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Portfolio Manager
Walter Dewey, Chartered Financial Analyst, is responsible for the day-to-day
management of the Portfolio. He has been with FIRMCO and its affiliates for 16
years and has managed the Portfolio since February 2000.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is capital appreciation.
Principal Investment Strategies
The Portfolio invests primarily in the common stocks of growth companies. In
selecting securities for the Portfolio, the Adviser evaluates a company's
earnings history and the risk and volatility of the company's business. The
Adviser also considers other factors, such as product position and the ability
to increase market share, but the ability to increase company earnings is the
primary consideration.
Under normal market conditions, the Portfolio invests at least 65% of its total
assets in common stocks or other equity securities, such as preferred stocks,
convertible securities and warrants. Typically, the Portfolio's stocks are
those of large- and medium-capitalization companies that are listed on the New
York Stock Exchange, the American Stock Exchange or NASDAQ.
The Portfolio may emphasize, from time to time, particular companies or market
sectors, such as technology, in attempting to achieve its investment objective.
Principal Risk Considerations
The Portfolio invests in stocks and other equity securities, which may decline
in value over short or extended periods of time. Equity markets tend to be
cyclical; there are times when stock prices generally increase, and other times
when they generally decrease. This could cause the value of your investment in
the Portfolio to fluctuate. In addition, the Portfolio is subject to the
additional risk that the growth stocks it typically holds may not perform as
well as other types of stocks, such as value stocks.
To the extent that the Portfolio emphasizes particular companies or market
sectors, such as technology, it will be especially susceptible to the risks
associated with investments in those companies or market sectors. Stocks of
technology companies may be subject to greater price volatility than stocks of
companies in other sectors. Technology companies may produce or use products or
services that prove commercially unsuccessful, become obsolete or become
adversely impacted by government regulation. Technology stocks may experience
significant price movements caused by disproportionate investor optimism or
pessimism.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolio and how they may advance the Portfolio's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
40
<PAGE>
Risk/Return Summary Growth Equity Portfolio
Return History+
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Institutional Shares has varied from year to year. The table shows how the
Portfolio's average annual returns for one year and since inception compare to
those of a broad-based market index. Both the bar chart and table assume
reinvestment of dividends and distributions. The Portfolio's past performance
does not necessarily indicate how it will perform in the future.
- --------------------------------------------------------------------------------
Know your index
The S&P 500 Index is an unmanaged index comprised of 500 widely held common
stocks listed on the New York Stock Exchange, the American Stock Exchange and
NASDAQ.
- --------------------------------------------------------------------------------
Institutional Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1998 1999
30.04% 24.11%
<TABLE>
<S> <C>
Best quarter: 25.66% for the quarter ending December 31, 1998
Worst quarter: -11.85% for the quarter ending September 30, 1998
</TABLE>
-------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year Inception*
-----------------
<S> <C> <C>
Institutional Shares 24.11% 25.56%
-----------------
S&P 500 Index 21.04% 24.65%
- -----------------------------------------
</TABLE>
+ The Portfolio commenced operations on January 4, 1993 as the Arrow Equity
Portfolio, a separate investment portfolio (the "Predecessor Portfolio") of
Arrow Funds. On November 24, 1997, the Predecessor Portfolio was
reorganized as a new portfolio of the Fund. Prior to the reorganization,
the Predecessor Portfolio offered and sold shares that were similar to the
Fund's Investor A Shares.
* December 2, 1997 for Institutional Shares; November 30, 1997 for the S&P
500 Index.
41
<PAGE>
Risk/Return Summary Growth Equity Portfolio
The table on the right shows the fees and expenses that you pay if you buy and
hold Institutional Shares of the Growth Equity Portfolio.
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
Fees and Expenses
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses
(expenses that are deducted from the Institutional
Portfolio's assets) Shares
<S> <C>
Management Fees .75%
- ----------------------------------------------------------
Distribution (12b-1) Fees None
- ----------------------------------------------------------
Other Expenses .62%/1/
- ----------------------------------------------------------
Total Annual Portfolio Operating Expenses 1.37%/1/
- ----------------------------------------------------------
</TABLE>
/1/ Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Institutional Shares for the current fiscal year are expected to
be less than the amounts shown above because certain of the Portfolio's
service providers are voluntarily waiving a portion of their fees and/or
reimbursing the Portfolio for certain other expenses. These fee waivers
and/or reimbursements are being made in order to keep the annual fees and
expenses for the Portfolio's Institutional Shares at a certain level. Other
Expenses and Total Annual Portfolio Operating Expenses, after taking these
fee waivers and expense reimbursements into account, are expected to be .52%
and 1.27%, respectively, for Institutional Shares. These fee waivers and
expense reimbursements may be revised or cancelled at any time.
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Institutional Shares $139 $434 $750 $1,646
- -----------------------------------------------
</TABLE>
42
<PAGE>
Risk/Return Summary Small Cap Equity Portfolio
- --------------------------------------------------------------------------------
Portfolio Manager
Robert J. Anthony, Senior Associate at FIRMCO, and Gregory Glidden, Senior
Portfolio Manager at FIRMCO, are responsible for the day-to-day management of
the Portfolio. Mr. Anthony has been with FIRMCO and its affiliates for 27 years
and has managed the Portfolio since its inception in 1992. Mr. Glidden has been
with FIRMCO and its affiliates for 17 years and has co-managed the Portfolio
since February 2000.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is capital appreciation.
Principal Investment Strategies
Under normal conditions, the Portfolio invests at least 65% of its total assets
in common stocks of small- to medium-sized companies with market
capitalizations from $100 million to $2 billion at the time of purchase and
which the Adviser believes have above-average prospects for capital
appreciation. Stocks purchased by the Portfolio may be listed on a national
securities exchange or may be unlisted securities with or without an
established over-the-counter market.
The Portfolio also may invest a portion of its assets in larger companies that
the Adviser believes offer improved growth possibilities because of rejuvenated
management, product changes or other developments likely to stimulate earnings
or asset growth. The Portfolio also invests in stocks the Adviser believes are
undervalued or to a limited extent in initial public offerings (IPOs) of new
companies that demonstrate the potential for price appreciation. The Adviser
selects stocks based on a number of factors, including historical and projected
earnings, asset value, potential for price appreciation and earnings growth,
and quality of the products manufactured or services offered. The Adviser uses
a screening process involving a variety of quantitative techniques in
evaluating prospects for capital appreciation.
The Portfolio may emphasize, from time to time, particular companies or market
sectors, such as technology, in attempting to achieve its investment objective.
43
<PAGE>
Risk/Return Summary Small Cap Equity Portfolio
Principal Risk Considerations
The Portfolio invests in stocks and other equity securities, which may decline
in value over short or extended periods of time. Equity markets tend to be
cyclical; there are times when stock prices generally increase, and other times
when they generally decrease. This could cause the value of your investment in
the Portfolio to fluctuate.
Compared to larger-capitalization stocks, small-capitalization stocks tend to
carry greater risk and exhibit greater price volatility because their
businesses may not be well-established. In addition, some smaller companies may
have specialized or limited product lines, markets or financial resources and
may be dependent on one-person management. All of these factors increase risk
and may result in more significant losses than the other Mercantile Stock
Portfolios. In an effort to reduce the risks inherent in smaller-company
stocks, the Portfolio's holdings are diversified over a number of companies and
industry groups.
To the extent that the Portfolio emphasizes particular companies or market
sectors, such as technology, it will be especially susceptible to the risks
associated with investments in those companies or market sectors. Stocks of
technology companies may be subject to greater price volatility than stocks of
companies in other sectors. Technology companies may produce or use products or
services that prove commercially unsuccessful, become obsolete or become
adversely impacted by government regulation. Technology stocks may experience
significant price movements caused by disproportionate investor optimism or
pessimism.
The Portfolio's performance results may reflect periods of above-average
performance attributable to its investing a portion of its assets in the
securities of companies offering shares in IPOs. It is possible that the above-
average performance of such companies may not be repeated in the future.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolio and how they may advance the Portfolio's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
44
<PAGE>
Risk/Return Summary Small Cap Equity Portfolio
Return History
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Institutional Shares has varied from year to year. The table shows how the
Portfolio's average annual returns for one year, five years and since inception
compare to those of a broad-based market index. Both the bar chart and the
table assume reinvestment of all dividends and distributions. The Portfolio's
past performance does not necessarily indicate how it will perform in the
future.
- --------------------------------------------------------------------------------
Know your index
The Russell 2000 Index is an unmanaged index comprised of the 2,000 smallest of
the 3,000 largest U.S. companies based on market capitalization.
- --------------------------------------------------------------------------------
Institutional Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1995 1996 1997 1998 1999
16.90% 10.61% 20.50% -8.02% 16.75%
<TABLE>
<S> <C>
Best quarter: 17.00% for the quarter ending June 30, 1999
Worst quarter: -24.69% for the quarter ending September 30, 1998
</TABLE>
-------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
5 Since
1 Year Years Inception*
------------------------
<S> <C> <C> <C>
Institutional Shares 16.75% 10.84% 9.34%
------------------------
Russell 2000 Index 21.26% 16.69% 13.38%
- ------------------------------------------------
</TABLE>
* January 3, 1994 for Institutional Shares; December 31, 1993 for the Russell
2000 Index.
45
<PAGE>
Risk/Return Summary Small Cap Equity Portfolio
The table on the right shows the fees and expenses that you pay if you buy and
hold Institutional Shares of the Small Cap Equity Portfolio.
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
Fees and Expenses
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses
(expenses that are deducted from the Institutional
Portfolio's assets) Shares
<S> <C>
Management Fees .75%
---------------------------------------------------------
Distribution (12b-1) Fees None
---------------------------------------------------------
Other Expenses .61%/1/
---------------------------------------------------------
Total Annual Portfolio Operating Expenses 1.36%/1/
- ----------------------------------------------------------
</TABLE>
/1/ Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Institutional Shares for the current fiscal year are expected to
be less than the amounts shown above because certain of the Portfolio's
service providers are voluntarily waiving a portion of their fees and/or
reimbursing the Portfolio for certain other expenses. These fee waivers
and/or reimbursements are being made in order to keep the annual fees and
expenses for the Portfolio's Institutional Shares at a certain level. Other
Expenses and Total Annual Portfolio Operating Expenses, after taking these
fee waivers and expense reimbursements into account, are expected to be .51%
and 1.26%, respectively, for Institutional Shares. These fee waivers and
expense reimbursements may be revised or cancelled at any time.
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Institutional Shares $138 $431 $745 $1,635
- -----------------------------------------------
</TABLE>
46
<PAGE>
Risk/Return Summary Small Cap Equity Index Portfolio
- --------------------------------------------------------------------------------
Indexing is a strategy whereby a Portfolio attempts to weight its securities to
match those of a broadly-based securities index in an attempt to approximate
the index's performance.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The S&P SmallCap 600 Index is an unmanaged index that tracks the performance of
600 domestic companies traded on the New York Stock Exchange, American Stock
Exchange and NASDAQ. The S&P SmallCap 600 Index is heavily weighted with the
stocks of small companies with market capitalizations that currently range
between $28 million and $4.2 billion. S&P does not endorse any stock in the S&P
SmallCap 600 Index and is not a sponsor of, or affiliated in any way with, the
Portfolio.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is to provide investment results that,
before deduction of operating expenses, approximate the price and yield
performance of U.S. common stocks with smaller stock market capitalizations, as
represented by the S&P SmallCap 600 Index.
The Portfolio's investment objective can be changed by the Fund's Board of
Directors without shareholder approval. Shareholders will be given at least 30
days' written notice before any such change occurs.
Principal Investment Strategies
The Portfolio uses an "indexing" strategy through the use of computer models to
approximate the investment performance of the S&P SmallCap 600 Index. The
Portfolio will invest at least 80% of its total assets in securities listed in
the S&P SmallCap 600 Index and typically will hold all 600 stocks represented
in the Index. Under certain circumstances, however, the Portfolio may not hold
all 600 stocks in the Index because of shareholder activity or changes in the
Index. In general, each stock's percentage weighting in the Portfolio is based
on its weighting in the S&P SmallCap 600 Index. When stocks are removed from or
added to the Index, those changes are reflected in the Portfolio. The Portfolio
periodically "rebalances" its holdings as dictated by changes in shareholder
purchase and redemption activity, and in the composition of the S&P SmallCap
600 Index.
To the extent that, from time to time, the stocks in a particular market
sector, such as technology, comprise a significant portion of the S&P SmallCap
600 Index, those stocks will be represented in substantially the same
proportion in the Portfolio.
Under normal market conditions, it is expected that the quarterly performance
of the Portfolio, before expenses, will track the performance of the S&P
SmallCap 600 Index within a .95 correlation coefficient.
47
<PAGE>
Risk/Return Summary Small Cap Equity Index Portfolio
Principal Risk Considerations
The Portfolio invests in stocks and other equity securities, which may decline
in value over short or extended periods of time. Equity markets tend to be
cyclical; there are times when stock prices generally increase, and other times
when they generally decrease. This could cause the value of your investment in
the Portfolio to fluctuate.
In addition, the Portfolio is subject to the additional risk that the small-
capitalization stocks that it holds may not perform as well as other types of
stocks. Compared to larger-capitalization stocks, small-capitalization stocks
tend to carry greater risk and exhibit greater price volatility because their
businesses may not be well-established. In addition, some smaller companies may
have specialized or limited product lines, markets or financial resources and
may be dependent on one-person management. All of these factors increase risk
and may result in more significant losses than the other Mercantile Stock
Portfolios. By typically investing in all 600 stocks in the Index, the
Portfolio remains broadly diversified, which may reduce some of this risk.
To the extent that the stocks in a particular market sector, such as
technology, comprise a significant portion of the S&P SmallCap 600 Index and,
correspondingly, of the Portfolio's holdings, the Portfolio will be especially
susceptible to the risks associated with investments in those market sectors.
Technology companies may produce or use products or services that prove
commercially unsuccessful, become obsolete or become adversely impacted by
government regulation. Technology stocks may experience significant price
movements caused by disproportionate investor optimism or pessimism.
There is the additional risk that the Portfolio's investment results may fail
to match those of the S&P SmallCap 600 Index as a result of shareholder
purchase and redemption activity, transaction costs, expenses and other
factors.
48
<PAGE>
Risk/Return Summary Small Cap Equity Index Portfolio
Return History
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows the performance of the Portfolio's
Institutional Shares during the last calendar year. The table shows how the
Portfolio's average annual returns for one year and since inception compare to
those of the S&P SmallCap 600 Index. Both the bar chart and the table assume
reinvestment of all dividends and distributions. The Portfolio's past
performance does not necessarily indicate how it will perform in the future.
Institutional Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1999
7.54%
<TABLE>
<S> <C>
Best quarter: 15.02% for the quarter ending June 30, 1999
Worst quarter: -10.90% for the quarter ending March 31, 1999
</TABLE>
-------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year Inception*
-----------------
<S> <C> <C>
Institutional Shares 7.54% 10.09%
-----------------
S&P SmallCap 600 Index 12.40% 12.40%
- -------------------------------------------
</TABLE>
* December 30, 1998 for Institutional Shares; December 31, 1998 for the S&P
Small Cap 600 Index.
49
<PAGE>
Risk/Return Summary Small Cap Equity Index Portfolio
The table on the right shows the fees and expenses that you pay if you buy and
hold Institutional Shares of the Small Cap Equity Index Portfolio.
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
Fees and Expenses
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses
(expenses that are deducted from the Institutional
Portfolio's assets) Shares
<S> <C>
Management Fees .40%
---------------------------------------------------------
Distribution (12b-1) Fees None
---------------------------------------------------------
Other Expenses .72%/1/
---------------------------------------------------------
Total Annual Portfolio Operating Expenses 1.12%/1/
- ----------------------------------------------------------
</TABLE>
/1/ Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Institutional Shares for the current fiscal year are expected to
be less than the amounts shown above because certain of the Portfolio's
service providers are voluntarily waiving a portion of their fees and/or
reimbursing the Portfolio for certain other expenses. These fee waivers
and/or reimbursements are being made in order to keep the annual fees and
expenses for the Portfolio's Institutional Shares at a certain level. Other
Expenses and Total Annual Portfolio Operating Expenses, after taking these
fee waivers and expense reimbursements into account, are expected to be .62%
and 1.02%, respectively, for Institutional Shares. These fee waivers and
expense reimbursements may be revised or cancelled at any time.
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Institutional Shares $114 $356 $617 $1,363
- -----------------------------------------------
</TABLE>
50
<PAGE>
Risk/Return Summary International Equity Portfolio
- --------------------------------------------------------------------------------
Sub-Adviser/Portfolio Manager
FIRMCO has appointed Clay Finlay Inc. ("Clay Finlay" or the "Sub-Adviser") as
sub-adviser to assist in the day-to-day management of the Portfolio. Frances
Dakers, a principal and senior portfolio manager of Clay Finlay, is responsible
for the management of the Portfolio. Ms. Dakers has been with Clay Finlay since
January 1982 and has managed the Portfolio since it began operations in 1994.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is to provide capital growth consistent
with reasonable investment risk.
Principal Investment Strategies
The Portfolio invests primarily in foreign common stocks, most of which will be
denominated in foreign currencies. During normal market conditions, the
Portfolio will invest substantially all (at least 80%) of its total assets in
the securities of companies that derive more than 50% of their gross revenues
outside the United States or have more than 50% of their assets outside the
United States. Under normal market conditions, the Portfolio invests in equity
securities from at least three foreign countries. Generally, at least 50% of
the Portfolio's total assets will be invested in securities of companies
located either in the developed countries of Western Europe or in Japan. The
Portfolio also may invest in other developed countries in the Far East and in
countries with emerging markets or economies.
By investing in various foreign stocks, the Portfolio attempts to achieve broad
diversification and to take advantage of differences between economic trends
and the performance of securities markets in different countries, regions and
geographic areas. In selecting stocks, the Sub-Adviser determines which
companies represent the best values relative to their long-term growth
prospects and local markets through the use of a screening tool which focuses
on valuation ranges. The Sub-Adviser focuses on companies with steady,
sustainable earnings growth rates that sell at a multiple lower than the
average for that growth rate in the local market. The Sub-Adviser also uses
fundamental analysis by evaluating balance sheets, market share and strength of
management.
51
<PAGE>
Risk/Return Summary International Equity Portfolio
Principal Risk Considerations
Investing in foreign companies involves different risks than investing in U.S.
companies due to such factors as foreign government restrictions, different
accounting standards and political instability. Although the multinational
character of the Portfolio's investments should reduce the effect that events
in any one country or geographic area will have on overall performance,
negative results in one foreign market may offset gains in, or negatively
affect, other foreign markets.
The risks associated with foreign investments are heightened when investing in
emerging markets. The governments and economies of emerging market countries
feature greater instability than those of more developed countries. Such
investments tend to fluctuate in price more widely and to be less liquid than
other foreign investments.
The Portfolio is also subject to currency risk, which is the potential for
price fluctuations in the dollar value of the foreign securities which the
Portfolio holds because of changing currency exchange rates.
As with U.S. equity markets, foreign markets tend to be cyclical. There are
times when stock prices generally increase, and other times when they generally
decrease.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolio and how they may advance the Portfolio's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
52
<PAGE>
Risk/Return Summary International Equity Portfolio
Return History
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Institutional Shares has varied from year to year. The table shows how the
Portfolio's average annual returns for one year, five years and since inception
compare to those of a broad-based market index. Both the bar chart and table
assume reinvestment of all dividends and distributions. The Portfolio's past
performance does not necessarily indicate how it will perform in the future.
- --------------------------------------------------------------------------------
Know your index
The Morgan Stanley Capital International Europe, Australasia and Far East
Index, or EAFE Index, is an unmanaged index consisting of companies in
Australia, New Zealand, Europe and the Far East.
- --------------------------------------------------------------------------------
Institutional Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1995 1996 1997 1998 1999
9.21% 10.00% 4.70% 17.45% 50.47%
<TABLE>
<S> <C>
Best quarter: 27.46% for the quarter ending December 31, 1999
Worst quarter: -17.15% for the quarter ending September 30, 1998
</TABLE>
-------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
5 Since
1 Year Years Inception*
------------------------
<S> <C> <C> <C>
Institutional Shares 50.47% 17.32% 15.21%
------------------------
EAFE Index 26.96% 12.83% 11.21%
- ------------------------------------------------
</TABLE>
* April 24, 1994 (date of initial public investment) for Institutional
Shares; April 30, 1994 for the EAFE Index.
53
<PAGE>
Risk/Return Summary International Equity Portfolio
The table on the right shows the fees and expenses that you pay if you buy and
hold Institutional Shares of the International Equity Portfolio.
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
Fees and Expenses
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses
(expenses that are deducted from the Institutional
Portfolio's assets) Shares
<S> <C>
Management Fees 1.00%
---------------------------------------------------------
Distribution (12b-1) Fees None
---------------------------------------------------------
Other Expenses .75%/1/
---------------------------------------------------------
Total Annual Portfolio Operating Expenses 1.75%/1/
- ----------------------------------------------------------
</TABLE>
/1/Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Institutional Shares for the current year are expected to be
less than the amounts shown above because certain of the Portfolio's service
providers are voluntarily waiving a portion of their fees and/or reimbursing
the Portfolio for certain other expenses. These fee waivers and/or
reimbursements are being made in order to keep the annual fees and expenses
for the Portfolio's Institutional Shares at a certain level. Other Expenses
and Total Annual Portfolio Operating Expenses, after taking these fee
waivers and expense reimbursements into account, are expected to be .59% and
1.59% respectively, for Institutional Shares. These fee waivers and expense
reimbursements may be revised or cancelled at any time.
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Institutional Shares $178 $551 $949 $2,062
- -----------------------------------------------
</TABLE>
54
<PAGE>
Risk/Return Summary Additional Information on Risk
The principal risks of investing in each Portfolio are described on the
previous pages. The following supplements that discussion.
Securities Lending
To obtain interest income, each Portfolio may lend its securities to broker-
dealers, banks or institutional borrowers pursuant to agreements requiring that
the loans be continuously secured by collateral equal at all times in value to
at least the market value of the securities loaned. There is the risk that,
when lending portfolio securities, the securities may not be available to the
Portfolio on a timely basis. Therefore, the Portfolio may lose the opportunity
to sell the securities at a desirable price. Additionally, in the event that a
borrower of securities would file for bankruptcy or become insolvent,
disposition of the securities may be delayed pending court action.
Temporary Defensive Positions
Each Portfolio may temporarily hold investments that are not part of its main
investment strategy to try to avoid losses during unfavorable market
conditions. These investments may include cash (which will not earn any
income). In addition, each of the Taxable Bond and Stock Portfolios may hold
money market instruments, including debt securities issued or guaranteed by the
U.S. Government or its agencies, and the International Equity Portfolio may
hold debt obligations of U.S. companies having their principal business
activities in the U.S. This strategy could prevent a Portfolio from achieving
its investment objective and, if utilized by a Stock Portfolio, could reduce
the Portfolio's return and affect its performance during a market upswing.
Other Types of Investments
This prospectus describes each Portfolio's principal investment strategies and
the particular types of securities in which each Portfolio principally invests.
Each Portfolio may, from time to time, make other types of investments and
pursue other investment strategies in support of its overall investment goal.
These supplemental investment strategies--and the risks involved--are described
in detail in the Statement of Additional Information ("SAI"), which is referred
to on the back cover of this prospectus.
Year 2000 Risks
Over the past several years, the Adviser and the Portfolio's other major
service providers expended considerable time and money in addressing the
computer and technology problems associated with the transition to the Year
2000. As a result of those efforts, the Portfolios did not experience any
material disruptions in their operations as a result of the transition to the
21st century. The Adviser and the Portfolios' other major service providers are
continuing to monitor the Year 2000 or Y2K problem, however, and there can be
no assurances that there will be no adverse impact to the Portfolios as a
result of future computer-related Y2K difficulties.
55
<PAGE>
Your Account Explanation of Sales Price
- --------------------------------------------------------------------------------
Business days defined
A business day with respect to the Stock Portfolios is any day that the New
York Stock Exchange is open for business. A business day with respect to the
Money Market and Taxable Bond Portfolios is any day that both the New York
Stock Exchange and the Federal Reserve Banks' Fedline System are open for
business. Currently, the Fund observes the following holidays: New Year's Day,
Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day
(observed), Independence Day (observed), Labor Day, Thanksgiving, Christmas
and, for the Money Market and Taxable Bond Portfolios, Columbus Day and
Veterans' Day.
- --------------------------------------------------------------------------------
Institutional Shares of the Portfolios are sold at their net asset value (NAV).
The NAV for each class of shares of a Money Market Portfolio is determined as
of 11:00 a.m. (Central time) and as of the close of regular trading on the New
York Stock Exchange (currently 3:00 p.m., Central time) on every business day.
The NAV for each class of shares of a Taxable Bond or Stock Portfolio is
determined as of the close of regular trading on the New York Stock Exchange
(currently 3:00 p.m., Central time) on every business day.
The NAV for a class of shares is determined by adding the value of a
Portfolio's investments, cash and other assets attributable to a particular
share class, subtracting the Portfolio's liabilities attributable that class
and then dividing the result by the total number of shares in the class that
are outstanding.
. The investments of each of the Money Market Portfolios are valued at
amortized cost, which is approximately equal to market value.
. The investments of each of the Taxable Bond and Stock Portfolios are valued
according to market value. When a market quote is not readily available, the
security's value is based on "fair value" as determined by FIRMCO (or Clay
Finlay, with respect to the International Equity Portfolio) under the
supervision of the Fund's Board of Directors. Foreign securities acquired by
the International Equity Fund may be valued in foreign markets on days when
the Portfolio's NAV is not calculated. In such cases, the NAV of the
Portfolio's shares may be significantly affected on days when investors
cannot buy and sell Portfolio shares.
. A properly placed purchase order (see "How to Buy Shares" on page 57) that is
delivered to the Fund by 11:00 a.m. (Central time) on any business day with
respect to the Treasury Money Market Portfolio or by 2:00 p.m. (Central time)
on any business day with respect to the Money Market Portfolio receives the
share price next determined if the Fund receives payment in federal funds or
other immediately available funds by 3:00 p.m. (Central time) that day. If
payment is not received by that time, the order will be cancelled. A properly
placed purchase order that is delivered to the Fund after 11:00 a.m. (Central
time) with respect to the Treasury Money Market Portfolio or after 2:00 p.m.
(Central time) with respect to the Money Market Portfolio will be placed the
following business day.
. A properly placed purchase order (see "How to Buy Shares" on page 57) for one
of the Taxable Bond or Stock Portfolios that is delivered to the Fund before
3:00 p.m. (Central time) on any business day receives the share price
determined as of 3:00 p.m. (Central time) that day. If the order is received
after 3:00 p.m. (Central time), it will receive the price determined on the
next business day. Your financial institution must forward your payment to
the Fund no later than 3:00 p.m.(Central time) the next business day after
placing the order, or the order will be cancelled.
56
<PAGE>
Your Account How to Buy Shares
Institutional Shares of the Portfolios are sold to financial institutions, such
as banks, trust companies and thrift institutions, that are purchasing shares
on behalf of discretionary and non-discretionary accounts for which they do not
receive account level asset-based management fees.
If you are purchasing Institutional Shares through a financial institution, you
must follow the procedures established by your institution. Your financial
institution is responsible for sending your purchase order to the Fund's
distributor and wiring payment to the Fund's custodian. Your financial
institution holds the shares in your name and receives all confirmations of
purchases and sales. Financial institutions placing orders for themselves or on
behalf of their customers should call the Fund at 1-800-452-2724.
The Fund does not have any minimum investment requirement for Institutional
Shares, but your financial institution may do so. They may also charge
transaction fees and require you to maintain a minimum account balance.
57
<PAGE>
Your Account How to Sell Shares
Orders to sell or "redeem" Institutional Shares should be placed with the same
financial institution that placed the original purchase order in accordance
with the procedures established by that institution. Your financial institution
is responsible for sending your order to the Fund's distributor and for
crediting your account with the proceeds. The Fund does not currently charge
for wiring the proceeds, but your financial institution may do so.
If the shares being sold are represented by share certificates, then the order
to sell must be made in writing and mailed to: Mercantile Mutual Funds, Inc.,
c/o Firstar Mutual Fund Services, LLC, P.O. Box 3011, Milwaukee, Wisconsin
53201-3011 (via overnight delivery to 615 E. Michigan Street, Milwaukee,
Wisconsin 53202). The order must be accompanied by the share certificates,
properly endorsed for transfer. Additional documents may be required for
certain types of shareholders, such as corporations, partnerships, executors,
trustees, administrators or guardians.
The Fund's transfer agent may require a signature guarantee unless the
redemption proceeds are payable to the shareholder of record and the proceeds
are either mailed to the shareholder's address of record or electronically
transferred to the account designated on the original account application. A
signature guarantee helps prevent fraud, and you may obtain one from most banks
and broker/dealers. Contact the Fund for more information on signature
guarantees.
Institutional Shares will be sold at the NAV next determined after the Fund
accepts an order (see above). If the order to sell is received and accepted by
the Fund before 11:00 a.m. (Central time) on a business day with respect to the
Treasury Money Market Portfolio or before 2:00 p.m. (Central time) on a
business day with respect to the Money Market Portfolio, the proceeds are sent
electronically the same day to the financial institution that placed the order.
If the order to sell is received and accepted by the Fund after 11:00 a.m.
(Central time) on a business day with respect to the Treasury Money Market
Portfolio or after 2:00 p.m. (Central time) on a business day with respect to
the Money Market Portfolio, or on a non-business day, the proceeds normally are
sent electronically to the financial institution on the next business day.
Proceeds from redemptions from the Taxable Bond and Stock Portfolios ordinarily
are sent electronically to your financial institution the next business day as
long as the Fund receives your order by 3:00 p.m. (Central time) on a business
day.
58
<PAGE>
Your Account How to Exchange Shares
The exchange privilege enables shareholders to exchange Institutional Shares of
one Portfolio for Institutional Shares of another Portfolio. Contact your
financial institution or the Fund's distributor for additional information on
the exchange privilege. The exchange privilege may be exercised only in those
states where Institutional Shares of the Portfolio being acquired may be
legally sold.
Institutional Shares of the Portfolios also may be exchanged for shares of
corresponding classes of the Firstar Funds and the Firstar Stellar Funds.
Please read the prospectuses for those Funds before investing.
Administrative Services Fees
Institutional Shares of the Portfolios pay administrative services fees at an
annual rate of up to 0.25% of each Money Market Portfolio's and up to 0.30% of
each Taxable Bond and Stock Portfolio's Institutional Share assets. These fees
are paid to financial institutions that provide certain administrative services
to their customers who own Institutional Shares.
General Transaction Policies
The Fund reserves the right to:
. Refuse any order to buy shares.
. Reject any exchange request.
. Redeem all shares in an account if the balance falls below $500. If,
within 60 days of the Fund's written request, the account balance has not
been increased, a shareholder may be required to redeem all shares. The
Fund will not require a shareholder to redeem shares if the value of the
account drops below $500 due to fluctuations in net asset value.
. Send redemption proceeds within seven days after receiving a request, if
an earlier payment could adversely affect a Portfolio.
. Modify or terminate the exchange privilege after 60 days' written notice
to shareholders.
. Make a "redemption in kind." Under abnormal conditions that may make
payment in cash unwise, the Fund may offer partial or complete payment in
portfolio securities rather than cash at such securities' then-market-
value equal to the redemption price. In such cases, a shareholder may
incur brokerage costs in converting these securities to cash.
Shareholders may be responsible for any fraudulent telephone orders as long as
the Fund has taken reasonable precautions to verify the shareholder's identity.
Shareholders who experience difficulty getting through to the Fund by telephone
because of unusual market conditions should consider selling or exchanging
their shares by mail.
59
<PAGE>
Distributions and Taxes Dividends and Distributions
.Money Market Portfolios
Each Money Market Portfolio declares dividends from net investment income
daily and pays them monthly. Although the Portfolios do not expect to realize
net long-term capital gains, any capital gains realized would be distributed
at least annually.
.Taxable Bond Portfolios
Each Taxable Bond Portfolio declares dividends from net investment income
daily and pays them monthly. Capital gains, if any, are distributed at least
once a year. It's expected that each Portfolio's annual distributions will be
primarily income dividends.
.Stock Portfolios
The Balanced, Equity Income, Equity Index, Growth & Income Equity and Growth
Equity Portfolios declare and pay dividends from net investment income
monthly. The Small Cap Equity, Small Cap Equity Index and International
Equity Portfolios declare and pay dividends from net investment income
quarterly. Capital gains, if any, for all of the Portfolios are distributed
at least once a year. It's expected that each Portfolio's annual
distributions will normally--but not always--consist primarily of capital
gains and not ordinary income.
.All Portfolios
Dividends on each share class of a Portfolio are determined in the same
manner and are paid in the same amount. However, each share class bears all
expenses associated with that particular class.
All of your dividends and capital gains distributions with respect to a
particular Portfolio will be reinvested in additional shares of the same
class unless you or your financial institution instruct otherwise on your
account application or have redeemed all shares you held in the Portfolio. In
such cases, dividends and distributions will be paid in cash.
60
<PAGE>
Distributions and Taxes Taxation
As with any investment, you should consider the tax implications of an
investment in the Portfolios. The following is only a brief summary of some of
the important tax considerations generally affecting the Portfolios and their
shareholders under current law, which may be subject to change in the future.
Consult your tax adviser with specific reference to your own tax situation.
Each Portfolio contemplates declaring as dividends each year all or
substantially all of its taxable income, including its net capital gains (the
excess of long-term capital gain over short-term capital loss). Distributions
attributable to the net capital gain of a Portfolio will be taxable to you as
long-term capital gain, regardless of how long you will have held your shares.
Other Portfolio distributions will generally be taxable as ordinary income. You
will be subject to income tax on distributions regardless whether they are paid
in cash or reinvested in additional shares.
Except in the case of a Money Market Portfolio, if you purchase shares just
prior to a distribution, the purchase price will reflect the amount of the
upcoming distribution, but you will be taxed on the entire amount of the
distribution received even though, as an economic matter, the distribution
simply constitutes a return of capital. This is known as "buying into a
dividend."
Except in the case of a Money Market Portfolio, you will recognize a taxable
gain or loss on a sale, exchange or redemption of your shares, including an
exchange for shares of another Portfolio, based on the difference between your
tax basis in the shares and the amount you receive for them. Generally, this
gain or loss will be long-term or short-term depending on whether your holding
period for the shares exceeds 12 months, except that any loss realized on
shares held for six months or less will be treated as a long-term capital loss
to the extent that any capital gains distributions were received on the shares.
Distributions on, and sales, exchanges and redemptions of, shares held in an
IRA or other tax-qualified plan will not be currently taxable.
The International Equity Portfolio is expected to be subject to foreign
withholding taxes with respect to dividends or interest received from sources
in foreign countries. The Portfolio may make an election to treat a
proportionate amount of these taxes as a distribution to each shareholder. This
will allow each shareholder to either (1) credit such proportionate amount of
taxes against U.S. federal income tax liability, or (2) take such amount as an
itemized deduction.
A Portfolio's dividends that are paid to its corporate shareholders and are
attributable to qualifying dividends the Portfolio receives from U.S. domestic
corporations may be eligible, in the hands of the corporate shareholders, for
the corporate dividends-received deduction, subject to certain holding period
requirements and debt financing limitations.
The Treasury Money Market Portfolio is designed to provide shareholders, to the
extent permitted by federal law, with income that is exempt or excluded from
taxation at the state or local level.
Shareholders may also be subject to state and local taxes on distributions and
redemptions. State income taxes may not apply however, to the portions of each
Portfolio's distributions, if any, that are attributable to interest on U.S.
Government securities or interest on securities of a particular state or
localities within the state.
61
<PAGE>
Distributions and Taxes
- --------------------------------------------------------------------------------
You will be advised at least annually regarding the federal income tax
treatment of dividends and distributions made to you. You should save your
account statements because they contain information you will need to calculate
your capital gains or losses, if any, upon your ultimate sale or exchange of
shares in the Portfolios.
- --------------------------------------------------------------------------------
The foregoing is only a summary of certain tax considerations under current
law, which may be subject to change in the future. Shareholders who are
nonresident aliens, foreign trusts or estates, or foreign corporations or
partnerships, may be subject to different U.S. federal income tax treatment.
For more information regarding the taxation of the Portfolios, consult the SAI
under the heading "Additional Information Concerning Taxes." You should also
consult your tax adviser for further information regarding federal, state,
local and/or foreign tax consequences relevant to your specific situation.
62
<PAGE>
Management of the Fund The Adviser
FIRMCO serves as the 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, with its main office at Firstar Center, 777 East Wisconsin Avenue,
Suite 800, Milwaukee, Wisconsin 53202, has been providing advisory services
since 1986. As of December 31, 1999, FIRMCO had approximately $35.3 billion in
assets under management.
FIRMCO, subject to the general supervision of the Fund's Board of Directors, is
responsible for the day-to-day management of the Portfolios in accordance with
each Portfolio's respective investment objective and policies. This includes
making investment decisions, buying and selling securities and overseeing the
administration and recordkeeping for each Portfolio.
In exchange for these services, FIRMCO receives an investment advisory fee,
which is calculated daily and paid monthly, according to the average daily net
assets of each Portfolio. For the fiscal year ended November 30, 1999, the
Portfolios paid MVA advisory fees as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
Investment advisory fees
Portfolio as a % of net assets
- ---------------------------------------------------------------
<S> <C>
Treasury Money Market
Portfolio .35%
- ---------------------------------------------------------------
Money Market Portfolio .35%
- ---------------------------------------------------------------
U.S. Government Securities
Portfolio .45%
- ---------------------------------------------------------------
Intermediate Corporate Bond
Portfolio .55%
- ---------------------------------------------------------------
Bond Index Portfolio .30%
- ---------------------------------------------------------------
Government & Corporate Bond Portfolio .45%
- ---------------------------------------------------------------
Balanced Portfolio .75%
- ---------------------------------------------------------------
Equity Income Portfolio .75%
- ---------------------------------------------------------------
Equity Index Portfolio .30%
- ---------------------------------------------------------------
Growth & Income Equity
Portfolio .55%
- ---------------------------------------------------------------
Growth Equity Portfolio .75%
- ---------------------------------------------------------------
Small Cap Equity Portfolio .75%
- ---------------------------------------------------------------
Small Cap Equity Index
Portfolio .32%
- ---------------------------------------------------------------
International Equity Portfolio 1.00%
- ---------------------------------------------------------------
</TABLE>
The Sub-Adviser
Clay Finlay Inc., an experienced international investment manager, serves as
sub-adviser to the International Equity Portfolio and is responsible for the
management of the Portfolio's assets. Clay Finlay manages the Portfolio under
the guidance and direction of FIRMCO and according to its sub-advisory
agreement with FIRMCO. For its services, Clay Finlay receives from FIRMCO a
monthly fee based on a percentage of the Portfolio's average daily net assets.
Founded in 1982, Clay Finlay is a registered investment adviser and a
subsidiary of United Asset Management Corporation, a financial services holding
company. Clay Finlay's principal office is located at 200 Park Avenue, 56th
Floor, New York, NY 10166.
63
<PAGE>
Financial Highlights Introduction
The financial highlights tables presented below are intended to help you
understand the financial performance of each Portfolio's Institutional Shares
for the past five years (or, if shorter, the period since the Portfolio began
operations or the particular shares were first offered). Certain information
reflects financial results for a single Institutional Share in each Portfolio.
The total returns in the tables represent the rate that an investor would have
earned (or lost) on an investment in Institutional Shares, assuming
reinvestment of all dividends and distributions. This information has been
audited by KPMG LLP, independent auditors, whose report, along with the
Portfolios' financial statements, are included in the Fund's Annual Report to
Shareholders, and are incorporated by reference into the SAI.
64
<PAGE>
Financial Highlights Treasury Money Market Portfolio
<TABLE>
<CAPTION>
Institutional Shares
(For a Share outstanding throughout each period)
January 26, 1995
Year Ended November 30, to
1999 1998 1997 1996 November 30, 1995(a)
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------------------------------------------------------------------------------------
Investment Activities
Net investment income 0.038 0.043 0.044 0.044 0.042
Net realized gains from
investments --(d) -- -- -- --
-------------------------------------------------------------------------------------
Total from Investment
Activities 0.038 0.043 0.044 0.044 0.042
-------------------------------------------------------------------------------------
Distributions
Net investment income (0.038) (0.043) (0.044) (0.044) (0.042)
Net realized gains --(d) -- -- -- --
-------------------------------------------------------------------------------------
Total Distributions (0.038) (0.043) (0.044) (0.044) (0.042)
-------------------------------------------------------------------------------------
Net Asset Value, End of
Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------------------------------------------------------------------------------------
Total Return 3.87% 4.40% 4.53% 4.46% 4.94%(b)
Ratios/Supplementary
Data:
Net Assets at end of
period (000) $ 62 $ 236 $ 233 $ 299 $ 28
Ratio of expenses to
average net assets 0.81% 0.81% 0.77% 0.79% 0.92%(c)
Ratio of net investment
income to average net
assets 3.76% 4.30% 4.44% 4.39% 5.76%(c)
Ratio of expenses to
average net assets* 0.95% 0.96% 0.92% 0.94% 1.07%(c)
</TABLE>
- --------------------------------------------------------------------------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
(a) Period from commencement of operations.
(b) Represents total return for the Investor A Shares from December 1, 1994
to January 25, 1995 plus the total return for the Institutional Shares
from January 26, 1995 to November 30, 1995.
(c) Annualized.
(d) Net realized gain and distribution from net realized gain was less than
$0.005.
65
<PAGE>
Financial Highlights Money Market Portfolio
<TABLE>
<CAPTION>
Institutional Shares
(For a Share outstanding throughout
each period)
Year Ended November 30,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------------------------------------------------------------------------
Investment Activities
Net investment income 0.043 0.048 0.048 0.047 0.052
Net realized gains from
investments -- --(a) -- -- --
------------------------------------------------------------------------------
Total from Investment
Activities 0.043 0.048 0.048 0.047 0.052
------------------------------------------------------------------------------
Distributions
Net investment income (0.043) (0.048) (0.048) (0.047) (0.052)
------------------------------------------------------------------------------
Total Distributions (0.043) (0.048) (0.048) (0.047) (0.052)
------------------------------------------------------------------------------
Net Asset Value, End of
Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------------------------------------------------------------------------
Total Return 4.43% 4.95% 4.93% 4.81% 5.33%
Ratio/Supplementary Data:
Net Assets at end of period
(000) $36,088 $28,536 $22,022 $15,921 $13,340
Ratio of expenses to average
net assets 0.80% 0.78% 0.77% 0.78% 0.77%
Ratio of net investment
income to average net
assets 4.33% 4.84% 4.83% 4.70% 5.20%
Ratio of expenses to average
net assets* 0.94% 0.93% 0.92% 0.93% 0.92%
</TABLE>
- --------------------------------------------------------------------------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
(a) Net realized gains per share were less than $0.005.
66
<PAGE>
Financial Highlights U.S. Government Securities Portfolio
<TABLE>
<CAPTION>
Institutional Shares
(For a Share outstanding
throughout each period)
Year Ended November 30
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $10.70 $10.58 $10.64 $10.82 $10.02
----------------------------------------------------------------------------
Investment Activities
Net investment income 0.53 0.57 0.56 0.62 0.63
Net realized and unrealized gains
(losses) from investments (0.38) 0.12 (0.04) (0.15) 0.80
----------------------------------------------------------------------------
Total from Investment Activities 0.15 0.69 0.52 0.47 1.43
----------------------------------------------------------------------------
Distributions
Net investment income (0.54) (0.57) (0.58) (0.62) (0.63)
In excess of net realized gains -- -- -- (0.03) --
----------------------------------------------------------------------------
Total Distributions (0.54) (0.57) (0.58) (0.65) (0.63)
----------------------------------------------------------------------------
Net Asset Value, End of Period $10.31 $10.70 $10.58 $10.64 $10.82
----------------------------------------------------------------------------
Total Return 1.45% 6.67% 5.10% 4.55% 14.69%
Ratio/Supplementary Data:
Net Assets at end of Period (000) $8,584 $6,140 $7,049 $2,232 $ 667
Ratio of expenses to average net
assets 0.98% 0.97% 0.97% 0.96% 0.97%
Ratio of net investment income to
average net assets 5.17% 5.34% 5.52% 5.75% 5.91%
Ratio of expenses to average net
assets* 1.09% 1.07% 1.07% 1.06% 1.07%
Portfolio turnover** 26.17% 54.57% 100.33% 53.76% 93.76%
</TABLE>
- --------------------------------------------------------------------------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
67
<PAGE>
Financial Highlights Intermediate Corporate Bond Portfolio
<TABLE>
<CAPTION>
Institutional Shares
(For a Share outstanding
throughout the period)
Year Ended February 10, 1997
November 30, to
1999 1998 November 30, 1997(a)
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $10.29 $10.11 $10.00
----------------------------------------------------------------------------
Investment Activities
Net investment income 0.57 0.61 0.53
Net realized and unrealized gains
(losses)
from investments (0.73) 0.29 0.11
----------------------------------------------------------------------------
Total from Investment Activities (0.16) 0.90 0.64
----------------------------------------------------------------------------
Distributions
Net investment income (0.57) (0.61) (0.53)
Net realized gains -- (0.11) --
In excess of net realized gains (0.01) -- --
----------------------------------------------------------------------------
Total Distributions (0.58) (0.72) (0.53)
----------------------------------------------------------------------------
Net Asset Value, End of Period $ 9.55 $10.29 $10.11
----------------------------------------------------------------------------
Total Return (1.56)% 9.32% 6.60%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000) $ 996 $1,124 $ 27
Ratio of expenses to average net
assets 1.09% 1.07% 0.29%(c)
Ratio of net investment income to
average net assets 5.77% 5.72% 7.06%(c)
Ratio of expenses to average net
assets* 1.19% 1.18% 1.31%(c)
Portfolio turnover** 25.71% 9.65% 61.98%
</TABLE>
- --------------------------------------------------------------------------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
68
<PAGE>
Financial Highlights Bond Index Portfolio
<TABLE>
<CAPTION>
Institutional Shares
(For a Share outstanding throughout the period)
Year Ended February 10, 1997
November 30, to
1999 1998 November 30, 1997(a)
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 10.45 $10.17 $10.00
-----------------------------------------------------------------------------
Investment Activities
Net investment income 0.56 0.62 0.53
Net realized and unrealized gains
(losses) from
investments (0.65) 0.31 0.17
-----------------------------------------------------------------------------
Total from Investment Activities (0.09) 0.93 0.70
-----------------------------------------------------------------------------
Distributions
Net investment income (0.57) (0.62) (0.53)
Net realized gains (0.04) (0.03) --
In excess of net realized gains (0.01) -- --
-----------------------------------------------------------------------------
Total Distributions (0.62) (0.65) (0.53)
-----------------------------------------------------------------------------
Net Asset Value, End of Period $ 9.74 $10.45 $10.17
-----------------------------------------------------------------------------
Total Return (0.90)% 9.47% 7.20%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000) $21,707 $7,034 $ 27
Ratio of expenses to average net
assets 0.83% 0.79% 0.24%(c)
Ratio of net investment income to
average net assets 5.66% 5.77% 7.09%(c)
Ratio of expenses to average net
assets* 0.93% 0.91% 0.95%(c)
Portfolio turnover** 21.88% 33.37% 46.16%
- --------------------------------------------------------------------------------
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
69
<PAGE>
Financial Highlights Government & Corporate Bond Portfolio
<TABLE>
<CAPTION>
Institutional Shares
(For a Share outstanding throughout each period)
Year Ended November 30,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $10.74 $ 10.37 $ 10.34 $ 10.53 $ 9.64
------------------------------------------------------------------------------
Investment Activities
Net investment income 0.56(a) 0.57 0.56 0.64 0.61
Net realized and unrealized
gains (losses) from
investments (0.68) 0.37 0.03 (0.19) 0.89
------------------------------------------------------------------------------
Total from Investment
Activities (0.12) 0.94 0.59 0.45 1.50
------------------------------------------------------------------------------
Distributions
Net investment income (0.56) (0.57) (0.56) (0.64) (0.61)
Net realized gains (0.13) -- -- -- --
In excess of net realized
gains (0.07) -- -- -- --
------------------------------------------------------------------------------
Total Distributions (0.76) (0.57) (0.56) (0.64) (0.61)
------------------------------------------------------------------------------
Net Asset Value, End of Period $ 9.86 $ 10.74 $ 10.37 $ 10.34 $10.53
------------------------------------------------------------------------------
Total Return (1.12)% 9.30% 6.00% 4.51% 15.98%
Ratios/Supplementary Data:
Net Assets at end of period
(000) $4,753 $20,835 $16,954 $14,875 $9,413
Ratio of expenses to average
net assets 0.97% 0.96% 0.95% 0.95% 0.95%
Ratio of net investment income
to average net assets 5.49% 5.41% 5.55% 6.06% 6.01%
Ratio of expenses to average
net assets* 1.08% 1.06% 1.05% 1.05% 1.05%
Portfolio turnover** 38.29% 91.14% 140.72% 149.20% 59.32%
</TABLE>
- --------------------------------------------------------------------------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Per share net investment income has been calculated using the daily
average share method.
70
<PAGE>
Financial Highlights Balanced Portfolio
<TABLE>
<CAPTION>
Institutional Shares
(For a Share outstanding throughout each period)
Year Ended November 30,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $ 12.59 $ 13.23 $ 12.54 $ 11.62 $ 9.60
------------------------------------------------------------------------------
Investment Activities
Net investment income 0.28 0.28 0.31 0.32 0.31
Net realized and unrealized
gains from investments 0.67 0.83 1.49 1.34 2.02
------------------------------------------------------------------------------
Total from Investment
Activities 0.95 1.11 1.80 1.66 2.33
------------------------------------------------------------------------------
Distributions
Net investment income (0.27) (0.28) (0.37) (0.32) (0.31)
In excess of net investment
income -- -- (0.03) -- --
Net realized gains (0.88) (1.47) (0.71) (0.42) --
------------------------------------------------------------------------------
Total Distributions (1.15) (1.75) (1.11) (0.74) (0.31)
------------------------------------------------------------------------------
Net Asset Value, End of Period $ 12.39 $ 12.59 $ 13.23 $ 12.54 $ 11.62
------------------------------------------------------------------------------
Total Return 8.24% 9.38% 15.52% 15.08% 24.67%
Ratios/Supplementary Data:
Net Assets at end of period
(000) $55,582 $70,962 $61,655 $54,731 $36,827
Ratio of expenses to average
net assets 1.28% 1.26% 1.27% 1.27% 1.27%
Ratio of net investment income
to average net assets 2.20% 2.23% 2.56% 2.78% 2.97%
Ratio of expenses to average
net assets* 1.38% 1.36% 1.37% 1.37% 1.37%
Portfolio turnover** 34.80% 47.79% 43.60% 85.16% 58.16%
</TABLE>
- --------------------------------------------------------------------------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
71
<PAGE>
Financial Highlights Equity Income Portfolio
<TABLE>
<CAPTION>
Institutional Shares
(For a Share outstanding throughout each period)
Year Ended November 30, February 27, 1997 to
1999 1998 November 30, 1997(a)
<S> <C> <C> <C>
Net Asset Value, Beginning
of Period $ 10.24 $ 11.56 $10.00
------------------------------------------------------------------------------
Investment Activities
Net investment income 0.14 0.18 0.19
Net realized and unrealized
gains (losses) from
investments (0.18) 0.98 1.56
------------------------------------------------------------------------------
Total from Investment
Activities (0.04) 1.16 1.75
------------------------------------------------------------------------------
Distributions
Net investment income (0.13) (0.19) (0.19)
Net realized gains (2.23) (2.29) --
------------------------------------------------------------------------------
Total Distributions (2.36) (2.48) (0.19)
------------------------------------------------------------------------------
Net Asset Value, End of
Period $ 7.84 $ 10.24 $11.56
------------------------------------------------------------------------------
Total Return 0.09%+ 11.82% 17.64%(b)
Ratios/Supplementary Data:
Net Assets at end of period
(000) $ 95 $ 35 $ 1
Ratio of expenses to
average net assets 1.28% 1.23% 0.37%(c)
Ratio of net investment
income to average net
assets 1.58% 1.40% 2.34%(c)
Ratio of expenses to
average net assets* 1.38% 1.32% 1.60%(c)
Portfolio turnover** 81.84% 98.32% 48.33%
</TABLE>
- --------------------------------------------------------------------------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
+ Incurred class specific gains. The total return excluding this would have
been (0.07)%.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
72
<PAGE>
Financial Highlights Equity Index Portfolio
<TABLE>
<CAPTION>
Institutional Shares
(For a Share outstanding throughout the period)
Year Ended November 30, May 1, 1997 to
1999 1998 November 30, 1997(a)
<S> <C> <C> <C>
Net Asset Value, Beginning of
Period $ 14.54 $ 11.94 $10.00
------------------------------------------------------------------------------
Investment Activities
Net investment income 0.09 0.10 0.10
Net realized and unrealized
gains from investments 2.74 2.63 1.94
------------------------------------------------------------------------------
Total from Investment
Activities 2.83 2.73 2.04
------------------------------------------------------------------------------
Distributions
Net investment income (0.08) (0.11) (0.10)
Net realized gains (0.18) (0.02) --
------------------------------------------------------------------------------
Total Distributions (0.26) (0.13) (0.10)
------------------------------------------------------------------------------
Net Asset Value, End of
Period $ 17.11 $ 14.54 $11.94
------------------------------------------------------------------------------
Total Return 19.83% 23.01% 20.40%(b)
Ratios/Supplementary Data:
Net Assets at end of period
(000) $ 36,856 $ 10,944 $ 8
Ratio of expenses to average
net assets 0.85% 0.91% 0.46%(c)
Ratio of net investment
income to average net
assets 0.51% 0.63% 1.30%(c)
Ratio of expenses to average
net assets* 0.95% 1.03% 1.19%(c)
Portfolio turnover** 27.84% 14.83% 1.66%
</TABLE>
- --------------------------------------------------------------------------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
73
<PAGE>
Financial Highlights Growth & Income Equity Portfolio
<TABLE>
<CAPTION>
Institutional Shares
(For a Share outstanding throughout each period)
Year Ended November 30,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $ 19.13 $ 21.12 $ 18.67 $ 16.29 $ 12.70
------------------------------------------------------------------------------
Investment Activities
Net investment income 0.08 0.12 0.12 0.20 0.23
Net realized and unrealized
gains from investments 2.29 1.58 3.95 3.33 3.74
------------------------------------------------------------------------------
Total from Investment
Activities 2.37 1.70 4.07 3.53 3.97
------------------------------------------------------------------------------
Distributions
Net investment income (0.08) (0.11) (0.13) (0.20) (0.24)
In excess of net investment
income -- (0.01) (0.03) (0.01) --
Net realized gains (1.48) (3.57) (1.46) (0.94) (0.14)
------------------------------------------------------------------------------
Total Distributions (1.56) (3.69) (1.62) (1.15) (0.38)
------------------------------------------------------------------------------
Net Asset Value, End of Period $ 19.94 $ 19.13 $ 21.12 $ 18.67 $ 16.29
------------------------------------------------------------------------------
Total Return 13.61% 9.36% 23.90% 23.08% 31.88%
Ratios/Supplementary Data:
Net Assets at end of period
(000) $91,034 $107,133 $92,515 $72,950 $40,228
Ratio of expenses to average
net assets 1.04% 1.04% 1.04% 1.05% 1.05%
Ratio of net investment
income to average net assets 0.45% 0.60% 0.60% 1.19% 1.58%
Ratio of expenses to average
net assets* 1.16% 1.14% 1.14% 1.15% 1.15%
Portfolio turnover** 60.31% 91.23% 57.11% 63.90% 58.50%
- --------------------------------------------------------------------------------
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
74
<PAGE>
Financial Highlights Growth Equity Portfolio
<TABLE>
<CAPTION>
Institutional Shares
(For a Share outstanding throughout the period)
Year Ended December 2, 1997 to
November 30, 1999 November 30, 1998(a)
<S> <C> <C>
Net Asset Value, Beginning of
Period $19.92 $16.27
-----------------------------------------------------------------------------
Investment Activities
Net investment income (loss) 0.03(d) (0.04)
Net realized and unrealized gains
from investments 4.70 3.70
-----------------------------------------------------------------------------
Total from Investment Activities 4.73 3.66
-----------------------------------------------------------------------------
Distributions
In excess of net investment income -- (0.01)
Net realized gains (2.03) --
-----------------------------------------------------------------------------
Total Distributions (2.03) (0.01)
-----------------------------------------------------------------------------
Net Asset Value, End of Period $22.62 $19.92
-----------------------------------------------------------------------------
Total Return 26.56% 19.56%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000) $ 162 $7,720
Ratio of expenses to average net
assets 1.27% 1.36%(c)
Ratio of net investment income to
average net assets 0.17% (0.28)%(c)
Ratio of expenses to average net
assets* 1.37% 1.46%(c)
Portfolio turnover** 21.85% 54.33%
</TABLE>
- --------------------------------------------------------------------------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Per share net investment income has been calculated using the daily
average share method.
75
<PAGE>
Financial Highlights Small Cap Equity Portfolio
<TABLE>
<CAPTION>
Institutional Shares
(For a Share outstanding throughout each period)
Year Ended November 30,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $11.82 $ 14.98 $ 13.36 $ 13.40 $ 11.96
-----------------------------------------------------------------------------
Investment Activities
Net investment loss (0.07)(a) (0.07) (0.04) (0.01) (0.01)
Net realized and
unrealized gains
(losses) from
investments 2.10 (1.87) 2.48 1.03 2.36
-----------------------------------------------------------------------------
Total from Investment
Activities 2.03 (1.94) 2.44 1.02 2.35
-----------------------------------------------------------------------------
Distributions
In excess of net
investment income -- -- -- (0.01) --
Net realized gains (0.05) (1.19) (0.82) (1.05) (0.91)
In excess of net
realized gains -- (0.03) -- -- --
-----------------------------------------------------------------------------
Total Distributions (0.05) (1.22) (0.82) (1.06) (0.91)
-----------------------------------------------------------------------------
Net Asset Value, End of
Period $13.80 $ 11.82 $ 14.98 $ 13.36 $ 13.40
-----------------------------------------------------------------------------
Total Return 17.27% (14.17)% 19.41% 8.39% 21.43%
Ratios/Supplementary
Data:
Net Assets at end of
period (000) $2,448 $25,037 $34,395 $30,081 $17,620
Ratio of expenses to
average net assets 1.26% 1.25% 1.25% 1.26% 1.26%
Ratio of net investment
loss to average net
assets (0.59)% (0.45)% (0.29)% (0.13)% (0.11)%
Ratio of expenses to
average net assets* 1.36% 1.35% 1.35% 1.36% 1.36%
Portfolio turnover** 72.08% 69.72% 80.23% 65.85% 83.13%
- --------------------------------------------------------------------------------
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Per share net investment loss has been calculated using the daily average
share method.
76
<PAGE>
Financial Highlights Small Cap Equity Index Portfolio
<TABLE>
<CAPTION>
Institutional Shares
(For a Share outstanding throughout the period)
December 30, 1998
to November 30, 1999(a)
<S> <C>
Net Asset Value, Beginning
of Period $ 10.00
------------------------------------------------------------------------------
Investment Activities
Net investment loss -- (d)
Net realized and unrealized
gains from investments 0.17
------------------------------------------------------------------------------
Total from Investment
Activities 0.17
------------------------------------------------------------------------------
Distributions
Net investment income -- (d)
------------------------------------------------------------------------------
Total Distributions --
------------------------------------------------------------------------------
Net Asset Value, End of
Period $ 10.17
------------------------------------------------------------------------------
Total Return 1.74%(b)
Ratios/Supplemental Data:
Net Assets at end of period
(000) $14,955
Ratio of expenses to
average net assets 0.92%(c)
Ratio of net investment
loss to average net assets (0.06)%(c)
Ratio of expenses to
average net assets* 1.12%(c)
Portfolio turnover** 35.27%
</TABLE>
- --------------------------------------------------------------------------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Period from initial public investment.
(b) Not annualized.
(c) Annualized.
(d) Net investment income and distributions from net investment income per
share was less than $0.005.
77
<PAGE>
Financial Highlights International Equity Portfolio
<TABLE>
<CAPTION>
Institutional Shares
(For a Share outstanding throughout each period)
Year Ended November 30,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $ 13.25 $11.97 $12.03 $10.75 $ 9.90
------------------------------------------------------------------------------
Investment Activities
Net investment income (loss) (0.01) -- (0.03) 0.01 0.01
Net realized and unrealized gains
from investments and foreign
currency 4.55 1.78 0.33 1.27 0.86
------------------------------------------------------------------------------
Total from Investment Activities 4.54 1.78 0.30 1.28 0.87
------------------------------------------------------------------------------
Distributions
Net investment income (0.03) (0.01) -- -- --
In excess of net investment
income (0.01) (0.06) (0.05) -- --
Net realized gains (0.75) (0.43) (0.31) -- (0.01)
Tax return of capital -- -- -- -- (0.01)
------------------------------------------------------------------------------
Total Distributions (0.79) (0.50) (0.36) -- (0.02)
------------------------------------------------------------------------------
Net Asset Value, End of Period $ 17.00 $13.25 $11.97 $12.03 $10.75
------------------------------------------------------------------------------
Total Return 36.61% 15.37% 2.59% 11.91% 8.78%
Ratios/Supplementary Data:
Net Assets at end of period (000) $11,307 $8,058 $6,798 $6,059 $2,159
Ratio of expenses to average net
assets 1.56% 1.58% 1.59% 1.44% 1.44%
Ratio of net investment income
(loss) to average net assets 0.00% 0.01% (0.21)% 0.16% 0.13%
Ratio of expenses to average net
assets* 1.75% 1.75% 1.75% 1.76% 1.75%
Portfolio turnover** 93.73% 88.95% 75.18% 77.63% 62.78%
</TABLE>
- --------------------------------------------------------------------------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
78
<PAGE>
Where to find more information
You'll find more information about the Portfolios in the following documents:
Annual and semi-annual reports
The Fund's annual and semi-annual reports contain information about each
Portfolio and a discussion about the market conditions and investment strategies
that had a significant effect on each Portfolio's performance during the last
fiscal year.
Statement of Additional Information (SAI)
The SAI contains detailed information about the Portfolios and their policies.
By law, it's incorporated by reference into (considered to be part of) this
prospectus.
You can get a free copy of these documents, request other information about the
Portfolios and make shareholder inquiries by calling the Fund at 1-800-452-2724
or by writing to:
Mercantile Mutual Funds, Inc.
c/o Firstar Mutual Fund Services, LLC
615 E. Michigan Street
P.O. Box 3011
Milwaukee, WI 53201-3011
If you buy your shares through a broker-dealer or other financial institution,
you may contact your institution for more information.
You can write to the Securities and Exchange Commission (SEC) Public Reference
Section and ask them to mail you information about the Portfolios, including the
SAI. They'll charge you a fee for this service. You can also visit the SEC
Public Reference Room and copy the documents while you're there. For more
information about the operation of the Public Reference Room, call the SEC.
Public Reference Section of the SEC
Washington, D.C. 20549-0102
1-202-942-8090
Reports and other information about the Portfolios are also available on the
EDGAR database on the SEC's website at http://www.sec.gov. Copies of this
-------------------
information may also be obtained, after paying a duplicating fee, by electronic
request to the SEC's e-mail address at [email protected].
-------------------
The Fund's Investment Company Act File No. is 811-3567
Form #MFINSTP-00
<PAGE>
MERCANTILE MUTUAL FUNDS
INVESTOR SHARES
[PHOTO] Prospectus
March 31, 2000
MONEY MARKET PORTFOLIOS
Treasury Money Market Portfolio
Money Market Portfolio
Tax-Exempt Money Market Portfolio
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved theses securities or passed upon the adequacy of this
prospectus. Any representation to the contrary is a criminal offense.
[LOGO OF FIRSTAR]
<PAGE>
Contents
<TABLE>
<CAPTION>
Introduction
- --------------------------------------------------------------
<C> <S>
3 Overview
Risk/Return Summary
- --------------------------------------------------------------
4 Treasury Money Market Portfolio
7 Money Market Portfolio
11 Tax-Exempt Money Market Portfolio
15 Additional Information on Risk
Your Account
- --------------------------------------------------------------
16 Distribution Arrangements/Sales Charges
18 Explanation of Sales Price
19 How to Buy Shares
20 How to Sell Shares
22 Investor Programs
24 General Transaction Policies
Distributions and Taxes
- --------------------------------------------------------------
25 Dividends and Distributions
25 Taxation
Management of the Fund
- --------------------------------------------------------------
27 The Adviser
Financial Highlights
- --------------------------------------------------------------
28 Introduction
29 Treasury Money Market Portfolio
30 Money Market Portfolio
32 Tax-Exempt Money Market Portfolio
</TABLE>
2
<PAGE>
Introduction Overview
This prospectus describes the Mercantile Money Market
Portfolios, three investment portfolios offered by Mercantile
Mutual Funds, Inc. (the "Fund"). On the following pages, you
will find important information about each Portfolio,
including:
. A description of the Portfolio's investment objective
(sometimes referred to as its goal);
. The Portfolio's principal investment strategies (the steps
it takes to try to meet its goal);
. The principal risks associated with the Portfolio (factors
that may prevent it from meeting its goal);
. The Portfolio's past performance (how successful it's been
in meeting its goal); and
. The fees and expenses (including sales charges) you pay as
an investor in the Portfolio.
Who May Want The Treasury Money Market Portfolio may be appropriate for
to Invest in investors who want a way to earn money market returns from
the U.S. Treasury obligations that are generally exempt from
Mercantile state and local taxes. The Money Market Portfolio may be
Money Market appropriate for investors who want a flexible and convenient
Portfolios? way to manage cash while earning money market returns. The
Tax-Exempt Money Market Portfolio may be appropriate for
investors who want a way to earn money market returns that
are generally exempt from federal income tax; however, the
Portfolio is not an appropriate investment for tax-deferred
retirement accounts, such as IRAs, because its return before
taxes is generally lower than that of a taxable fund.
Before investing in a Portfolio, you should carefully
consider:
. Your own investment goals
. The amount of time you are willing to leave your money
invested
. How much risk you are willing to take.
The Firstar Investment Research & Management Company, LLC, which
Investment is referred to in this prospectus as "FIRMCO" or the
Adviser "Adviser," serves as the investment adviser to each
Portfolio. FIRMCO is a subsidiary of Firstar Corporation, a
banking and financial services organization.
An investment in the Portfolios is not a deposit of Firstar
Bank, N.A. and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency.
Although the Portfolios seek to preserve the value of your
investment at $1.00 per share, it is possible to lose money
by investing in the Portfolios.
3
<PAGE>
Risk/Return Summary Treasury Money Market Portfolio
- --------------------------------------------------------------------------------
Money market instruments are short-term obligations issued by banks,
corporations, the U.S. Government and state and local governments. Money market
instruments purchased by the Portfolios must meet strict requirements as to
investment quality, maturity and diversification. The Portfolios generally do
not invest in securities with maturities of more than 397 days and the average
maturity of all securities held by a particular Portfolio must be 90 days or
less. Prior to purchasing a money market instrument for one of the Portfolios,
the Adviser must determine that the instrument carries very little credit risk.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is to seek a high level of current income
exempt from state income tax consistent with liquidity and security of
principal.
Principal Investment Strategies
The Portfolio invests substantially all (but not less than 65%) of its total
assets in money market instruments issued by the U.S. Treasury and certain U.S.
Government agencies and instrumentalities that provide income that is generally
not subject to state income tax.
Principal Risk Considerations
The yield paid by the Portfolio will vary with changes in interest rates.
During periods of rising interest rates, the Portfolio's yield will tend to be
lower than prevailing market rates, while during periods of falling interest
rates, the Portfolio's yield will tend to be higher.
Although U.S. Government securities, particularly U.S. Treasury obligations,
have historically involved little risk, if an issuer fails to pay interest or
repay principal, the value of your investment could decline.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolio and how they may advance the Portfolio's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
There's no guarantee the Portfolio will be able to preserve the value of your
investment at $1.00 per share.
4
<PAGE>
Risk/Return Summary Treasury Money Market Portfolio
Return History
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Investor A Shares has varied from year to year. The table shows the Portfolio's
average annual returns for one year, five years and since inception. Both the
bar chart and table assume reinvestment of all dividends and distributions. The
Portfolio's past performance does not necessarily indicate how it will perform
in the future.
Investor A Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1993 2.43%
1994 3.33%
1995 4.96%
1996 4.43%
1997 4.54%
1998 4.34%
1999 3.95%
<TABLE>
<S> <C>
Best quarter: 1.26% for the quarter ending June 30, 1995
Worst quarter: 0.58% for the quarter ending June 30, 1993
</TABLE>
-------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year 5 Years Inception*
-------------------------
<S> <C> <C> <C>
Investor A Shares 3.95% 4.44% 3.89%
- ----------------------------------------------
</TABLE>
* April 20, 1992.
To obtain the Portfolio's current 7-day yield, please call 1-800-452-2724.
5
<PAGE>
Risk/Return Summary Treasury Money Market Portfolio
The table on the right shows the fees and expenses that you pay if you buy and
hold Investor A Shares of the Treasury Money Market Portfolio. There are no
sales charges when you buy or sell Investor A Shares of the Portfolio.
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
Fees and Expenses
<TABLE>
<CAPTION>
Annual Portfolio Operating
Expenses
(expenses that are deducted from
the Portfolio's assets) Investor A
Shares
<S> <C>
Management Fees .40%/1/
----------------------------------------------
Distribution (12b-1) and Service
Fees .25%
----------------------------------------------
Other Expenses .34%/1/
----------------------------------------------
Total Annual Portfolio Operating
Expenses .99%/1/
- -----------------------------------------------
</TABLE>
/1/ Management Fees, Other Expenses and Total Annual Portfolio Operating
Expenses for the Portfolio's Investor A Shares for the current fiscal year
are expected to be less than the amounts shown above because certain of the
Portfolio's service providers are voluntarily waiving a portion of their
fees and/or reimbursing the Portfolio for certain other expenses. These fee
waivers and/or reimbursements are being made in order to keep the annual
fees and expenses for the Portfolio's Investor A Shares at a certain level.
Management Fees, Other Expenses and Total Annual Portfolio Operating
Expenses, after taking these fee waivers and expense reimbursements into
account, are expected to be .35%, .24% and .84%, respectively, for Investor
A Shares. These fee waivers and expense reimbursements may be revised or
cancelled at any time.
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Investor A Shares $101 $315 $547 $1,213
- --------------------------------------------
</TABLE>
6
<PAGE>
Risk/Return Summary Money Market Portfolio
Investment Objective
The Portfolio's investment objective is to seek current income with liquidity
and stability of principal.
Principal Investment Strategies
The Portfolio invests substantially all (but not less than 80%) of its total
assets in a broad range of U.S. dollar-denominated money market instruments,
including commercial paper, notes and bonds issued by U.S. and foreign
corporations, obligations issued by the U.S. Government and its agencies and
instrumentalities, and obligations issued by U.S. and foreign banks, such as
certificates of deposit, letters of credit, bankers' acceptances and time
deposits.
The Portfolio will only buy a money market instrument if it has the highest
short-term rating from at least two nationally recognized statistical rating
organizations, such as Standard & Poor's Ratings Group or Moody's Investors
Service, Inc., or only one such rating if only one organization has rated the
instrument. If the money market instrument is not rated, the Adviser must
determine that it is of comparable quality to eligible rated instruments.
Principal Risk Considerations
The yield paid by the Portfolio will vary with short-term interest rates.
During periods of rising interest rates, the Portfolio's yield will tend to be
lower than prevailing market rates, while during periods of falling interest
rates, the Portfolio's yield will tend to be higher.
Although credit risk is very low because the Portfolio only invests in high
quality obligations, if an issuer fails to pay interest or repay principal, the
value of your investment could decline.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolio and how they may advance the Portfolio's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
There's no guarantee the Portfolio will be able to preserve the value of your
investment at $1.00 per share.
7
<PAGE>
Risk/Return Summary Money Market Portfolio
Return History
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Investor A Shares has varied from year to year. The table shows the Portfolio's
average annual returns for one year, five years, ten years and since inception.
Both the bar chart and table assume reinvestment of all dividends and
distributions. The Portfolio's past performance does not necessarily indicate
how it will perform in the future.
Investor A Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1990 8.03%
1991 5.45%
1992 3.06%
1993 2.51%
1994 3.58%
1995 5.36%
1996 4.78%
1997 4.96%
1998 4.90%
1999 4.50%
The returns for Investor B Shares differed from the returns shown in the bar
chart because the two classes bear different expenses.
<TABLE>
<S> <C>
Best quarter: 1.97% for the quarter ending June 30, 1990
Worst quarter: 0.61% for the quarter ending June 30, 1993
</TABLE>
-------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year 5 Years 10 Years Inception*
-------------------------------------------------
<S> <C> <C> <C> <C>
Investor A Shares 4.50% 4.90% 4.70% 5.29%
-------------------------------------------------
Investor B Shares
(with applicable
contingent deferred
sales charge) -1.28% N/A N/A 3.30%
- --------------------------------------------------------------------------
</TABLE>
* March 24, 1983 for Investor A Shares; January 26, 1996 for Investor B
Shares.
To obtain the Portfolio's current 7-day yield, please call 1-800-452-2724.
8
<PAGE>
Risk/Return Summary Money Market Portfolio
The table on the right shows the fees and expenses that you pay if you buy and
hold Investor A Shares or Investor B Shares of the Money Market Portfolio.
Fees and Expenses
<TABLE>
<CAPTION>
Shareholder Fees Investor A Investor B
(fees you pay directly) Shares Shares
<S> <C> <C>
Maximum sales charge (load) to buy shares, shown as a
% of the offering price None None
-----------------------------------------------------------------------------
Maximum deferred sales charge (load) shown as a % of
the offering price or sale price, whichever is less None 5.00%/1/
</TABLE>
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses
(expenses that are deducted from the Investor A Investor B
Portfolio's assets) Shares Shares
<S> <C> <C>
Management Fees .40%/2/ .40%/2/
-----------------------------------------------------------------
Distribution (12b-1) and Service Fees .25% 1.00%
-----------------------------------------------------------------
Other Expenses .32%/2/ .32%/2/
-----------------------------------------------------------------
Total Annual Portfolio Operating Expenses .97%/2/ 1.72%/2/
- ------------------------------------------------------------------
</TABLE>
/1/ This amount applies if you sell your shares in the first year after
purchase and gradually declines until it is eliminated after six years.
After six years, Investor B Shares will automatically convert to Investor A
Shares. See "Distribution Arrangements/Sales Charges" below.
/2/ Management Fees, Other Expenses and Total Annual Portfolio Operating
Expenses for the Portfolio's Investor A Shares and Investor B Shares for
the current fiscal year are expected to be less than the amounts shown
above because certain of the Portfolio's service providers are voluntarily
waiving a portion of their fees and/or reimbursing the Portfolio for
certain other expenses. These fee waivers and/or reimbursements are being
made in order to keep the annual fees and expenses for the Portfolio's
Investor A Shares and Investor B Shares at certain levels. Management Fees,
Other Expenses and Total Annual Portfolio Operating Expenses, after taking
these fee waivers and expense reimbursements into account, are expected to
be .35%, .22% and .82%, respectively, for Investor A Shares and .35%, .22%
and 1.57%, respectively, for Investor B Shares. These fee waivers and
expense reimbursements may be revised or cancelled at any time.
9
<PAGE>
Risk/Return Summary Money Market Portfolio
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year, the
Portfolio's operating expenses remain the same, and your Investor B Shares
automatically convert to Investor A Shares after six years. Although your
actual costs may be higher or lower, based on these assumptions your costs
would be:
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Investor A Shares $ 99 $309 $ 536 $1,190
------------------------------------------------------------------------------
Investor B Shares $675 $842 $1,133 $1,649
If you hold Investor B Shares, you would pay the
following expenses if you did not sell your shares: $175 $542 $ 933 $1,649
</TABLE>
- --------------------------------------------------------------------------------
10
<PAGE>
Risk/Return Summary Tax-Exempt Money Market Portfolio
- --------------------------------------------------------------------------------
What Are Municipal Securities?
State and local governments issue municipal securities to raise money to
finance public works, to repay outstanding obligations, to raise funds for
general operating expenses and to make loans to other public institutions. Some
municipal securities, known as private activity bonds, are backed by private
entities and are used to finance various non-public projects. Municipal
securities, which can be issued as bonds, notes or commercial paper, usually
have fixed interest rates, although some have interest rates that change from
time to time.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is to seek as high a level of current
interest income exempt from federal income tax as is consistent with liquidity
and stability of principal.
Principal Investment Strategies
The Portfolio normally invests at least 80% of its total assets in short-term
municipal securities that pay interest which is exempt from federal income tax.
Municipal securities purchased by the Portfolio may include general obligation
securities, revenue securities and private activity bonds. General obligation
securities are secured by the issuer's full faith, credit and taxing power.
Revenue securities are usually payable only from revenues derived from specific
facilities or revenue sources. Private activity bonds are usually revenue
obligations since they are typically payable by the private user of the
facilities financed by the bonds. The interest on private activity bonds may be
subject to the federal alternative minimum tax. Investments in private activity
bonds will not be treated as investments in municipal securities for purposes
of the 80% requirement stated above. Under normal conditions, the Portfolio's
investments in private activity bonds, together with any investments in taxable
obligations, will not exceed 20% of its total assets.
The Portfolio will only buy a municipal security if it has the highest short-
term rating from at least two nationally recognized statistical rating
organizations, such as Standard & Poor's Ratings Group or Moody's Investors
Service, Inc., or one such rating if only one organization has rated the
security. If the security is not rated, the Adviser must determine that it is
of comparable quality to eligible rated securities.
11
<PAGE>
Risk/Return Summary Tax-Exempt Money Market Portfolio
Principal Risk Considerations
The yield paid by the Portfolio will vary with changes in interest rates.
During periods of rising interest rates, the Portfolio's yield will tend to be
lower than prevailing market rates, while during periods of falling interest
rates, the Portfolio's yield will tend to be higher.
Although credit risk is very low because the Portfolio only invests in high
quality obligations, if an issuer fails to pay interest or repay principal, the
value of your investment could decline. The ability of a state or local
government issuer to make payments can be affected by many factors, including
economic conditions, the flow of tax revenues and changes in the level of
federal, state or local aid. Some municipal securities are payable only from
limited revenue sources or by private entities.
The Portfolio is not diversified, which means that it can invest a large
percentage of its assets in a small number of issuers. As a result, a change in
the value of any one investment held by the Portfolio may affect the overall
value of the Portfolio more than it would affect a diversified portfolio.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolio and how they may advance the Portfolio's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
There's no guarantee the Portfolio will be able to preserve the value of your
investment at $1.00 per share.
12
<PAGE>
Risk/Return Summary Tax-Exempt Money Market Portfolio
Return History+
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Investor A Shares has varied from year to year. The table shows the Portfolio's
average annual returns for one year, five years, ten years and since inception.
Both the bar chart and table assume reinvestment of all dividends and
distributions. The Portfolio's past performance does not necessarily indicate
how it will perform in the future.
Investor A Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1990 5.50%
1991 3.73%
1992 2.24%
1993 1.72%
1994 2.13%
1995 3.04%
1996 2.77%
1997 2.89%
1998 2.68%
1999 2.49%
<TABLE>
<S> <C>
Best quarter: 1.38% for the quarter ending June 30, 1990
Worst quarter: 0.39% for the quarter ending March 31, 1994
</TABLE>
-------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year 5 Years 10 Years Inception*
----------------------------------
<S> <C> <C> <C> <C>
Investor A Shares 2.49% 2.77% 2.92% 3.34%
- -------------------------------------------------------
</TABLE>
+ The Portfolio commenced operations on July 10, 1986 as a separate
investment portfolio (the "Predecessor Portfolio") of The ARCH Tax-Exempt
Trust. On October 2, 1995, the Predecessor Portfolio was reorganized as a
new portfolio of the Fund. Prior to the reorganization, the Predecessor
Portfolio offered and sold shares that were similar to the Fund's Investor
A Shares. Total returns for periods prior to October 2, 1995 reflect the
performance of Investor A Shares of the Predecessor Portfolio.
* July 10, 1986.
To obtain the Portfolio's current 7-day yield, please call 1-800-452-2724.
13
<PAGE>
Risk/Return Summary Tax-Exempt Money Market Portfolio
The table on the right shows the fees and expenses that you pay if you buy and
hold Investor A Shares of the Tax-Exempt Money Market Portfolio. There are no
sales charges when you buy or sell Investor A Shares of the Portfolio.
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
Fees and Expenses
<TABLE>
<CAPTION>
Annual Portfolio Operating
Expenses
(expenses that are deducted from
the Investor A
Portfolio's assets) Shares
<S> <C>
Management Fees .40%/1/
----------------------------------------------
Distribution (12b-1) and Service
Fees .25%
----------------------------------------------
Other Expenses .20%
----------------------------------------------
Total Annual Portfolio Operating
Expenses .85%/1/
- -----------------------------------------------
</TABLE>
/1/ Management Fees and Total Annual Portfolio Operating Expenses for the
Portfolio's Investor A Shares for the current fiscal year are expected to
be less than the amounts shown above because the Adviser is voluntarily
waiving a portion of its advisory fee. This fee waiver is being made in
order to keep the annual fees and expenses for the Portfolio's Investor A
Shares at a certain level. Management Fees and Total Annual Portfolio
Operating Expenses, after taking this fee waiver into account, are expected
to be .35%, and .80%, respectively, for Investor A Shares. This fee waiver
may be revised or cancelled at any time.
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Investor A Shares $87 $271 $471 $1,049
- --------------------------------------------
</TABLE>
14
<PAGE>
Risk/Return Summary Additional Information on Risk
LOGO FOR RISK/RETURN SUMMARY
The principal risks of investing in each Portfolio are described on the
previous pages. The following supplements that discussion.
Securities Lending
To obtain interest income, the Treasury Money Market Portfolio and Money Market
Portfolio may lend their securities to broker-dealers, banks or institutional
borrowers pursuant to agreements requiring that the loans be continuously
secured by collateral equal at all times in value to at least the market value
of the securities loaned. There is the risk that, when lending portfolio
securities, the securities may not be available to the Portfolio on a timely
basis. Therefore, the Portfolio may lose the opportunity to sell the securities
at a desirable price. Additionally, in the event that a borrower of securities
would file for bankruptcy or become insolvent, disposition of the securities
may be delayed pending court action.
Temporary Defensive Positions
Each Portfolio may temporarily hold investments that are not part of its main
investment strategy during unfavorable market conditions. These investments may
include cash (which will not earn any income) and, in the case of the Tax-
Exempt Money Market Portfolio, short-term taxable money market instruments not
to exceed 20% of the Portfolio's total assets. This strategy could prevent a
Portfolio from achieving its investment objective.
Other Types of Investments
This prospectus describes each Portfolio's principal investment strategies and
the particular types of securities in which each Portfolio principally invests.
Each Portfolio may, from time to time, make other types of investments and
pursue other investment strategies in support of its overall investment goal.
These supplemental investment strategies - and the risks involved - are
described in detail in the Statement of Additional Information ("SAI"), which
is referred to on the back cover of this prospectus.
Year 2000 Risks
Over the past several years, the Adviser and the Portfolios' other major
service providers expended considerable time and money in addressing the
computer and technology problems associated with the transition to the Year
2000. As a result of those efforts, the Portfolios did not experience any
material disruptions in their operations as a result of the transition to the
21st century. The Adviser and the Portfolios' other major service providers are
continuing to monitor the Year 2000 or Y2K problem, however, and there can be
no assurances that there will be no adverse impact to the Portfolios as a
result of future computer-related Y2K difficulties.
15
<PAGE>
Your Account Distribution Arrangements/Sales Charges
LOGO FOR YOUR ACCOUNT
Share Classes
Each Portfolio offers Investor A Shares. The Money Market Portfolio also offers
Investor B Shares. The primary difference between the share classes is the
sales charge structure and distribution/service fee arrangement.
<TABLE>
<CAPTION>
Types of Charges Investor A Shares Investor B Shares
<S> <C> <C>
Sales Charge (Load) None. A contingent deferred sales
charge (CDSC) is assessed
on shares redeemed within
six years of purchase.
Investor B Shares
automatically convert to
Investor A Shares six years
after purchase.
- -----------------------------------------------------------------------------------------
Distribution (12b-1) and Subject to annual Subject to annual
Service Fees distribution and shareholder distribution and
servicing fees of up to shareholder servicing fees
0.25% of a Portfolio's of up to 1.00% of a
average daily net assets Portfolio's average daily
attributable to its Investor net assets attributable to
A Shares. its Investor B Shares.
</TABLE>
16
<PAGE>
Your Account Distribution Arrangements/Sales Charges
Calculation of Sales Charges
Investor B Shares
For purposes of calculating the CDSC, all purchases made during a calendar month
are considered to be made on the first day of that month. The CDSC is based on
the value of the Investor B Shares on the date that they are sold or the
original cost of the shares, whichever is lower. To keep your CDSC as low as
possible each time you sell shares, the Fund will first sell any shares in your
account that are not subject to a CDSC. If there are not enough of these, the
Fund will sell the shares that have the lowest CDSC.
<TABLE>
<CAPTION>
CDSC as
a % of
Dollar
Amount
Number of Subject
Years Since to the
Purchase Charge
<C> <S>
1 or less 5.0%
1-2 4.0%
2-3 3.0%
3-4 3.0%
4-5 2.0%
5-6 1.0%
More than 6 None
----------------------------
</TABLE>
No CDSC is assessed on redemptions of Investor B Shares if:
. The shares were purchased with reinvested dividends or capital gains
distributions.
. The shares were purchased through an exchange of Investor B Shares of
another Portfolio.
. The redemption represents a distribution from a qualified retirement plan
under Section 403(b)(7) of the Internal Revenue Code, due to death,
disability or the attainment of a specified age.
. The redemption is in connection with the death or disability of the
shareholder.
. You participate in the Systematic Withdrawal Plan and your annual
withdrawals do not exceed 12% of your account's value.
. Your account falls below the Portfolio's minimum account size, and the
Fund liquidates your account (see page 24 ).
. The redemption results from a tax-free return of an excess contribution,
pursuant to Section 408(d)(4) or (5) of the Internal Revenue Code.
Distribution and Service Fees
Investor A Shares of the Portfolios pay distribution (12b-1) and shareholder
service fees at an annual rate of up to 0.25% of each Portfolio's Investor A
Share assets. Investor B Shares of the Money Market Portfolio pay distribution
(12b-1) and shareholder service fees at an annual rate of up to 1.00% of the
Portfolio's Investor B Share assets. The Fund has adopted separate distribution
and service plans under Rule 12b-1 that allow each Portfolio to pay fees from
its Investor A Share and/or Investor B Share assets for selling and
distributing Investor A Shares or Investor B Shares, as the case may be, and
for services provided to shareholders. Because 12b-1 fees are paid on an
ongoing basis, over time they increase the cost of your investment and may cost
more than other sales charges.
Converting Investor B Shares to Investor A Shares
Six years after you buy Investor B Shares of the Money Market Portfolio, they
will automatically convert to Investor A Shares of the Portfolio. This allows
you to benefit from the lower annual expenses of Investor A Shares.
17
<PAGE>
Your Account Explanation of Sales Price
- --------------------------------------------------------------------------------
Business days defined A business day is any day that both the New York Stock
Exchange and the Federal Reserve Banks' Fedline System are open for business.
Currently, the Fund observes the following holidays: New Year's Day, Martin
Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day (observed),
Independence Day (observed), Labor Day, Columbus Day, Veterans' Day,
Thanksgiving and Christmas.
- --------------------------------------------------------------------------------
Shares of each class in a Portfolio are sold at their net asset value (NAV).
The NAV for each class of shares of a Portfolio is determined as of 11:00 a.m.
(Central time) and as of the close of regular trading on the New York Stock
Exchange (currently 3:00 p.m., Central time) on every business day. The NAV for
a class of shares is determined by adding the value of the Portfolio's
investments, cash and other assets attributable to a particular share class,
subtracting the Portfolio's liabilities attributable to that class and then
dividing the result by the total number of shares in the class that are
outstanding.
. Each Portfolio's investments are valued at amortized cost, which is
approximately equal to market value.
. If you properly place a purchase order (see "How to Buy Shares" on page 19)
that is delivered to the Fund by 11:00 a.m. (Central time) on any business
day with respect to the Treasury Money Market Portfolio and Tax-Exempt Money
Market Portfolio or by 2:00 p.m. (Central time) on any business day with
respect to the Money Market Portfolio, the order receives the share price
next determined if the Fund receives payment in federal funds or other
immediately available funds by 3:00 p.m. (Central time) that day. If payment
is not received by that time, your order will be cancelled. A properly placed
purchase order that is delivered to the Fund after 11:00 a.m. (Central time)
with respect to the Treasury Money Market Portfolio and Tax-Exempt Money
Market Portfolio or after 2:00 p.m. (Central time) with respect to the Money
Market Portfolio will be placed the following business day.
18
<PAGE>
Your Account How to Buy Shares
Investing in the Mercantile Money Market Portfolios is quick and convenient.
You can purchase Investor A Shares in any of the following ways:
. Through a broker-dealer organization. You can purchase shares through any
broker-dealer organization that has a sales agreement with the Fund's
distributor. The broker-dealer organization is responsible for sending your
purchase order to the Fund.
. Through a financial organization. You can purchase shares through any
financial organization that has entered into a servicing agreement with the
Fund. The financial organization is responsible for sending your purchase
order to the Fund.
<TABLE>
<CAPTION>
To Open To Add to
Minimum Investments Your Account Your Account
<S> <C> <C>
Regular accounts $1,000 $50
-------------------------------------------------
Sweep program
through your
financial
institution None None
-------------------------------------------------
Wrap fee program
through your
financial institution None None
-------------------------------------------------
Payroll
Deduction
Program* None $25
-------------------------------------------------
ConvertiFund* $5,000 $1,000 minimum
account balance
-------------------------------------------------
Periodic
Investment Plan* $50 $50
- --------------------------------------------------
</TABLE>
* See Investor Programs below.
. Directly from the Fund by mail. Just complete an account application and send
it, along with a check for at least the minimum purchase amount, to:
Mercantile Mutual Funds, Inc., c/o Firstar Mutual Fund Services, LLC, P.O.
Box 3011, Milwaukee, Wisconsin 53201-3011 (via overnight delivery to 615 E.
Michigan Street, Milwaukee, Wisconsin 53202). To make additional investments
once you've opened your account, send your check to the address above
together with the detachable form that's included with your Fund statement or
confirmation of a prior transaction or a letter stating the amount of your
investment, the name of the Portfolio you want to invest in and your account
number.
Investor B Shares of the Money Market Portfolio are available only to holders
of Investor B Shares of another of the Fund's portfolios who wish to exchange
such shares for Investor B Shares of the Money Market Portfolio. See "Investor
Programs" below for more information on the Fund's exchange privilege.
In addition, you may call the Fund at 1-800-452-2724 for more information on
how to buy shares.
19
<PAGE>
Your Account How to Sell Shares
- --------------------------------------------------------------------------------
Selling recently purchased shares If you attempt to sell shares you recently
purchased with a personal check, the Fund may delay processing your request
until it collects payment for those shares. This process may take up to 15
days, so if you plan to sell shares shortly after purchasing them, you may want
to consider purchasing shares via electronic transfer to avoid delays.
- --------------------------------------------------------------------------------
You can arrange to get money out of your account by selling some or all of your
shares. This is known as "redeeming" your shares. You can redeem your shares in
the following ways:
. Through a broker-dealer or other financial organization. If you purchased
your shares through a broker-dealer or other financial organization, your
redemption order should be placed through the same organization. The
organization is responsible for sending your redemption order to the Fund on
a timely basis.
. By mail. Send your written redemption request to: Mercantile Mutual Funds,
Inc., c/o Firstar Mutual Fund Services, LLC, P.O. Box 3011, Milwaukee,
Wisconsin 53201-3011 (via overnight delivery to 615 E. Michigan Street,
Milwaukee, Wisconsin 53202). Your request must include the name of the
Portfolio, the number of shares or the dollar amount you want to sell, your
account number, your social security or tax identification number and the
signature of each registered owner of the account. Your request also must be
accompanied by any share certificates that are properly endorsed for
transfer. Additional documents may be required for certain types of
shareholders, such as corporations, partnerships, executors, trustees,
administrators or guardians.
The Fund's transfer agent may require a signature guarantee unless the
redemption proceeds are payable to the shareholder of record and the
redemption is either mailed to the shareholder's address of record or
electronically transferred to the account designated on the original account
application. A signature guarantee helps prevent fraud, and you may obtain
one from most banks and broker-dealers. Contact your broker-dealer or other
financial organization or the Fund for more information on signature
guarantees.
. By telephone. You may redeem your shares by telephone if you have selected
that option on your account application and if there has been no change of
address by telephone within the preceding 15 days. Call the Fund at 1-800-
452-2724 with your request. You may have your proceeds mailed to your address
or transferred electronically to the bank account designated on your account
application. If you have not previously selected the telephone privilege, you
may add this feature by providing written instructions to the Fund's transfer
agent. If you have difficulty getting through to the Fund because of unusual
market conditions, consider selling your shares by mail.
20
<PAGE>
Your Account How to Sell Shares
You may sell your Portfolio shares at any time. Your shares will be sold at the
NAV next determined after the Fund accepts your order (see page 20). The
proceeds of the sale of Investor B Shares of the Money Market Portfolio will be
reduced by the applicable CDSC. If your order to sell is received and accepted
by the Fund before 11:00 a.m. (Central time) on a business day with respect to
the Treasury Money Market Portfolio and Tax-Exempt Money Market Portfolio or
before 2:00 p.m. (Central time) on a business day with respect to the Money
Market Portfolio, your proceeds normally will be sent electronically the same
day or mailed by check the next business day. If your order to sell is received
and accepted by the Fund after 11:00 a.m. (Central time) on a business day with
respect to the Treasury Money Market Portfolio and Tax-Exempt Money Market
Portfolio or after 2:00 p.m. (Central time) on a business day with respect to
the Money Market Portfolio, or on a non-business day, your proceeds will
normally be sent electronically the next business day (or mailed by check the
second business day thereafter). If your account holds both Investor A Shares
and Investor B Shares, be sure to specify which shares you are selling.
Otherwise, Investor A Shares will be sold first.
21
<PAGE>
Your Account Investor Programs
It's also easy to buy or sell shares of the Portfolios by using one of the
programs described below.
Periodic Investment Plan
You may open an account or make additional investments to an existing account
for as little as $50 a month with the Fund's Periodic Investment Plan (PIP).
Under the PIP (which was formerly known as the Automatic Investment Program),
you specify the dollar amount to be automatically withdrawn each month from
your bank checking account and invested in your Portfolio account. Purchases of
Investor A Shares or Investor B Shares will occur on the day of the month
designated by you (or the next business day after the designated day) of each
month at the net asset value next determined on the day the order is effected.
To take advantage of the PIP, complete the PIP authorization form included with
your account application or contact your broker-dealer or other financial
organization.
Exchanges
The exchange privilege enables you to exchange Investor A Shares of one
Portfolio for Investor A Shares (or in certain limited circumstances as
described in the SAI, Trust or Institutional Shares) of another Portfolio and
to exchange Investor B Shares of the Money Market Portfolio for Investor B
Shares of another Portfolio. Just sign up for the exchange privilege on your
account application and contact your broker-dealer or other financial
organization when you want to exchange shares. You also may exchange shares by
telephoning the Fund directly (call 1-800-452-2724) if you have elected this
privilege on your account application. The exchange privilege may be exercised
only in those states where the class of shares of the Portfolio being acquired
may be legally sold.
Unless you qualify for a waiver, you will have to pay a sales charge when you
exchange Investor A Shares of a Portfolio for Investor A Shares of another
Portfolio that imposes a sales charge on purchases.
You may exchange Investor B Shares of the Money Market Portfolio without paying
a CDSC on the exchange. The holding period of the shares originally held and
redeemed will be added to the holding period of the new shares acquired through
the exchange.
Shares of the Portfolios also may be exchanged for shares of corresponding
classes of the Firstar Funds and the Firstar Stellar Funds. Please read the
prospectuses for those Funds before investing.
ConvertiFund
This program (which was formerly known as the Automatic Exchange Program) lets
you automatically exchange shares of one Portfolio for shares of another
Portfolio on a regular basis, as long as the shares are of the same class.
To participate, you must make a minimum initial purchase of $5,000 and maintain
a minimum account balance of $1,000. In addition, you must complete the
authorization form included with your account application or available from
your broker-dealer or other financial organization. In order to change
instructions with respect to ConvertiFund or to discontinue the program, you
must send written instructions to your broker-dealer or other financial
organization or to the Fund.
22
<PAGE>
Your Account Investor Programs
Systematic Withdrawal Plan
If the net asset value of your account equals $10,000 or more, you may take
advantage of the Fund's Systematic Withdrawal Plan (SWP). With the SWP (which
was formerly known as the Automatic Withdrawal Plan), you can have monthly,
quarterly, semi-annual or annual redemptions of at least $50 from your
Portfolio account sent to you via check or to your bank account electronically
on the day designated by you (or the next business day after the designated
day) of the applicable month of withdrawal. No CDSC will be charged on
withdrawals of Investor B Shares of the Money Market Portfolio made through the
SWP that don't annually exceed 12% of your account's value.
To participate in the SWP, complete the SWP application included with your
account application or contact your broker-dealer or other financial
organization. A signature guarantee will be required. You may terminate your
participation in the SWP upon 30 days' notice to your broker-dealer or other
financial organization or to the Fund.
Checkwriting Privilege
You can sign up for the Fund's checkwriting privilege by completing the
signature card that accompanies the account application or by calling your
broker-dealer or other financial organization to obtain a signature card. You
may write up to six checks per month in an amount per check of $250 or more.
The Fund may charge a fee for use of the checkwriting privilege. Please note
that you can't write a check to close your account.
Payroll Deduction Program
You can make regular investments from your paycheck. The minimum investment is
$25 per pay period. Call the Fund at 1-800-452-2724 for an application and
further information. The Fund may terminate the program at any time.
Internet Transactions
You generally can request purchases, exchanges and redemptions of Investor A
Shares and Investor B Shares of the Portfolios on-line via the Internet after
an account is opened. Redemption requests of up to $25,000 will be accepted
through the Internet. Payment for shares purchased on-line must be made by
electronic funds transfer from your banking institution. To authorize this
service, call the Fund's transfer agent at 1-800-452-2724.
The Fund and its agents will not be responsible for any losses resulting from
unauthorized on-line transactions when procedures are followed which are
designed to confirm that the on-line transaction request is genuine. Statements
of accounts shall be conclusive if not objected to in writing within 10 days
after transmitted by mail. During periods of significant economic or market
change, it may be difficult to reach the Fund on-line. If this happens, you may
initiate transactions in your share accounts by mail or otherwise as described
above.
23
<PAGE>
Your Account General Transaction Policies
The Fund reserves the right to:
. Vary or waive any minimum investment requirement.
. Refuse any order to buy shares.
. Reject any exchange request.
. Change or cancel the procedures for selling or exchanging shares by telephone
at any time.
. Redeem all shares in your account if your balance falls below $500. If,
within 60 days of the Fund's written request, you have not increased your
account balance, you may be required to redeem your shares. The Fund will not
require you to redeem shares if the value of your account drops below $500
due to fluctuations in net asset value.
. Send redemption proceeds within seven days after receiving a request, if an
earlier payment could adversely affect a Portfolio.
. Modify or terminate the Periodic Investment Plan, ConvertiFund and Systematic
Withdrawal Plan programs at any time.
. Modify or terminate the exchange privilege after 60 days' written notice to
shareholders.
. Modify or terminate the checkwriting privilege after 30 days' written notice
to shareholders.
. Make a "redemption in kind." Under abnormal conditions that may make payment
in cash unwise, the Fund may offer partial or complete payment in portfolio
securities rather than cash at such securities' then-market-value equal to
the redemption price. In such cases, you may incur brokerage costs in
converting these securities to cash.
If you elect telephone privileges on the account application or in a letter to
the Fund, you may be responsible for any fraudulent telephone orders as long as
the Fund has taken reasonable precautions to verify your identity.
Also, your broker-dealer or other financial organization may establish policies
that differ from those of the Fund. For example, the organization may charge
transaction fees, set higher minimum investments, or impose certain limitations
on purchasing or redeeming shares in addition to those identified in this
prospectus. Contact your broker-dealer or other financial organization for
details.
24
<PAGE>
Distributions and Taxes
Dividends and Distributions
Each Portfolio declares dividends from net investment income daily and pays
them monthly. Although the Portfolios do not expect to realize net long-term
capital gains, any capital gains realized will be distributed at least
annually.
Dividends on each share class of the Portfolios are determined in the same
manner and are paid in the same amount. However, each share class bears all
expenses associated with that particular class. So, because Investor B Shares
have higher distribution and service fees than Investor A Shares, the dividends
paid to Investor B shareholders will be lower than those paid to Investor A
shareholders.
All of your dividends and capital gains distributions with respect to a
particular Portfolio will be reinvested in additional shares of the same class
unless you instruct otherwise on your account application or have redeemed all
shares you held in the Portfolio. In such cases, dividends and distributions
will be paid in cash.
Taxation
As with any investment, you should consider the tax implications of an
investment in the Portfolios. The following is only a brief summary of some of
the important tax considerations generally affecting the Portfolios and their
shareholders under current law, which may be subject to change in the future.
Consult your tax adviser with specific reference to your own tax situation.
. Treasury Money Market and Money Market Portfolios
Distributions from these Portfolios will generally be taxable to
shareholders. It is expected that all or substantially all of these
distributions will consist of ordinary income and not capital gains. You will
be subject to income tax on these distributions regardless of whether they
are paid in cash or reinvested in additional shares. The one major exception
to these tax principles is that distributions on shares held in an IRA (or
other tax-qualified plan) will not be currently taxable.
. Tax-Exempt Money Market Portfolio
The Portfolio anticipates that substantially all of its income dividends will
be "exempt interest dividends," which are exempt from federal income taxes.
However, some dividends may be taxable, such as dividends that are derived
from occasional taxable investments and distributions of short and long-term
capital gains.
Interest on indebtedness incurred by a shareholder to purchase or carry
shares of the Portfolio generally will not be deductible for federal income
tax purposes.
You should note that a portion of the exempt-interest dividends paid by the
Portfolio may constitute an item of tax preference for purposes of
determining federal alternative minimum tax liability. Exempt-interest
dividends will also be considered along with other adjusted gross income in
determining whether any Social Security or railroad retirement payments
received by you are subject to federal income taxes.
25
<PAGE>
Distributions and Taxes
- --------------------------------------------------------------------------------
You will be advised at least annually regarding the federal income tax
treatment of dividends and distributions made to you. You should save your
account statements because they contain information you will need to calculate
your capital gains or losses, if any, upon your ultimate sale or exchange of
shares in the Portfolios.
- --------------------------------------------------------------------------------
. State and Local Taxes
Shareholders may also be subject to state and local taxes on distributions
and redemptions. State income taxes may not apply however, to the portions of
each Portfolio's distributions, if any, that are attributable to interest on
U.S. Government securities or interest on securities of a particular state or
localities within the state.
Dividends paid by a Portfolio may be taxable to investors under state or
local law as dividend income even though all or a portion of such dividends
may be derived from interest on obligations which, if realized directly,
would be exempt from such taxes.
The Treasury Money Market Portfolio is designed to provide shareholders, to
the extent permitted by federal law, with income that is exempt or excluded
from taxation at the state or local level. Please consult with a tax adviser
as to the status of distributions by the Portfolio in your state.
The foregoing is only a summary of certain tax considerations under current
law, which may be subject to change in the future. Shareholders who are
nonresident aliens, foreign trusts or estates, or foreign corporations or
partnerships, may be subject to different U.S. federal income tax treatment.
For more information regarding the taxation of the Portfolios, consult the SAI
under the heading "Additional Information Concerning Taxes." You should also
consult your tax adviser for further information regarding federal, state,
local and/or foreign tax consequences relevant to your specific situation.
26
<PAGE>
Management of the Fund
The Adviser
FIRMCO serves as the 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 Advisers Inc. ("MVA"), on March 1, 2000.
FIRMCO, with its main office at Firstar Center, 777 East Wisconsin Avenue,
Suite 800, Milwaukee, Wisconsin 53202, has been providing advisory services
since 1986. As of December 31, 1999, FIRMCO had approximately $35.3 billion in
assets under management.
FIRMCO, subject to the general supervision of the Fund's Board of Directors, is
responsible for the day-to-day management of the Portfolios in accordance with
each Portfolio's respective investment objective and policies. This includes
making investment decisions, buying and selling securities and overseeing the
administration and recordkeeping for each Portfolio.
In exchange for these services, FIRMCO receives an investment advisory fee,
which is calculated daily and paid monthly, according to the average daily net
assets of each Portfolio. For the fiscal year ended November 30, 1999, the
Portfolios paid MVA advisory fees as follows:
<TABLE>
<CAPTION>
Investment advisory fees
Portfolio as a % of net assets
-------------------------
<S> <C>
Treasury Money Market
Portfolio .35%
-------------------------
Money Market Portfolio .35%
-------------------------
Tax-Exempt Money Market
Portfolio .35%
- -------------------------------------------------
</TABLE>
27
<PAGE>
Financial Highlights
Introduction
The financial highlights tables presented below are intended to help you
understand the financial performance of each Portfolio's Investor A Shares
and/or Investor B Shares for the past five years (or, if shorter, the period
since the Portfolio began operations or the particular shares were first
offered). Certain information reflects financial results for a single Investor
A Share or Investor B Share in each Portfolio. The total returns in the tables
represent the rate that an investor would have earned on an investment in
either Investor A Shares or Investor B Shares, assuming reinvestment of all
dividends and distributions. This information has been audited by KPMG LLP,
independent auditors, whose report, along with the Portfolios' financial
statements, are included in the Fund's Annual Report to Shareholders, and are
incorporated by reference into the SAI.
28
<PAGE>
Financial Highlights Treasury Money Market Portfolio
<TABLE>
<CAPTION>
Investor A Shares
(For a Share outstanding throughout each period)
Year Ended November 30,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net Asset Value
Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-----------------------------------------------------------------------------------
Investment Activities
Net investment income 0.038 0.043 0.044 0.044 0.048
Net realized gains from
investments -- (a) -- -- -- --
-----------------------------------------------------------------------------------
Total from Investment
Activities 0.038 0.043 0.044 0.044 0.048
-----------------------------------------------------------------------------------
Distributions
Net investment income (0.038) (0.043) (0.044) (0.044) (0.048)
Net realized gains -- (a) -- -- -- --
-----------------------------------------------------------------------------------
Total Distributions (0.038) (0.043) (0.044) (0.044) (0.048)
-----------------------------------------------------------------------------------
Net Asset Value, End of
Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-----------------------------------------------------------------------------------
Total Return 3.87% 4.40% 4.53% 4.46% 4.93%
Ratios/Supplementary
Data:
Net Assets at end of
period (000) $ 20,470 $ 25,665 $ 8,409 $ 7,667 $ 2,776
Ratio of expenses to
average net assets 0.81% 0.81% 0.77% 0.81% 0.78%
Ratio of net investment
income to average net
assets 3.80% 4.22% 4.43% 4.35% 4.84%
Ratio of expenses to
average net assets* 0.95% 0.96% 0.92% 0.96% 0.93%
- --------------------------------------------------------------------------------
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
(a) Net realized gain and distribution from net realized gains was less than
$0.005.
29
<PAGE>
Financial Highlights Money Market Portfolio
<TABLE>
<CAPTION>
Investor A Shares
(For a Share outstanding throughout each period)
Year Ended November 30,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------------------------------------------------------------------------------------
Investment Activities
Net investment income 0.043 0.048 0.048 0.047 0.052
Net realized gains from
investments -- -- (a) -- -- --
------------------------------------------------------------------------------------------
Total from Investment
Activities 0.043 0.048 0.048 0.047 0.052
------------------------------------------------------------------------------------------
Distributions
Net investment income (0.043) (0.048) (0.048) (0.047) (0.052)
------------------------------------------------------------------------------------------
Total Distributions (0.043) (0.048) (0.048) (0.047) (0.052)
------------------------------------------------------------------------------------------
Net Asset Value, End of
Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------------------------------------------------------------------------------------
Total Return 4.43% 4.95% 4.93% 4.81% 5.33%
Ratios/Supplementary
Data:
Net Assets at end of
period (000) $ 255,404 $ 203,583 $ 164,777 $ 91,166 $ 64,865
Ratio of expenses to
average net assets 0.80% 0.78% 0.77% 0.78% 0.77%
Ratio of net investment
income to average net
assets 4.34% 4.83% 4.84% 4.70% 5.20%
Ratio of expenses to
average net assets* 0.94% 0.93% 0.92% 0.93% 0.92%
- --------------------------------------------------------------------------------
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been
indicated.
(a) Net realized gain per share was less than $0.005.
30
<PAGE>
Financial Highlights Money Market Portfolio
<TABLE>
<CAPTION>
Investor B Shares
(For a Share outstanding throughout each period)
Jan 26, 1996
Year Ended November 30, To
1999 1998 1997 Nov. 30, 1996(a)
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------------------------------------------------------------------------------------------
Investment Activities
Net investment income 0.036 0.041 0.041 0.033
Net realized gains from
investments -- -- (d) -- --
-------------------------------------------------------------------------------------------
Total from Investment
Activities 0.036 0.041 0.041 0.033
-------------------------------------------------------------------------------------------
Distributions
Net investment income (0.036) (0.041) (0.041) (0.033)
-------------------------------------------------------------------------------------------
Total Distributions (0.036) (0.041) (0.041) (0.033)
-------------------------------------------------------------------------------------------
Net Asset Value, End of
Period $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------------------------------------------------------------------------------------------
Total Return 3.65% 4.17% 4.15% 3.35%(b)
Ratios/Supplementary
Data:
Net Assets at end of
period (000) $ 173 $ 84 $ 73 $ 41
Ratio of expenses to
average net assets 1.55% 1.53% 1.52% 1.47%(c)
Ratio of net investment
income to average net
assets 3.61% 4.09% 4.10% 3.73%(c)
Ratio of expenses to
average net assets* 1.67% 1.68% 1.67% 1.68%(c)
</TABLE>
- --------------------------------------------------------------------------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been
indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Net realized gain per share was less than $0.005.
31
<PAGE>
Financial Highlights Tax-Exempt Money Market Portfolio
<TABLE>
<CAPTION>
Investor A Shares
(For a Share outstanding throughout each period)
Six Months
Ended Year Ended
Year Ended November 30, Nov. 30, May 31,
1999 1998 1997 1996 1995(a) 1995(d)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-----------------------------------------------------------------------------------------------------
Investment Activities
Net Investment income 0.024 0.027 0.028 0.028 0.014 0.027
-----------------------------------------------------------------------------------------------------
Total from Investment
Activities 0.024 0.027 0.028 0.028 0.014 0.027
-----------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.024) (0.027) (0.028) (0.028) (0.014) (0.027)
-----------------------------------------------------------------------------------------------------
Total Distributions (0.024) (0.027) (0.028) (0.028) (0.014) (0.027)
-----------------------------------------------------------------------------------------------------
Net Asset Value, End of
Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-----------------------------------------------------------------------------------------------------
Total Return 2.44% 2.72% 2.88% 2.83% 1.45%(b) 2.70%
Ratios/Supplementary
Data:
Net Assets at end of
period (000) $11,306 $13,980 $15,789 $17,984 $ 5,403 $5,138
Ratio of expenses to
average net assets 0.79% 0.79% 0.77% 0.75% 0.94%(c) 0.84%
Ratio of net investment
income to average net
assets 2.40% 2.68% 2.82% 2.78% 2.87%(c) 2.63%
Ratio of expenses to
average net assets* 0.84% 0.84% 0.82% 0.80% 0.99%(c) 0.93%
</TABLE>
- --------------------------------------------------------------------------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
(a) Upon reorganizing as a portfolio of The ARCH Fund, Inc. on October 2,
1995, the Tax-Exempt Money Market Portfolio changed its fiscal year-end
from May 31 to November 30.
(b) Not annualized.
(c) Annualized.
(d) On September 27, 1994, the Portfolio redesignated Investor Shares as
"Investor A" Shares.
32
<PAGE>
Where to find more information
You'll find more information about the Portfolios in the following documents:
Annual and semi-annual reports
The Fund's annual and semi-annual reports contain information about each
Portfolio and a discussion about the market conditions and investment strategies
that had a significant effect on each Portfolio's performance during the last
fiscal year.
Statement of Additional Information (SAI)
The SAI contains detailed information about the Portfolios and their policies.
By law, it's incorporated by reference into (considered to be part of) this
prospectus.
You can get a free copy of these documents, request other information about the
Portfolios and make shareholder inquiries by calling the Fund at 1-800-452-2724
or by writing to:
Mercantile Mutual Funds, Inc.
c/o Firstar Mutual Fund Services, LLC
615 E. Michigan Street
P.O. Box 3011
Milwaukee, WI 53201-3011
If you buy your shares through a broker-dealer or other financial institution,
you may contact your institution for more information.
You can write to the Securities and Exchange Commission (SEC) Public Reference
Section and ask them to mail you information about the Portfolios, including the
SAI. They'll charge you a fee for this service. You can also visit the SEC
Public Reference Room and copy the documents while you're there. For more
information about the operation of the Public Reference Room, call the SEC.
Public Reference Section of the SEC
Washington, D.C. 20549-0102
1-202-942-8090
Reports and other information about the Portfolios are also available on the
EDGAR database on the SEC's website at http://www.sec.gov. Copies of this
-------------------
information may also be obtained, after paying a duplicating fee, by electronic
request to the SEC's e-mail address at [email protected].
-------------------
The Fund's Investment Company Act File No. is 811-3567
<PAGE>
MERCANTILE MUTUAL FUNDS
INVESTOR SHARES
[PHOTO]
Prospectus
March 31, 2000
TAXABLE BOND PORTFOLIOS
U.S.Government Securities Portfolio
Intermediate Corporate Bond Portfolio
Bond Index Portfolio
Government & Corporate Bond Portfolio
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved these securities or passed upon the adequacy of this
prospectus. Any representation to the contrary is a criminal offense.
[LOGO OF FIRSTAR]
<PAGE>
Contents
<TABLE>
<CAPTION>
Introduction
- --------------------------------------------------------------
<C> <S>
3 Overview
Risk/Return Summary
- --------------------------------------------------------------
4 U.S. Government Securities Portfolio
9 Intermediate Corporate Bond Portfolio
14 Bond Index Portfolio
19 Government & Corporate Bond Portfolio
24 Additional Information on Risk
Your Account
- --------------------------------------------------------------
25 Distribution Arrangements/Sales Charges
30 Explanation of Sales Price
31 How to Buy Shares
32 How to Sell Shares
33 Investor Programs
35 General Transaction Policies
Distributions and Taxes
- --------------------------------------------------------------
36 Dividends and Distributions
37 Taxation
Management of the Fund
- --------------------------------------------------------------
38 The Adviser
Financial Highlights
- --------------------------------------------------------------
39 Introduction
40 U.S. Government Securities Portfolio
42 Intermediate Corporate Bond Portfolio
43 Bond Index Portfolio
44 Government & Corporate Bond Portfolio
</TABLE>
2
<PAGE>
Introduction Overview
This prospectus describes the Mercantile Taxable Bond
Portfolios, four investment portfolios offered by Mercantile
Mutual Funds, Inc. (the "Fund"). On the following pages, you
will find important information about each Portfolio,
including:
. A description of the Portfolio's investment objective
(sometimes referred to as its goal);
. The Portfolio's principal investment strategies (the steps
it takes to try to meet its goal);
. The principal risks associated with the Portfolio (factors
that may prevent it from meeting its goal);
. The Portfolio's past performance (how successful it's been
in meeting its goal); and
. The fees and expenses (including sales charges) you pay as
an investor in the Portfolio.
Who May Want The Mercantile Taxable Bond Portfolios may be appropriate for
to Invest in investors who seek current income from their investments
the greater than that normally available from a money market fund
Mercantile and can accept fluctuations in price and yield. The
Taxable Bond Portfolios may not be appropriate for investors who are
Portfolios? investing for long-term capital appreciation.
Before investing in a Portfolio, you should carefully
consider:
. Your own investment goals
. The amount of time you are willing to leave your money
invested
. How much risk you are willing to take.
The Firstar Investment Research & Management Company, LLC, which
Investment is referred to in this prospectus as "FIRMCO" or the
Adviser "Adviser," serves as the investment adviser to each
Portfolio. FIRMCO is a subsidiary of Firstar Corporation, a
banking and financial services organization.
An investment in the Portfolios is not a deposit of Firstar
Bank, N.A. and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency.
You could lose money by investing in the Portfolios.
3
<PAGE>
Risk/Return Summary U.S. Government Securities Portfolio
[LOGO OF RISK/RETUURN SCALE]
- --------------------------------------------------------------------------------
Repurchase agreements are transactions in which a Portfolio buys securities
from a seller (usually a bank or broker-dealer) who agrees to buy them back
from the Portfolio on a certain date and at a certain price.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Mortgage-backed securities are certificates representing ownership interests in
a pool of mortgage loans, and include those issued by the Government National
Mortgage Association ("Ginnie Maes"), the Federal National Mortgage Association
("Fannie Maes") and the Federal Home Loan Mortgage Corporation ("Freddie
Macs").
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Portfolio Manager
David A. Bethke is the person primarily responsible for the day-to-day
management of the Portfolio. Mr. Bethke, Senior Associate, has been with FIRMCO
and its affiliates since 1987 and has eight years of prior investment
experience. He has managed the Portfolio since it commenced operations in 1988.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is to seek a high rate of current income
that is consistent with relative stability of principal.
Principal Investment Strategies
The Portfolio normally invests at least 65% of its total assets in debt
obligations issued or guaranteed by the U.S. Government and its agencies,
including U.S. Treasury bonds, notes and bills, as well as in repurchase
agreements backed by such obligations. The Portfolio also invests in mortgage-
backed securities issued by U.S. Government-sponsored entities such as Ginnie
Maes, Fannie Maes, and Freddie Macs. The remaining maturity (i.e., length of
time until an obligation must be repaid) of the obligations held by the
Portfolio will vary from one to 30 years. Under normal conditions, however, the
Adviser does not expect the Portfolio's average weighted maturity to exceed 10
years when adjusted for the expected average life of any mortgage-backed
securities held by the Portfolio.
Principal Risk Considerations
The prices of debt securities tend to move in the opposite direction to
interest rates. When rates are rising, the prices of debt securities tend to
fall. When rates are falling, the prices of debt securities tend to rise.
Generally, the longer the time until maturity, the more sensitive the price of
a debt security is to interest rate changes.
Changes in interest rates may also cause certain debt securities held by the
Portfolio, including mortgage-backed securities, to be paid off much sooner or
later than expected. In the event that a security is paid off sooner than
expected because of a decline in interest rates, the Portfolio may be unable to
recoup all of its initial investment and may also suffer from having to
reinvest in lower-yielding securities. In the event of a later than expected
payment because of a rise in interest rates, the value of the obligation will
decrease, and the Portfolio may suffer from the inability to invest in higher-
yielding securities.
The value of debt securities also depends on the ability of issuers to make
principal and interest payments. If an issuer can't meet its payment
obligations, the value of its debt securities will fall. Securities issued or
guaranteed by the U.S. Government and its agencies have historically involved
little risk of loss of principal if held to maturity. Certain U.S. Government
securities, such as Ginnie Maes, are supported by the full faith and credit of
the U.S. Treasury. Others, such as Freddie Macs, are supported by the right of
the issuer to borrow from the U.S. Treasury.
4
<PAGE>
Risk/Return Summary U.S. Government Securities Portfolio
Other securities, such as Fannie Maes, are supported by the discretionary
authority of the U.S. Government to purchase certain obligations of the issuer,
and still others are supported by the issuer's own credit.
Repurchase agreements carry the risk that the other party may not fulfill its
obligations under the agreement.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolio and how they may advance the Portfolio's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
5
<PAGE>
Risk/Return Summary U.S. Government Securities Portfolio
Return History
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Investor A Shares has varied from year to year. The table shows how the
Portfolio's average annual returns for one year, five years, ten years and
since inception compare to those of a broad-based market index. Both the bar
chart and table assume reinvestment of all dividends and distributions. The
Portfolio's past performance does not necessarily indicate how it will perform
in the future.
- --------------------------------------------------------------------------------
Know your index
The Lehman Brothers Intermediate Government Bond Index is an unmanaged index
which tracks the performance of intermediate-term U.S. Government bonds.
- --------------------------------------------------------------------------------
Investor A Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1990 11.04%
1991 13.98%
1992 5.48%
1993 8.77%
1994 -2.74%
1995 14.95%
1996 3.01%
1997 6.37%
1998 6.43%
1999 0.69%
The returns for Investor B Shares differed from the returns shown in the bar
chart because the two classes bear different expenses. The bar chart does not
reflect any sales charges on purchases of the Portfolio's Investor A Shares. If
sales charges were included, returns would be lower than those shown.
<TABLE>
<S> <C>
Best quarter: 5.40% for the quarter ending September 30, 1991
Worst quarter: -2.60% for the quarter ending March 31, 1994
</TABLE>
---------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended December 31, 1999
-------------------------------------------------------------------
<TABLE>
<CAPTION>
1 5 10 Since
Year Years Years Inception
----------------------------------------
<S> <C> <C> <C> <C>
Investor A Shares
(with 4.00% sales charge) -3.36% 5.32% 6.23% 6.53%/1/
----------------------------------------
Investor B Shares
(with applicable contingent
deferred sales charge) -4.60% N/A N/A 4.01%/1/
----------------------------------------
Lehman Brothers Intermediate
Government Bond Index 0.49% 6.93% 7.10% 7.55%/2/
6.24%/3/
- ----------------------------------------------------------------------------
</TABLE>
/1/ June 2, 1988 for Investor A Shares; May 11, 1995 (data of initial public
investment) for Investor B Shares.
/2/ May 31, 1988.
/3/ April 30, 1995.
6
<PAGE>
Risk/Return Summary U.S. Government Securities Portfolio
The table on this page shows the fees and expenses that you pay if you buy and
hold Investor A Shares or Investor B Shares of the U.S. Government Securities
Portfolio.
Fees and Expenses
<TABLE>
<CAPTION>
Shareholder Fees Investor Investor
(fees you pay directly) A Shares B Shares
<S> <C> <C>
Maximum sales charge (load) to buy shares, shown as a % of
the offering
price 4.00%/1/ None
------------------------------------------------------------------------------
Maximum deferred sales charge (load) shown as a % of the
offering price or sale price, whichever is less None 5.00%/2/
</TABLE>
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses
(expenses that are deducted from the Investor Investor
Portfolio's assets) A Shares B Shares
<S> <C> <C>
Management Fees .45% .45%
-------------------------------------------------------------
Distribution (12b-1) and Service Fees .30% 1.00%
-------------------------------------------------------------
Other Expenses .34%/3/ .34%/3/
-------------------------------------------------------------
Total Annual Portfolio Operating Expenses 1.09%/3/ 1.79%/3/
- --------------------------------------------------------------
</TABLE>
/1/ Reduced sales charges may be available. See "Distribution
Arrangements/Sales Charges" below.
/2/ This amount applies if you sell your shares in the first year after
purchase and gradually declines until it is eliminated after six years.
After six years, your Investor B Shares will automatically convert to
Investor A Shares. See "Distribution Arrangements/Sales Charges" below.
/3/ Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Investor A Shares and Investor B Shares for the current fiscal
year are expected to be less than the amounts shown above because certain
of the Portfolio's service providers are voluntarily waiving a portion of
their fees and/or reimbursing the Portfolio for certain other expenses.
These fee waivers and/or reimbursements are being made in order to keep the
annual fees and expenses for the Portfolio's Investor A Shares and Investor
B Shares at certain levels. Other Expenses and Total Annual Portfolio
Operating Expenses, after taking these fee waivers and expense
reimbursements into account, are expected to be .24% and .99%,
respectively, for Investor A Shares and .24% and 1.69%, respectively, for
Investor B Shares. These fee waivers and expense reimbursements may be
revised or cancelled at any time.
7
<PAGE>
Risk/Return Summary U.S. Government Securities Portfolio
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year, the
Portfolio's operating expenses remain the same and your Investor B Shares
automatically convert to Investor A Shares after six years. Although your
actual costs may be higher or lower, based on these assumptions your costs
would be:
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Investor A Shares $507 $733 $ 977 $1,676
------------------------------------------------------------------------------
Investor B Shares $682 $863 $1,170 $1,752
If you hold Investor B Shares, you would pay the
following expenses if you did not sell your shares: $182 $563 $ 970 $1,752
- -------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
Risk/Return Summary Intermediate Corporate Bond Portfolio
- --------------------------------------------------------------------------------
Investment grade debt securities are those of medium credit quality or better
as determined by a national rating agency, such as Standard & Poor's Ratings
Group (debt securities rated in the four highest rating categories, i.e. BBB or
higher) and Moody's Investors Service, Inc. (debt securities rated in the four
highest rating categories, i.e. Baa or higher). The higher the credit rating,
the less likely it is that the issuer of the securities will default on its
principal and interest payments.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Average weighted maturity gives you the average time until all debt securities
in a Portfolio come due or mature. It is calculated by averaging the time to
maturity of all debt securities held by a Portfolio with each maturity
"weighted" according to the percentage of assets it represents.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is to seek as high a level of current
income as is consistent with preservation of capital.
Principal Investment Strategies
The Portfolio normally invests at least 65% of its total assets in corporate
debt obligations. These include obligations that are issued by U.S. and foreign
business corporations and obligations issued by agencies, instrumentalities or
authorities that are organized as corporations by the United States, by states
or political subdivisions of the United States, or by foreign governments or
political subdivisions. The Portfolio also invests in obligations issued or
guaranteed by U.S. or foreign governments, their agencies and instrumentalities
and in mortgage-backed securities, including Ginnie Maes, Fannie Maes and
Freddie Macs.
The Portfolio may only purchase investment grade debt obligations. Under normal
market conditions, however, the Portfolio intends to invest at least 65% of its
total assets in debt obligations rated in one of the three highest rating
categories. Unrated debt obligations will be purchased only if they are
determined by the Adviser to be at least comparable in quality at the time of
purchase to eligible rated securities. Occasionally, the rating of a security
held by the Portfolio may be downgraded to below investment grade. If that
happens, the Portfolio does not have to sell the security unless the Adviser
determines that under the circumstances the security is no longer an
appropriate investment for the Portfolio.
In making investment decisions, the Adviser will consider a number of factors
including current yield, maturity, yield to maturity, anticipated changes in
interest rates, and the overall quality of the investment. The Portfolio's
average weighted maturity will generally be between three and ten years.
9
<PAGE>
Risk/Return Summary Intermediate Corporate Bond Portfolio
- --------------------------------------------------------------------------------
Portfolio Manager
David A. Bethke is the person primarily responsible for the day-to-day
management of the Portfolio. Mr. Bethke, Senior Associate, has been with FIRMCO
and its affiliates since 1987 and has eight years of prior investment
experience. He has managed the Portfolio since it commenced operations in 1997.
- --------------------------------------------------------------------------------
Principal Risk Considerations
The prices of debt securities tend to move in the opposite direction to
interest rates. When rates are rising, the prices of debt securities tend to
fall. When rates are falling, the prices of debt securities tend to rise.
Generally, the longer the time until maturity, the more sensitive the price of
a debt security is to interest rate changes.
Changes in interest rates also may cause certain debt securities held by the
Portfolio, including callable securities and mortgage-backed securities, to be
paid off much sooner or later than expected. In the event that a security is
paid off sooner than expected because of a decline in interest rates, the
Portfolio may be unable to recoup all of its initial investment and may also
suffer from having to reinvest in lower-yielding securities. In the event of a
later than expected payment because of a rise in interest rates, the value of
the obligation will decrease, and the Portfolio may suffer from the inability
to invest in higher-yielding securities.
The value of debt securities also depends on the ability of issuers to make
principal and interest payments. If an issuer can't meet its payment
obligations or if its credit rating is lowered, the value of its debt
securities will fall.
Foreign investments may be riskier than U.S. investments because of currency
exchange rate volatility, government restrictions, different accounting
standards and political instability. In addition, investments in foreign
securities may involve higher costs than investments in U.S. securities,
including higher transaction and custody costs as well as the imposition of
additional taxes by foreign governments.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolio and how they may advance the Portfolio's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
10
<PAGE>
Risk/Return Summary Intermediate Corporate Bond Portfolio
Return History
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Investor A Shares has varied from year to year. The table shows how the
Portfolio's average annual returns for one year and since inception compare to
those of a broad-based market index. Both the bar chart and table assume
reinvestment of all dividends and distributions. The Portfolio's past
performance does not necessarily indicate how it will perform in the future.
- --------------------------------------------------------------------------------
Know your index
The Lehman Brothers Intermediate Corporate Bond Index is an unmanaged index
which tracks the performance of intermediate-term U.S. corporate bonds.
- --------------------------------------------------------------------------------
Investor A Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1998 8.79%
1999 -2.56%
The bar chart does not reflect any sales charges on purchases of the
Portfolio's Investor A Shares. If sales charges were included, returns would
be lower than those shown.
<TABLE>
<S> <C>
Best quarter: 5.25% for the quarter ending September 30, 1998
Worst quarter: -1.49% for the quarter ending June 30, 1999
</TABLE>
---------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended December 31, 1999
-------------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year Inception
---------------------------------
<S> <C> <C>
Investor A Shares
(with 4.00% sales charge) -6.47% 3.15%/1/
---------------------------------
Lehman Brothers Intermediate
Corporate Bond Index 0.16% 5.55%/2/
- ---------------------------------------------------------------------
</TABLE>
/1/ February 10, 1997.
/2/ January 31, 1997.
11
<PAGE>
Risk/Return Summary Intermediate Corporate Bond Portfolio
The table on this page shows the fees and expenses that you pay if you buy and
hold Investor A Shares of the Intermediate Corporate Bond Portfolio.
Fees and Expenses
<TABLE>
<CAPTION>
Shareholder Fees
(fees you pay directly) Investor A Shares
<S> <C>
Maximum sales charge (load) to buy
shares, shown as a % of the offering
price 4.00%/1/
---------------------------------------------------------
Maximum deferred sales charge (load)
shown as a % of the offering price or
sale price, whichever is less None
</TABLE>
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses
(expenses that are deducted from the
Portfolio's assets) Investor A Shares
<S> <C>
Management Fees .55%
-------------------------------------------------------------
Distribution (12b-1) and Service Fees .30%
-------------------------------------------------------------
Other Expenses .34%/2/
-------------------------------------------------------------
Total Annual Portfolio Operating Expenses 1.19%/2/
- --------------------------------------------------------------
</TABLE>
/1/ Reduced sales charges may be available. See "Distribution
Arrangements/Sales Charges" below.
/2/ Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Investor A Shares for the current fiscal year are expected to
be less than the amounts shown above because certain of the Portfolio's
service providers are voluntarily waiving a portion of their fees and/or
reimbursing the Portfolio for certain other expenses. These fee waivers
and/or reimbursements are being made in order to keep the annual fees and
expenses for the Portfolio's Investor A Shares at a certain level. Other
Expenses and Total Annual Portfolio Operating Expenses, after taking these
fee waivers and expense reimbursements into account, are expected to be
.24% and 1.09%, respectively, for Investor A Shares. These fee waivers and
expense reimbursements may be revised or cancelled at any time.
12
<PAGE>
Risk/Return Summary Intermediate Corporate Bond Portfolio
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Investor A Shares $516 $763 $1,028 $1,785
- ---------------------------------------------
</TABLE>
13
<PAGE>
Risk/Return Summary Bond Index Portfolio
- --------------------------------------------------------------------------------
Indexing is a strategy whereby a Portfolio attempts to weight its securities to
match those of a broadly-based securities index in an attempt to approximate
the index's performance.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Lehman Brothers Aggregate Bond Index is an unmanaged index made up of
Lehman Brothers' Government/Corporate Bond Index, its Mortgage Backed
Securities Index and its Asset Backed Securities Index. Lehman Brothers, Inc.
does not endorse any securities in the Lehman Brothers Aggregate Bond Index and
is not a sponsor of, or affiliated in any way with, the Portfolio.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is to seek to provide investment results
that, before deduction of operating expenses, approximate the price and yield
performance of U.S. Government, mortgage-backed, asset-backed and corporate
debt securities as represented by the Lehman Brothers Aggregate Bond Index,
which is referred to in this prospectus as the "Lehman Aggregate."
The Portfolio's investment objective can be changed by the Fund's Board of
Directors without shareholder approval. Shareholders will be given at least 30
days' written notice before any such change occurs.
Principal Investment Strategies
The Portfolio uses an "indexing" strategy through the use of computer models to
approximate the investment performance of the Lehman Aggregate. The Adviser
generally selects securities for the Portfolio on the basis of their weightings
in the Lehman Aggregate and will only purchase a security for the Portfolio
that is included in the Lehman Aggregate at the time of such purchase. Because
of the large number of securities listed in the Lehman Aggregate, the Portfolio
cannot invest in all of them. Instead, the Portfolio holds a representative
sample of approximately 100 of the securities in the Lehman Aggregate,
selecting one or two securities to represent an entire "class" or type of
security in the Lehman Aggregate. The Portfolio will invest substantially all
(but not less than 80%) of its total assets in securities listed in the Lehman
Aggregate.
The Portfolio's average weighted maturity will vary from time to time depending
on the maturity of the securities in the Lehman Aggregate. Under normal
conditions, however, the Adviser does not expect the Portfolio's average
weighted maturity to exceed nine years.
Under normal market conditions, it is expected that the quarterly performance
of the Portfolio, before expenses, will track the performance of the Lehman
Aggregate within a .95 correlation coefficient.
14
<PAGE>
Risk/Return Summary Bond Index Portfolio
Principal Risk Considerations
The prices of debt securities tend to move in the opposite direction to
interest rates. When rates are rising, the prices of debt securities tend to
fall. When rates are falling, the prices of debt securities tend to rise.
Generally, the longer the time until maturity, the more sensitive the price of
a debt security is to interest rate changes.
Changes in interest rates also may cause certain debt securities held by the
Portfolio, including callable securities and mortgage-backed securities, to be
paid off much sooner or later than expected. In the event that a security is
paid off sooner than expected because of a decline in interest rates, the
Portfolio may be unable to recoup all of its initial investment and may also
suffer from having to reinvest in lower-yielding securities. In the event of a
later than expected payment because of a rise in interest rates, the value of
the obligation will decrease, and the Portfolio may suffer from the inability
to invest in higher-yielding securities.
The value of debt securities also depends on the ability of issuers to make
principal and interest payments. If an issuer can't meet its payment
obligations or if its credit rating is lowered, the value of its debt
securities will fall.
There is the additional risk that the Portfolio will fail to match the
investment results of the Lehman Aggregate as a result of shareholder purchase
and redemption activity, transaction costs, expenses and other factors.
15
<PAGE>
Risk/Return Summary Bond Index Portfolio
Return History
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Investor A Shares has varied from year to year. The table shows how the
Portfolio's average annual returns for one year and since inception compare to
those of the Lehman Aggregate. Both the bar chart and table assume reinvestment
of all dividends and distributions. The Portfolio's past performance does not
necessarily indicate how it will perform in the future.
Investor A Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1998 8.60%
1998 -1.81%
The bar chart does not reflect any sales charges on purchases of the
Portfolio's Investor A Shares. If sales charges were included, returns would
be lower than those shown.
<TABLE>
<S> <C>
Best quarter: 4.60% for the quarter ending September 30, 1998
Worst quarter: -1.08% for the quarter ending June 30, 1999
</TABLE>
---------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended
December 31, 1999
-------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year Since Inception
-----------------------
<S> <C> <C>
Investor A Shares
(with 4.00% sales charge) -5.71% 3.52%/1/
-----------------------
Lehman Aggregate -0.82% 3.82%/2/
- ----------------------------------------------------
</TABLE>
/1/ February 10, 1997.
/2/ January 31, 1997.
16
<PAGE>
Risk/Return Summary Bond Index Portfolio
The table on this page shows the fees and expenses that you pay if you buy and
hold Investor A Shares of the Bond Index Portfolio.
Fees and Expenses
<TABLE>
<CAPTION>
Shareholder Fees
(fees you pay directly) Investor A Shares
<S> <C>
Maximum sales charge (load)
to buy shares, shown as a % of
the offering price 4.00%/1/
---------------------------------------------------------
Maximum deferred sales charge (load)
shown as a % of the offering price or
sale price, whichever is less None
</TABLE>
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses
(expenses that are deducted from the
Portfolio's assets) Investor A Shares
<S> <C>
Management Fees .30%
-------------------------------------------------------------
Distribution (12b-1) and Service Fees .30%
-------------------------------------------------------------
Other Expenses .33%/2/
-------------------------------------------------------------
Total Annual Portfolio Operating Expenses .93%/2/
- --------------------------------------------------------------
</TABLE>
/1/ Reduced sales charges may be available. See "Distribution
Arrangements/Sales Charges" below.
/2/ Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Investor A Shares for the current fiscal year are expected to
be less than the amounts shown above because certain of the Portfolio's
service providers are voluntarily waiving a portion of their fees and/or
reimbursing the Portfolio for certain other expenses. These fee waivers
and/or reimbursements are being made in order to keep the annual fees and
expenses for the Portfolio's Investor A Shares at a certain level. Other
Expenses and Total Annual Portfolio Operating Expenses, after taking these
fee waivers and expense reimbursements into account, are expected to be
.23% and .83%, respectively, for Investor A Shares. These fee waivers and
expense reimbursements may be revised or cancelled at any time.
17
<PAGE>
Risk/Return Summary Bond Index Portfolio
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Investor A Shares $491 $685 $894 $1,497
- --------------------------------------------
</TABLE>
18
<PAGE>
Risk/Return Summary Government & Corporate Bond Portfolio
- --------------------------------------------------------------------------------
Portfolio Manager
George J. Schupp is the person primarily responsible for the day-to-day
management of the Portfolio. Mr. Schupp, FIRMCO's Director of Fixed Income
Management, has been with FIRMCO and its affiliates since 1983 and has 7 years
of prior investment experience. He has managed the Portfolio since February
1998.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is to seek the highest level of current
income consistent with conservation of capital.
Principal Investment Strategies
The Portfolio invests substantially all of its assets in a broad range of debt
obligations, including corporate obligations and U.S. Government obligations.
Corporate obligations may include bonds, notes, and debentures. U.S. Government
obligations may include U.S. Treasury obligations and obligations of certain
U.S. Government agencies. The Portfolio also invests in mortgage-backed
securities, including Ginnie Maes, Fannie Maes and Freddie Macs. Although the
Portfolio invests primarily in the debt obligations of U.S. issuers, it may
from time to time invest up to 10% of its total assets in U.S. dollar-
denominated debt obligations of foreign corporations and governments.
The Portfolio may only purchase investment grade debt obligations, which are
those rated in one of the four highest rating categories by one or more
national rating agencies such as Standard & Poor's Ratings Group or Moody's
Investors Service, Inc. Under normal market conditions, however, the Portfolio
intends to invest at least 65% of its total assets in debt obligations rated in
one of the three highest rating categories. Unrated debt obligations will be
purchased only if they are determined by the Adviser to be at least comparable
in quality at the time of purchase to eligible rated securities. Occasionally,
the rating of a security held by the Portfolio may be downgraded to below
investment grade. If that happens, the Portfolio does not have to sell the
security unless the Adviser determines that under the circumstances the
security is no longer an appropriate investment for the Portfolio.
In making investment decisions, the Adviser considers a number of factors
including credit quality, the price of the security relative to that of other
securities in its sector, current yield, maturity, yield to maturity,
anticipated changes in interest rates and other economic factors, liquidity and
the overall quality of the investment.
The remaining maturity (i.e., length of time until an obligation must be
repaid) of the obligations held by the Portfolio will vary from one to 30
years. The Portfolio's average weighted maturity will vary from time to time
depending on current market and economic conditions and the Adviser's
assessment of probable changes in interest rates.
19
<PAGE>
Risk/Return Summary Government & Corporate Bond Portfolio
Principal Risk Considerations
The prices of debt securities tend to move in the opposite direction to
interest rates. When rates are rising, the prices of debt securities tend to
fall. When rates are falling, the prices of debt securities tend to rise.
Generally, the longer the time until maturity, the more sensitive the price of
a debt security is to interest rate changes.
Changes in interest rates also may cause certain debt securities held by the
Portfolio, including callable securities and mortgage-backed securities, to be
paid off much sooner or later than expected. In the event that a security is
paid off sooner than expected because of a decline in interest rates, the
Portfolio may be unable to recoup all of its initial investment and may also
suffer from having to reinvest in lower-yielding securities. In the event of a
later than expected payment because of a rise in interest rates, the value of
the obligation will decrease, and the Portfolio may suffer from the inability
to invest in higher-yielding securities.
The value of debt securities also depends on the ability of issuers to make
principal and interest payments. If an issuer can't meet its payment
obligations or if its credit rating is lowered, the value of its debt
securities will fall.
Foreign investments may be riskier than U.S. investments because of currency
exchange rate volatility, government restrictions, different accounting
standards and political instability. In addition, investments in foreign
securities may involve higher costs than investments in U.S. securities,
including higher transaction and custody costs as well as the imposition of
additional taxes by foreign governments.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolio and how they may advance the Portfolio's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
20
<PAGE>
Risk/Return Summary Government & Corporate Bond Portfolio
Return History
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Investor A Shares has varied from year to year. The table shows how the
Portfolio's average annual returns for one year, five years, ten years and
since inception compare to those of a broad-based market index. Both the bar
chart and table assume reinvestment of all dividends and distributions. The
Portfolio's past performance does not necessarily indicate how it will perform
in the future.
- --------------------------------------------------------------------------------
Know your index
The Lehman Brothers Aggregate Bond Index is an unmanaged index made up of
Lehman Brothers' Government/Corporate Bond Index, its Mortgage Backed
Securities Index and its Asset Backed Securities Index.
- --------------------------------------------------------------------------------
Investor A Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1990 6.46%
1991 15.23%
1992 5.78%
1993 9.07%
1994 -2.92%
1995 16.73%
1996 1.83%
1997 8.03%
1998 8.67%
1999 -2.01%
The returns for Investor B Shares differed from the returns shown in the bar
chart because the two classes bear different expenses. The bar chart does not
reflect any sales charges on purchases of the Portfolio's Investor A Shares.
If sales charges were included, returns would be lower than those shown.
<TABLE>
<S> <C>
Best quarter: 5.60% for the quarter ending June 30, 1995
Worst quarter: -2.79% for the quarter ending March 31, 1996
</TABLE>
---------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended December 31, 1999
-------------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year 5 Years 10 Years Inception
-----------------------------------------------------
<S> <C> <C> <C> <C>
Investor A Shares
(with 4.00% sales charge) -5.92% 5.61% 6.08% 6.47%/1/
-----------------------------------------------------
Investor B Shares
(with applicable contingent
deferred sales charge) -7.28% N/A N/A 5.05%/1/
-----------------------------------------------------
Lehman Brothers Aggregate
Bond Index -0.82% 7.73% 7.70% 8.34%/2/
7.04%/3/
- -------------------------------------------------------------------------------
</TABLE>
/1/ June 15, 1988 for Investor A Shares; March 7, 1995 (date of initial public
investment) for Investor B Shares.
/2/ May 31, 1988.
/3/ February 28, 1995.
21
<PAGE>
Risk/Return Summary Government & Corporate Bond Portfolio
The table on this page shows the fees and expenses that you pay if you buy and
hold Investor A Shares or Investor B Shares of the Government & Corporate Bond
Portfolio.
Fees and Expenses
<TABLE>
<CAPTION>
Investor A Investor B
Shareholder Fees Shares Shares
(fees you pay directly)
<S> <C> <C>
Maximum sales charge (load) to buy shares, shown as a
% of the offering price 4.00%/1/ None
-----------------------------------------------------------------------------
Maximum deferred sales charge (load) shown as a % of
the offering price or sale price, whichever is less None 5.00%/2/
</TABLE>
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses
(expenses that are deducted from the Investor A Investor B
Portfolio's assets) Shares Shares
<S> <C> <C>
Management Fees .45% .45%
-----------------------------------------------------------------
Distribution (12b-1) and Service Fees .30% 1.00%
-----------------------------------------------------------------
Other Expenses .33%/3/ .33%/3/
-----------------------------------------------------------------
Total Annual Portfolio Operating Expenses 1.08%/3/ 1.78%/3/
- ------------------------------------------------------------------
</TABLE>
/1/ Reduced sales charges may be available. See "Distribution
Arrangements/Sales Charges" below.
/2/ This amount applies if you sell your shares in the first year after
purchase and gradually declines until it is eliminated after six years.
After six years, your Investor B Shares will automatically convert to
Investor A Shares. See "Distribution Arrangements/Sales Charges" below.
/3/ Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Investor A Shares and Investor B Shares for the current fiscal
year are expected to be less than the amounts shown above because certain
of the Portfolio's service providers are voluntarily waiving a portion of
their fees and/or reimbursing the Portfolio for certain other expenses.
These fee waivers and/or reimbursements are being made in order to keep the
annual fees and expenses for the Portfolio's Investor A Shares and Investor
B Shares at certain levels. Other Expenses and Total Annual Portfolio
Operating Expenses, after taking these fee waivers and expense
reimbursements into account, are expected to be .23% and .98%,
respectively, for Investor A Shares and .23% and 1.68%, respectively, for
Investor B shares. These fee waivers and expense reimbursements may be
revised or cancelled at any time.
22
<PAGE>
Risk/Return Summary Government & Corporate Bond Portfolio
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year, the
Portfolio's operating expenses remain the same and your Investor B Shares
automatically convert to Investor A Shares after six years. Although your
actual costs may be higher or lower, based on these assumptions your costs
would be:
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Investor A Shares $506 $730 $ 972 $1,664
------------------------------------------------------------------------------
Investor B Shares $681 $860 $1,164 $1,741
If you hold Investor B Shares, you would pay the
following expenses if you did not sell your shares: $181 $560 $ 964 $1,741
- -------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
Risk/Return Summary Additional Information on Risk
The principal risks of investing in each Portfolio are described on the
previous pages. The following supplements that discussion.
Securities Lending
To obtain interest income, the Portfolios may lend their securities to broker-
dealers, banks or institutional borrowers pursuant to agreements requiring that
the loans be continuously secured by collateral equal at all times in value to
at least the market value of the securities loaned. There is the risk that,
when lending portfolio securities, the securities may not be available to the
Portfolio on a timely basis. Therefore, the Portfolio may lose the opportunity
to sell the securities at a desirable price. Additionally, in the event that a
borrower of securities would file for bankruptcy or become insolvent,
disposition of the securities may be delayed pending court action.
Temporary Defensive Positions
Each Portfolio may temporarily hold investments that are not part of its main
investment strategy to try to avoid losses during unfavorable market
conditions. These investments may include cash (which will not earn any
income), money market instruments and short-term debt securities issued or
guaranteed by the U.S. Government or its agencies. This strategy could prevent
a Portfolio from achieving its investment objective.
Other Types of Investments
This prospectus describes each Portfolio's principal investment strategies and
the particular types of securities in which each Portfolio principally invests.
Each Portfolio may, from time to time, make other types of investments and
pursue other investment strategies in support of its overall investment goal.
These supplemental investment strategies--and the risks involved--are described
in detail in the Statement of Additional Information ("SAI"), which is referred
to on the back cover of this prospectus.
Year 2000 Risks
Over the past several years, the Adviser and the Portfolios' other major
service providers expended considerable time and money in addressing the
computer and technology problems associated with the transition to the Year
2000. As a result of those efforts, the Portfolios did not experience any
material disruptions in their operations as a result of the transition to the
21st century. The Adviser and the Portfolios' other major service providers are
continuing to monitor the Year 2000 or Y2K problem, however, and there can be
no assurances that there will be no adverse impact to the Portfolios as a
result of future computer-related Y2K difficulties.
24
<PAGE>
Your Account Distribution Arrangements/Sales Charges
LOGO FOR YOUR ACCOUNT
Share Classes
Each Portfolio offers Investor A Shares and each Portfolio except the
Intermediate Corporate Bond Portfolio and Bond Index Portfolio offers Investor
B Shares. The primary difference between the share classes is the sales charge
structure and distribution/service fee arrangement.
<TABLE>
<CAPTION>
Types of Charges Investor A Shares Investor B Shares
<S> <C> <C>
Sales Charge (Load) A front-end sales charge is A contingent deferred sales
assessed at the time of charge (CDSC) is assessed
your purchase. on shares redeemed within
six years of purchase.
Investor B Shares
automatically convert to
Investor A Shares six years
after purchase.
- -------------------------------------------------------------------------------------
Distribution (12b-1) and Subject to annual Subject to annual
Service Fees distribution and distribution and
shareholder servicing fees shareholder servicing fees
of up to 0.30% of a of up to 1.00% of a
Portfolio's average daily Portfolio's average daily
net assets attributable to net assets attributable to
its Investor A Shares. its Investor B Shares.
- -------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
Your Account Distribution Arrangements/Sales Charges
Calculation of Sales Charges
Investor A Shares
<TABLE>
<CAPTION>
Sales Charge Sales Charge Dealers'
as a % of the as a % of Reallowance
Amount of Offering Price Net Asset Value as a % of
Transaction Per Share Per Share Offering Price
<S> <C> <C> <C>
Less than $50,000 4.00% 4.17% 3.75%
----------------------------------------------------------------------------
$50,000 but less than
$100,000 3.50% 3.63% 3.25%
----------------------------------------------------------------------------
$100,000 but less than
$250,000 3.00% 3.09% 2.75%
----------------------------------------------------------------------------
$250,000 but less than
$500,000 2.50% 2.56% 2.25%
----------------------------------------------------------------------------
$500,000 but less than $1
million 2.00% 2.04% 1.75%
----------------------------------------------------------------------------
$1 million or more 0.50% 0.50% 0.40%
</TABLE>
- --------------------------------------------------------------------------------
The Fund's distributor reserves the right to pay the entire sales charges on
purchases of Investor A Shares to dealers. In addition, the Fund's distributor
may from time to time implement programs under which a broker-dealer's sales
force may be eligible to win nominal awards for certain sales efforts. If any
such program is made available to any broker-dealer, it will be made available
to all broker-dealers on the same terms. Payments made under such programs are
made by the Fund's distributor out of its own assets and not out of the assets
of the Portfolios. These programs will not change the price of Investor A
Shares or the amount that the Portfolios will receive from such sales.
26
<PAGE>
Your Account Distribution Arrangements/Sales Charges
Calculation of Sales Charges
Investor B Shares
For purposes of calculating the CDSC, all purchases made during a calendar
month are considered to be made on the first day of that month. The CDSC is
based on the value of the Investor B Shares on the date that they are sold or
the original cost of the shares, whichever is lower. To keep your CDSC as low
as possible each time you sell shares, the Fund will first sell any shares in
your account that are not subject to a CDSC. If there are not enough of these,
the Fund will sell the shares that have the lowest CDSC.
<TABLE>
<CAPTION>
Number of CDSC as a % of
Years Since Dollar Amount
Purchase Subject to the Charge
<C> <S>
1 or less 5.0%
1-2 4.0%
2-3 3.0%
3-4 3.0%
4-5 2.0%
5-6 1.0%
More than 6 None
- ---------------------------------------
</TABLE>
Sales Charge Reductions
Investor A Shares
You may reduce the sales charge on Investor A Shares through:
. Rights of Accumulation. You can add the value of the Investor A Shares that
you already own in any Portfolio of the Fund that charges a sales load, as
well as the value of any existing Class A shares of any other fund in the
Firstar family of funds, to your next investment in Investor A Shares for
purposes of calculating the sales charge.
. Quantity Discounts. As the dollar amount of your purchase increases, your
sales charge may decrease (see the table on page 26). In addition, the Fund
will combine purchases made on the same day by you and your immediate family
members when calculating applicable sales charges.
. Letter of Intent. You can purchase Investor A Shares of any Portfolio of the
Fund or Class A shares of any fund in the Firstar family of funds that
charges a sales load over a 13-month period and pay the same sales charge you
would have paid if all shares were purchased at once. The Fund's transfer
agent will hold in escrow 5% of your total investment (for payment of a
higher sales load in case you do not purchase the full amount indicated on
the application) until the full amount is received. To participate, complete
the "Letter of Intent" section on your account application.
. Reinvestment Privilege. You can reinvest some or all of the money that you
receive when you sell Investor A Shares of a Portfolio in Investor A Shares
of any Portfolio of the Fund or in shares of any other fund in the Firstar
family of funds within 60 days without paying a sales charge. You must notify
the Fund's transfer agent at the time of your reinvestment that you qualify
for this privilege.
27
<PAGE>
Your Account Distribution Arrangements/Sales Charges
- --------------------------------------------------------------------------------
Purchase of Investor A Shares at Net Asset Value
From time to time, the Fund's distributor may offer investors the option to
purchase Investor A Shares at net asset value without payment of a front-end
sales charge. To qualify, you must pay for the shares with the redemption
proceeds from a non-affiliated mutual fund. In addition, you must have paid a
front-end sales charge on the shares you redeem. The purchase of Investor A
Shares must occur within 30 days of the prior redemption, and you must show
evidence of the redemption transaction. At the time of purchase, your broker-
dealer or other financial institution must notify the Fund that your
transaction qualifies for a purchase at net asset value.
- --------------------------------------------------------------------------------
Sales Charge Waivers
Investor A Shares
In addition, there's no sales charge when you buy Investor A Shares if:
. You buy shares by reinvesting your dividends and capital gains distributions.
. You're an officer or director of the Fund (or an immediate family member of
any such individual).
. You're a director, a current or retired employee or a participant in an
employee benefit or retirement plan of Firstar Corporation or the Fund's
distributor or any of their affiliates (or an immediate family member of any
such individual).
. You're a broker, dealer or agent who has a sales agreement with the Fund's
distributor (or an employee or immediate family member of any such
individual).
. You buy shares pursuant to a wrap-free program offered by a broker-dealer or
other financial institution.
. You buy shares with the proceeds of Trust Shares or Institutional Shares of a
Portfolio redeemed in connection with a rollover of benefits paid by a
qualified retirement or employee benefit plan or a distribution on behalf of
any other qualified account administered by Firstar Bank, N.A. or its
affiliates or correspondents within 60 days of receipt of such payment.
. You buy shares through a payroll deduction program.
. You're an employee of any sub-adviser to the Fund.
. You were a holder of a Southwestern Bell VISA card formerly issued by
Mercantile Bank of Southern Illinois, N.A. and you participated in the Fund's
Automatic Investment Plan.
. You're exchanging Trust Shares of a Portfolio received from the distribution
of assets held in a qualified trust, agency or custodian account with Firstar
Bank, N.A. or any of its affiliates or correspondents.
. You're another investment company distributed by the Fund's distributor or
its affiliates.
If you think you qualify for any of these waivers, please call the Fund at
1-800-452-2724 before buying any shares.
28
<PAGE>
Your Account Distribution Arrangements/Sales Charges
Sales Charge Waivers
Investor B Shares
No CDSC is assessed on redemptions of Investor B Shares if:
. The shares were purchased with reinvested dividends or capital gains
distributions.
. The shares were purchased through an exchange of Investor B Shares of another
Portfolio.
. The redemption represents a distribution from a qualified retirement plan
under Section 403(b)(7) of the Internal Revenue Code, due to death,
disability or the attainment of a specified age.
. The redemption is in connection with the death or disability of the
shareholder.
. You participate in the Systematic Withdrawal Plan and your annual withdrawals
do not exceed 12% of your account's value.
. Your account falls below the Portfolio's minimum account size, and the Fund
liquidates your account (see page 35).
. The redemption results from a tax-free return of an excess contribution,
pursuant to Section 408(d)(4) or (5) of the Internal Revenue Code.
Distribution and Service Fees
Investor A Shares of the Portfolios pay distribution (12b-1) and shareholder
service fees at an annual rate of up to 0.30% of each Portfolio's Investor A
Share assets. Investor B Shares of the U.S. Government Securities and
Government & Corporate Bond Portfolios pay distribution (12b-1) and shareholder
service fees at an annual rate of up to 1.00% of each Portfolio's Investor B
Share assets. The Fund has adopted separate distribution and service plans
under Rule 12b-1 that allow each Portfolio to pay fees from its Investor A
Share or Investor B Share assets for selling and distributing Investor A Shares
or Investor B Shares, as the case may be, and for services provided to
shareholders. Because 12b-1 fees are paid on an ongoing basis, over time they
increase the cost of your investment and may cost more than other sales
charges.
Converting Investor B Shares to Investor A Shares
Six years after you buy Investor B Shares of a Portfolio, they will
automatically convert to Investor A Shares of the Portfolio. This allows you to
benefit from the lower annual expenses of Investor A Shares.
Choosing Between Investor A Shares and Investor B Shares
In deciding whether to buy Investor A Shares or Investor B Shares, you should
consider how long you plan to hold the shares. Over time, the higher fees on
Investor B Shares may equal or exceed the initial sales charge and fees for
Investor A Shares. Investor A Shares may be a better choice if you qualify to
have the sales charges reduced or eliminated, or if you plan to sell your
shares within one or two years. Consult your financial adviser for help in
choosing the appropriate share class.
29
<PAGE>
Your Account Explanation of Sales Price
- --------------------------------------------------------------------------------
Business days defined A business day is any day that both the New York Stock
Exchange and the Federal Reserve Banks' Fedline System are open for business.
Currently, the Fund observes the following holidays: New Year's Day, Martin
Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day (observed),
Independence Day (observed), Labor Day, Columbus Day, Veterans' Day,
Thanksgiving and Christmas.
- --------------------------------------------------------------------------------
Shares of each class in a Portfolio are sold at their net asset value (NAV)
plus, in the case of Investor A Shares, a front-end sales charge, if
applicable. This is commonly referred to as the "public offering price."
The NAV for each class of shares of a Portfolio is determined as of the close
of regular trading on the New York Stock Exchange (currently 3:00 p.m., Central
time) on every business day. The NAV for a class of shares is determined by
adding the value of the Portfolio's investments, cash and other assets
attributable to a particular share class, subtracting the Portfolio's
liabilities attributable to that class and then dividing the result by the
total number of shares in the class that are outstanding.
. Each Portfolio's investments are valued according to market value. When a
market quote is not readily available, the security's value is based on "fair
value" as determined by FIRMCO under the supervision of the Fund's Board of
Directors.
. If you properly place a purchase order (see "How to Buy Shares" on page 31)
that is delivered to the Fund before 3:00 p.m. (Central time) on any business
day, the order receives the share price determined for your share class as of
3:00 p.m. (Central time) that day. If the order is received after 3:00 p.m.,
(Central time) it will receive the price determined on the next business day.
You must pay for your shares no later than 3:00 p.m. (Central time) three
business days after placing the order, or the order will be cancelled.
30
<PAGE>
Your Account How to Buy Shares
Investing in the Mercantile Taxable Bond Portfolios is quick and convenient.
You can purchase Investor A Shares or Investor B Shares in any of the following
ways:
<TABLE>
<CAPTION>
To Open To Add to
Minimum Investments Your Account Your Account
<S> <C> <C>
Regular accounts $1,000 $50
------------------------------------------------------
Sweep program through your
financial institution None None
------------------------------------------------------
Wrap fee program through
your financial institution None None
------------------------------------------------------
Payroll Deduction Program* None $25
------------------------------------------------------
ConvertiFund* $5,000 $1,000 minimum
account balance
------------------------------------------------------
Periodic Investment Plan* $50 $50
------------------------------------------------------
*See Investor Programs below.
</TABLE>
. Through a broker-dealer organization.
You can purchase shares through any broker-dealer organization that has a
sales agreement with the Fund's distributor. The broker-dealer organization
is responsible for sending your purchase order to the Fund.
. Through a financial organization. You can purchase shares through any
financial organization that has entered into a servicing agreement with the
Fund. The financial organization is responsible for sending your purchase
order to the Fund.
. Directly from the Fund by mail. Just complete an account application and send
it, along with a check for at least the minimum purchase amount, to:
Mercantile Mutual Funds, Inc., c/o Firstar Mutual Fund Services, LLC, P.O.
Box 3011, Milwaukee, Wisconsin 53201-3011 (via overnight delivery to 615 E.
Michigan Street, Milwaukee, Wisconsin 53202). Remember to specify whether
you're buying Investor A Shares or Investor B Shares. To make additional
investments once you've opened your account, send your check to the address
above together with the detachable form that's included with your Fund
statement or confirmation of a prior transaction or a letter stating the
amount of your investment, the name of the Portfolio you want to invest in
and your account number.
In addition, you may call the Fund at 1-800-452-2724 for more information on
how to buy shares.
31
<PAGE>
Your Account How to Sell Shares
- --------------------------------------------------------------------------------
Selling recently purchased shares
If you attempt to sell shares you recently purchased with a personal check, the
Fund may delay processing your request until it collects payment for those
shares. This process may take up to 15 days, so if you plan to sell shares
shortly after purchasing them, you may want to consider purchasing shares via
electronic transfer to avoid delays.
- --------------------------------------------------------------------------------
You can arrange to get money out of your account by selling some or all of your
shares. This is known as "redeeming" your shares. You can redeem your shares in
the following ways:
. Through a broker-dealer or other financial organization. If you purchased
your shares through a broker-dealer or other financial organization, your
redemption order should be placed through the same organization. The
organization is responsible for sending your redemption order to the Fund on
a timely basis.
. By mail. Send your written redemption request to: Mercantile Mutual Funds,
Inc., c/o Firstar Mutual Fund Services, LLC, P.O. Box 3011, Milwaukee,
Wisconsin 53201-3011 (via overnight delivery to 615 E. Michigan Street,
Milwaukee, Wisconsin 53202).Your request must include the name of the
Portfolio, the number of shares or the dollar amount you want to sell, your
account number, your social security or tax identification number and the
signature of each registered owner of the account. Your request also must be
accompanied by any share certificates that are properly endorsed for
transfer. Additional documents may be required for certain types of
shareholders, such as corporations, partnerships, executors, trustees,
administrators or guardians.
The Fund's transfer agent may require a signature guarantee unless the
redemption proceeds are payable to the shareholder of record and the
redemption is either mailed to the shareholder's address of record or
electronically transferred to the account designated on the original account
application. A signature guarantee helps prevent fraud, and you may obtain
one from most banks and broker-dealers. Contact your broker-dealer or other
financial organization or the Fund for more information on signature
guarantees.
. By telephone. You may redeem your shares by telephone if you have selected
that option on your account application and if there has been no change of
address by telephone within the preceding 15 days. Call the Fund at 1-800-
452-2724 with your request. You may have your proceeds mailed to your address
or transferred electronically to the bank account designated on your account
application. If you have not previously selected the telephone privilege, you
may add this feature by providing written instructions to the Fund's transfer
agent. If you have difficulty getting through to the Fund because of unusual
market conditions, consider selling your shares by mail.
You may sell your Portfolio shares at any time. Your shares will be sold at the
NAV next determined after the Fund accepts your order (see above). The proceeds
of the sale of Investor B Shares will be reduced by the applicable CDSC. Your
proceeds ordinarily are sent electronically or mailed by check within three
business days. If your account holds both Investor A Shares and Investor B
Shares, be sure to specify which shares you are selling. Otherwise, Investor A
Shares will be sold first.
32
<PAGE>
Your Account Investor Programs
It's also easy to buy or sell shares of the Portfolios by using one of the
programs described below.
Periodic Investment Plan
You may open an account or make additional investments to an existing account
for as little as $50 a month with the Fund's Periodic Investment Plan (PIP).
Under the PIP (which was formerly known as the Automatic Investment Program),
you specify the dollar amount to be automatically withdrawn each month from
your bank checking account and invested in your Portfolio account. Purchases of
Investor A Shares or Investor B Shares will occur on the day of the month
designated by you (or the next business day after the designated day) of each
month at the net asset value plus any front-end sales charge, if applicable,
next determined on the day the order is effected. To take advantage of the PIP,
complete the PIP authorization form included with your account application or
contact your broker-dealer or other financial organization.
PIP lets you take advantage of "dollar cost averaging," a long-term investment
technique designed to help investors reduce their average cost per share over
time. Instead of trying to time the market, you can invest a fixed dollar
amount each month. So, you buy fewer Portfolio shares when prices are high and
more when prices are low. Because dollar cost averaging involves regular
investing over time, regardless of share price, it may not be appropriate for
all investors.
In addition, dollar cost averaging does not guarantee a profit or protect
against loss in a steadily declining market. To be effective, dollar cost
averaging usually should be followed on a sustained, consistent basis. Even
then, however, there can be no guarantee of the success of this technique, and
it will not prevent a loss if an investor ultimately redeems his or her shares
at a price that is lower than the original purchase price.
Exchanges
The exchange privilege enables you to exchange Investor A Shares of one
Portfolio for Investor A Shares (or in certain limited circumstances described
in the SAI, Trust or Institutional Shares) of another Portfolio and to exchange
Investor B Shares of one Portfolio for Investor B Shares of another Portfolio.
Just sign up for the exchange privilege on your account application and contact
your broker-dealer or other financial organization when you want to exchange
shares. You also may exchange shares by telephoning the Fund directly (call 1-
800-452-2724) if you have elected this privilege on your account application.
The exchange privilege may be exercised only in those states where the class of
shares of the Portfolio being acquired may be legally sold.
When exchanging Investor A Shares of a Portfolio that has no sales charge or a
lower sales charge for Investor A Shares of a Portfolio with a higher sales
charge, you will pay the difference.
You may exchange Investor B Shares without paying a CDSC on the exchange. The
holding period of the shares originally held and redeemed will be added to the
holding period of the new shares acquired through the exchange.
Shares of the Portfolios also may be exchanged for shares of corresponding
classes of the Firstar Funds and the Firstar Stellar Funds. Please read the
prospectuses for those Funds before investing.
33
<PAGE>
Your Account Investor Programs
ConvertiFund
This program (which was formerly known as the Automatic Exchange Program) lets
you automatically exchange shares of one Portfolio for shares of another
Portfolio on a regular basis, as long as the shares are of the same class.
Because you're making regular purchases, ConvertiFund enables you to take
advantage of dollar cost averaging. (See "Periodic Investment Plan" above.)
To participate, you must make a minimum initial purchase of $5,000 and maintain
a minimum account balance of $1,000. In addition, you must complete the
authorization form included with your account application or available from
your broker-dealer or other financial organization. In order to change
instructions with respect to ConvertiFund or to discontinue the program, you
must send written instructions to your broker-dealer or other financial
organization or to the Fund.
Systematic Withdrawal Plan
If the net asset value of your account equals $10,000 or more, you may take
advantage of the Fund's Systematic Withdrawal Plan (SWP). With the SWP (which
was formerly known as the Automatic Withdrawal Plan), you can have monthly,
quarterly, semi-annual or annual redemptions of at least $50 from your
Portfolio account sent to you via check or to your bank account electronically
on the day designated by you (or the next business day after the designated
day) of the applicable month of withdrawal. No CDSC will be charged on
withdrawals of Investor B Shares made through the SWP that don't annually
exceed 12% of your account's value.
To participate in the SWP, complete the SWP application included with your
account application or contact your broker-dealer or other financial
organization. A signature guarantee will be required. You may terminate your
participation in the SWP upon 30 days' notice to your broker-dealer or other
financial organization or to the Fund.
Payroll Deduction Program
You can make regular investments from your paycheck. The minimum investment is
$25 per pay period. Call the Fund at 1-800-452-2724 for an application and
further information. The Fund may terminate the program at any time.
Internet Transactions
You generally can request purchases, exchanges and redemptions of Investor A
Shares and Investor B Shares of the Portfolios on-line via the Internet after
an account is opened. Redemption requests of up to $25,000 will be accepted
through the Internet. Payment for shares purchased on-line must be made by
electronic funds transfer from your banking institution. To authorize this
service, call the Fund's transfer agent at 1-800-452-2724.
The Fund and its agents will not be responsible for any losses resulting from
unauthorized on-line transactions when procedures are followed which are
designed to confirm that the on-line transaction request is genuine. Statements
of accounts shall be conclusive if not objected to in writing within 10 days
after transmitted by mail. During periods of significant economic or market
change, it may be difficult to reach the Fund on-line. If this happens, you may
initiate transactions in your share accounts by mail or otherwise as described
above.
34
<PAGE>
Your Account General Transaction Policies
The Fund reserves the right to:
. Vary or waive any minimum investment requirement.
. Refuse any order to buy shares.
. Reject any exchange request.
. Change or cancel the procedures for selling or exchanging shares by telephone
at any time.
. Redeem all shares in your account if your balance falls below $500. If,
within 60 days of the Fund's written request, you have not increased your
account balance, you may be required to redeem your shares. The Fund will not
require you to redeem shares if the value of your account drops below $500
due to fluctuations in net asset value.
. Send redemption proceeds within seven days after receiving a request, if an
earlier payment could adversely affect a Portfolio.
. Modify or terminate the Periodic Investment Plan, ConvertiFund and Systematic
Withdrawal Plan programs at any time.
. Modify or terminate the exchange privilege after 60 days' written notice to
shareholders.
. Make a "redemption in kind." Under abnormal conditions that may make payment
in cash unwise, the Fund may offer partial or complete payment in portfolio
securities rather than cash at such securities' then-market-value equal to
the redemption price. In such cases, you may incur brokerage costs in
converting these securities to cash.
If you elect telephone privileges on the account application or in a letter to
the Fund, you may be responsible for any fraudulent telephone orders as long as
the Fund has taken reasonable precautions to verify your identity.
Also, your broker-dealer or other financial organization may establish policies
that differ from those of the Fund. For example, the organization may charge
transaction fees, set higher minimum investments, or impose certain limitations
on purchasing or redeeming shares in addition to those identified in this
prospectus. Contact your broker-dealer or other financial organization for
details.
35
<PAGE>
Distributions and Taxes
Dividends and Distributions
The Portfolios pay their shareholders dividends from the Portfolios' respective
net investment income and distribute any net capital gains the Portfolios have
realized.
Dividends are declared daily and paid monthly. Shares of the Portfolios earn
dividends from the day after the Fund's transfer agent receives a purchase
order through the day the transfer agent receives a redemption order for those
shares. Capital gains, if any, are distributed for all of the Portfolios at
least once a year. It's expected that each Portfolio's annual distributions
will normally--but not always--consist primarily of ordinary income rather than
capital gains.
Dividends on each share class of the Portfolios are determined in the same
manner and are paid in the same amount. However, each share class bears all
expenses associated with that particular class. So, because Investor B Shares
have higher distribution and service fees than Investor A Shares, the dividends
paid to Investor B shareholders will be lower than those paid to Investor A
shareholders.
All of your dividends and capital gains distributions with respect to a
particular Portfolio will be reinvested in additional shares of the same class
unless you instruct otherwise on your account application or have redeemed all
shares you held in the Portfolio. In such cases, dividends and distributions
will be paid in cash.
36
<PAGE>
Distributions and Taxes
- --------------------------------------------------------------------------------
You will be advised at least annually regarding the federal income tax
treatment of dividends and distributions made to you. You should save your
account statements because they contain information you will need to calculate
your capital gains or losses, if any, upon your ultimate sale or exchange of
shares in the Portfolios.
- --------------------------------------------------------------------------------
Taxation
As with any investment, you should consider the tax implications of an
investment in the Portfolios. The following is only a brief summary of some of
the important tax considerations generally affecting the Portfolios and their
shareholders under current law, which may be subject to change in the future.
Consult your tax adviser with specific reference to your own tax situation.
. Each Portfolio contemplates declaring as dividends each year all or
substantially all of its taxable income, including its net capital gain (the
excess of long-term capital gain over short-term capital loss). Distributions
attributable to the net capital gain of a Portfolio will be taxable to you as
long-term capital gain, regardless of how long you have held your shares.
Other Portfolio distributions will generally be taxable as ordinary income.
You will be subject to income tax on these distributions whether they are
paid in cash or reinvested in additional shares.
. If you purchase shares just prior to a distribution, the purchase price will
reflect the amount of the upcoming distribution, but you will be taxed on the
entire amount of the distribution received even though, as an economic
matter, the distribution simply constitutes a return of capital. This is
known as "buying into a dividend."
. You will recognize a taxable gain or loss on a sale, exchange or redemption
of your shares, including an exchange for shares of another Portfolio, based
on the difference between your tax basis in the shares and the amount you
receive for them. Generally, this gain or loss will be long-term or short-
term depending on whether your holding period for the shares exceeds 12
months except that any loss realized on shares held for six months or less
will be treated as a long-term capital loss to the extent that any capital
gains distributions were received with respect to the shares.
. Distributions on, and sales, exchanges and redemptions of, shares held in an
IRA or other tax-qualified plan will not be currently taxable.
. Shareholders may also be subject to state and local taxes on distributions
and redemptions. State income taxes may not apply however, to the portions of
each Portfolio's distributions, if any, that are attributable to interest on
U.S. Government securities or interest on securities of a particular state
and localities within the state.
The foregoing is only a summary of certain tax considerations under current
law, which may be subject to change in the future. Shareholders who are
nonresident aliens, foreign trusts or estates, or foreign corporations or
partnerships, may be subject to different U.S. federal income tax treatment.
For more information regarding the taxation of the Portfolios, consult the SAI
under the heading "Additional Information Concerning Taxes." You should also
consult your tax adviser for further information regarding federal, state,
local and/or foreign tax consequences relevant to your specific situation.
37
<PAGE>
Management of the Fund
The Adviser
FIRMCO serves as the 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, with its main office at Firstar Center, 777 East Wisconsin Avenue,
Suite 800, Milwaukee, Wisconsin 53202, has been providing advisory services
since 1986. As of December 31, 1999, FIRMCO had approximately $35.3 billion in
assets under management.
FIRMCO, subject to the general supervision of the Fund's Board of Directors, is
responsible for the day-to-day management of the Portfolios in accordance with
each Portfolio's respective investment objective and policies. This includes
making investment decisions, buying and selling securities and overseeing the
administration and recordkeeping for each Portfolio.
In exchange for these services, FIRMCO receives an investment advisory fee,
which is calculated daily and paid monthly, according to the average daily net
assets of each Portfolio. For the fiscal year ended November 30, 1999, the
Portfolios paid MVA advisory fees as follows:
<TABLE>
<CAPTION>
Investment advisory fees
Portfolio as a % of net assets
-------------------------
<S> <C>
U.S. Government
Securities Portfolio .45%
-------------------------
Intermediate Corporate
Bond Portfolio .55%
-------------------------
Bond Index Portfolio .30%
-------------------------
Government & Corporate
Bond Portfolio .45%
- -------------------------------------------------
</TABLE>
38
<PAGE>
Financial Highlights
Introduction
The financial highlights tables presented below are intended to help you
understand the financial performance of each Portfolio's Investor A Shares
and/or Investor B Shares for the past five years (or, if shorter, the period
since the Portfolio began operations or the particular shares were first
offered). Certain information reflects the financial results for a single
Investor A Share or Investor B Share in each Portfolio. The total returns in
the tables represent the rate that an investor would have earned (or lost) on
an investment in either Investor A Shares or Investor B Shares, assuming
reinvestment of all dividends and distributions. This information has been
audited by KPMG LLP, independent auditors, whose report, along with the
Portfolios' financial statements, are included in the Fund's Annual Report to
Shareholders, and are incorporated by reference into the SAI.
39
<PAGE>
Financial Highlights U.S. Government Securities Portfolio
<TABLE>
<CAPTION>
Investor A Shares
(For a Share outstanding
throughout each period)
Year Ended November 30,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $10.74 $10.62 $10.67 $10.85 $10.05
------------------------------------------------------------------------------
Investment Activities
Net investment income 0.54 0.57 0.60 0.62 0.64
Net realized and unrealized
gains (losses) from
investments (0.40) 0.12 (0.07) (0.15) 0.80
------------------------------------------------------------------------------
Total from Investment
Activities 0.14 0.69 0.53 0.47 1.44
------------------------------------------------------------------------------
Distributions
Net investment income (0.54) (0.57) (0.58) (0.62) (0.64)
In excess of net realized gains -- -- -- (0.03) --
------------------------------------------------------------------------------
Total Distributions (0.54) (0.57) (0.58) (0.65) (0.64)
------------------------------------------------------------------------------
Net Asset Value, End of Period $10.34 $10.74 $10.62 $10.67 $10.85
------------------------------------------------------------------------------
Total Return (excludes sales
charge) 1.37% 6.66% 5.20% 4.57% 14.66%
Ratios/Supplementary Data:
Net Assets at end of period
(000) $4,620 $4,664 $5,181 $7,153 $8,179
Ratio of expenses to average
net assets 0.98% 0.97% 0.97% 0.97% 0.97%
Ratio of net investment income
to average net assets 5.15% 5.35% 5.56% 5.82% 6.05%
Ratio of expenses to average
net assets* 1.09% 1.07% 1.07% 1.07% 1.07%
Portfolio turnover** 26.17% 54.57% 100.33% 53.76% 93.76%
- --------------------------------------------------------------------------------
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
40
<PAGE>
Financial Highlights U.S. Government Securities Portfolio
<TABLE>
<CAPTION>
Investor B Shares
(For a Share outstanding throughout
each period)
Year Ended November 30,
March
1,
1995 to
Nov.
30,
1999 1998 1997 1996 1995(a)
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $10.74 $10.61 $10.66 $10.84 $10.34
-------------------------------------------------------------------------
Investment Activities
Net investment income 0.47(d) 0.50(d) 0.51 0.55 0.31
Net realized and
unrealized gains
(losses) from
investments (0.38) 0.13 (0.05) (0.15) 0.50
-------------------------------------------------------------------------
Total from Investment
Activities 0.09 0.63 0.46 0.40 0.81
-------------------------------------------------------------------------
Distributions
Net investment income (0.47) (0.50) (0.51) (0.55) (0.31)
In excess of net
realized gains -- -- -- (0.03) --
-------------------------------------------------------------------------
Total Distributions (0.47) (0.50) (0.51) (0.58) (0.31)
-------------------------------------------------------------------------
Net Asset Value, End of
Period $10.36 $10.74 $10.61 $10.66 $10.84
-------------------------------------------------------------------------
Total Return (excludes
redemption charge) 0.86% 6.02% 4.47% 3.85% 12.85%(b)
Ratios/Supplementary
Data:
Net Assets at end of
period (000) $ 282 $ 149 $ 466 $ 359 $ 41
Ratio of expenses to
average net assets 1.68% 1.67% 1.67% 1.66% 1.68%(c)
Ratio of net investment
income to average net
assets 4.47% 4.67% 4.84% 5.06% 5.37%(c)
Ratio of expenses to
average net assets* 1.79% 1.77% 1.77% 1.76% 1.78%(c)
Portfolio turnover** 26.17% 54.57% 100.33% 53.76% 93.76%
- --------------------------------------------------------------------------
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Represents the total return for Investor A Shares from December 1, 1994
to February 28, 1995 plus the total return for Investor B Shares from
March 1, 1995 to November 30, 1995.
(c) Annualized.
(d) Per share net investment income has been calculated using the daily
average share method.
41
<PAGE>
Financial Highlights Intermediate Corporate Bond Portfolio
<TABLE>
<CAPTION>
Investor A Shares
(For a Share outstanding
throughout each period)
Year Ended February 10, 1997
November 30, to
1999 1998 November 30, 1997(a)
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $10.30 $10.11 $10.00
------------------------------------------------------------------------------
Investment Activities
Net investment income 0.57 0.60 0.52
Net realized and unrealized gains
(losses) from investments (0.74) 0.30 0.11
------------------------------------------------------------------------------
Total from Investment Activities (0.17) 0.90 0.63
------------------------------------------------------------------------------
Distributions
Net investment income (0.57) (0.60) (0.52)
Net realized gains -- (0.11) --
In excess of net realized gains (0.01) -- --
------------------------------------------------------------------------------
Total Distributions (0.58) (0.71) (0.52)
------------------------------------------------------------------------------
Net Asset Value, End of Period $ 9.55 $10.30 $10.11
------------------------------------------------------------------------------
Total Return (excludes sales charge) (1.65)% 9.32% 6.48%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000) $ 436 $ 284 $ 277
Ratio of expenses to average net
assets 1.09% 0.89% 0.58%(c)
Ratio of net investment income to
average net assets 5.78% 5.92% 6.52%(c)
Ratio of expenses to average net
assets* 1.19% 1.19% 1.31%(c)
Portfolio turnover** 25.71% 9.65% 61.98%
- --------------------------------------------------------------------------------
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
42
<PAGE>
Financial Highlights Bond Index Portfolio
<TABLE>
<CAPTION>
Investor A Shares
(For a Share outstanding throughout each period)
February 10, 1997
Year Ended November 30, to
1999 1998 November 30, 1997(a)
<S> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 10.45 $ 10.17 $ 10.00
-------------------------------------------------------------------------------------------
Investment Activities
Net investment income 0.56 0.61 0.50
Net realized and
unrealized gains
(losses) from
investments (0.65) 0.31 0.17
-------------------------------------------------------------------------------------------
Total from Investment
Activities (0.09) 0.92 0.67
-------------------------------------------------------------------------------------------
Distributions
Net investment income (0.57) (0.61) (0.50)
Net realized gains (0.04) (0.03) --
In excess of net
realized gains (0.01) -- --
-------------------------------------------------------------------------------------------
Total Distributions (0.62) (0.64) (0.50)
-------------------------------------------------------------------------------------------
Net Asset Value, End of
Period $ 9.74 $ 10.45 $ 10.17
-------------------------------------------------------------------------------------------
Total Return (excludes
sales charge) (0.90)% 9.36% 6.93%(b)
Ratios/Supplementary
Data:
Net Assets at end of
period (000) $ 1,074 $ 364 $ 55
Ratio of expenses to
average net assets 0.83% 0.77% 0.54%(c)
Ratio of net investment
income to average net
assets 5.65% 5.81% 6.71%(c)
Ratio of expenses to
average net assets* 0.93% 0.93% 0.95%(c)
Portfolio turnover** 21.88% 33.37% 46.16%
- --------------------------------------------------------------------------------
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a
whole without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
43
<PAGE>
Financial Highlights Government & Corporate Bond Portfolio
<TABLE>
<CAPTION>
Investor A Shares
(For a Share outstanding throughout each period)
Year Ended November 30,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 10.72 $ 10.35 $ 10.34 $ 10.53 $ 9.64
----------------------------------------------------------------------------------
Investment Activities
Net investment income 0.57 0.57 0.56 0.64 0.61
Net realized and
unrealized gains
(losses) from
investments (0.69) 0.37 0.01 (0.19) 0.89
----------------------------------------------------------------------------------
Total from Investment
Activities (0.12) 0.94 0.57 0.45 1.50
----------------------------------------------------------------------------------
Distributions
Net investment income (0.56) (0.57) (0.56) (0.64) (0.61)
Net realized gains (0.13) -- -- -- --
In excess of net
realized gains (0.07) -- -- -- --
----------------------------------------------------------------------------------
Total Distributions (0.76) (0.57) (0.56) (0.64) (0.61)
----------------------------------------------------------------------------------
Net Asset Value, End of
Period $ 9.84 $ 10.72 $ 10.35 $ 10.34 $ 10.53
----------------------------------------------------------------------------------
Total Return (excludes
sales charge) (1.13)% 9.31% 5.78% 4.51% 15.98%
Ratios/Supplementary
Data:
Net Assets at end of
period (000) $ 3,878 $ 4,927 $ 4,774 $ 4,915 $ 5,496
Ratio of expenses to
average net assets 0.97% 0.96% 0.95% 0.95% 0.95%
Ratio of net investment
income to average net
assets 5.54% 5.41% 5.46% 6.06% 6.03%
Ratio of expenses to
average net assets* 1.08% 1.06% 1.05% 1.05% 1.05%
Portfolio turnover** 38.29% 91.14% 140.72% 149.20% 59.32%
- --------------------------------------------------------------------------------
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a
whole without distinguishing between the classes of shares issued.
44
<PAGE>
Financial Highlights Government & Corporate Bond Portfolio
<TABLE>
<CAPTION>
Investor B Shares
(For a Share outstanding throughout each
period)
March 1, 1995 to
Year Ended November 30, November 30,
1999 1998 1997 1996 1995(a)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period $10.75 $10.37 $10.34 $10.53 $ 9.92
------------------------------------------------------------------------------
Investment Activities
Net investment income 0.49 0.50 0.49 0.57 0.38
Net realized and
unrealized gains
(losses)
from investments (0.69) 0.38 0.03 (0.19) 0.61
------------------------------------------------------------------------------
Total from Investment
Activities (0.20) 0.88 0.52 0.38 0.99
------------------------------------------------------------------------------
Distributions
Net investment income (0.49) (0.50) (0.49) (0.57) (0.38)
Net realized gains (0.13) -- -- -- --
In excess of net realized
gains (0.07) -- -- -- --
------------------------------------------------------------------------------
Total Distributions (0.69) (0.50) (0.49) (0.57) (0.38)
------------------------------------------------------------------------------
Net Asset Value, End of
Period $ 9.86 $10.75 $10.37 $10.34 $10.53
------------------------------------------------------------------------------
Total Return (excludes
redemption charge) (1.90)% 8.65% 5.26% 3.79% 15.27%(b)
Ratios/Supplementary Data:
Net Assets at end of
period (000) $ 712 $ 662 $ 545 $ 511 $ 106
Ratio of expenses to
average net assets 1.67% 1.66% 1.65% 1.65% 1.65%(c)
Ratio of net investment
income to average
net assets 4.85% 4.70% 4.84% 5.37% 5.19%(c)
Ratio of expenses to
average net assets* 1.78% 1.76% 1.75% 1.75% 1.75%(c)
Portfolio turnover** 38.29% 91.14% 140.72% 149.20% 59.32%
- --------------------------------------------------------------------------------
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio is calculated on the basis of the Portfolio as a whole without
distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Represents the total return for Investor A Shares from December 1, 1994
to February 28, 1995 plus the total return for Investor B Shares from
March 1, 1995 to November 30, 1995.
(c) Annualized.
45
<PAGE>
Where to find more information
You'll find more information about the Portfolios in the following documents:
Annual and semi-annual reports
The Fund's annual and semi-annual reports contain information about each
Portfolio and a discussion about the market conditions and investment strategies
that had a significant effect on each Portfolio's performance during the last
fiscal year.
Statement of Additional Information (SAI)
The SAI contains detailed information about the Portfolios and their policies.
By law, it's incorporated by reference into (considered to be part of) this
prospectus.
You can get a free copy of these documents, request other information about the
Portfolios and make shareholder inquiries by calling the Fund at 1-800-452-2724
or by writing to:
Mercantile Mutual Funds, Inc.
c/o Firstar Mutual Fund Services, LLC
615 E. Michigan Street
P.O. Box 3011
Milwaukee, WI 53201-3011
If you buy your shares through a broker-dealer or other financial institution,
you may contact your institution for more information.
You can write to the Securities and Exchange Commission (SEC) Public Reference
Section and ask them to mail you information about the Portfolios, including the
SAI. They'll charge you a fee for this service. You can also visit the SEC
Public Reference Room and copy the documents while you're there. For more
information about the operation of the Public Reference Room, call the SEC.
Public Reference Section of the SEC
Washington, D.C. 20549-0102
1-202-942-8090
Reports and other information about the Portfolios are also available on the
EDGAR database on the SEC's website at http://www.sec.gov. Copies of this
-------------------
information may also be obtained, after paying a duplicating fee, by electronic
request to the SEC's e-mail address at [email protected].
-------------------
The Fund's Investment Company Act File No. is 811-3567
Form #MFINVTBP-00
<PAGE>
MERCANTILE MUTUAL FUNDS
INVESTOR SHARES
Prospectus
March 31, 2000
[PHOTO]
TAX-EXEMPT BOND PORTFOLIOS
Short-Intermediate Municipal Portfolio
Missouri Tax-Exempt Bond Portfolio
National Municipal Bond Portfolio
As with all mutual funds,the Securities and Exchange Commission has not approved
or disapproved these securities or passed upon the adequacy of this prospectus.
Any representation to the contrary is a criminal offense.
[LOGO OF FIRSTAR]
<PAGE>
Contents
<TABLE>
<CAPTION>
Introduction
- --------------------------------------------------------------
<C> <S>
3 Overview
[GRAPHIC] Risk/Return Summary
- --------------------------------------------------------------
4 Short-Intermediate Municipal Portfolio
9 Missouri Tax-Exempt Bond Portfolio
14 National Municipal Bond Portfolio
19 Additional Information on Risk
[GRAPHIC] Your Account
- --------------------------------------------------------------
20 Distribution Arrangements/Sales Charges
25 Explanation of Sales Price
26 How to Buy Shares
27 How to Sell Shares
28 Investor Programs
30 General Transaction Policies
[GRAPHIC] Distributions and Taxes
- --------------------------------------------------------------
31 Dividends and Distributions
32 Taxation
[GRAPHIC] Management of the Fund
- --------------------------------------------------------------
34 The Adviser
[GRAPHIC] Financial Highlights
- --------------------------------------------------------------
35 Introduction
36 Short-Intermediate Municipal Portfolio
37 Missouri Tax-Exempt Bond Portfolio
39 National Municipal Bond Portfolio
</TABLE>
2
<PAGE>
Introduction Overview
This prospectus describes the Mercantile Tax-Exempt Bond
Portfolios, three investment portfolios offered by Mercantile
Mutual Funds, Inc. (the "Fund"). On the following pages, you
will find important information about each Portfolio,
including:
. A description of the Portfolio's investment objective
(sometimes referred to as its goal);
. The Portfolio's principal investment strategies (the steps
it takes to try to meet its goal);
. The principal risks associated with the Portfolio (factors
that may prevent it from meeting its goal);
. The Portfolio's past performance (how successful it's been
in meeting its goal); and
. The fees and expenses (including sales charges) you pay as
an investor in the Portfolio.
Who May Want The Mercantile Tax-Exempt Bond Portfolios may be appropriate
to Invest in for investors who are looking for income that is exempt from
the federal income tax and who can accept fluctuations in price
Mercantile and yield. The Missouri Tax-Exempt Bond Portfolio is best
Tax-Exempt suited to Missouri residents who are also looking for income
Bond that is exempt from Missouri state income tax. The Portfolios
Portfolios? are not appropriate investments for tax-deferred retirement
accounts, such as IRAs, because their returns before taxes
are generally lower than those of taxable funds.
Before investing in a Mercantile Tax-Exempt Bond Portfolio,
you should carefully consider:
. Your own investment goals
. The amount of time you are willing to leave your money
invested
. How much risk you are willing to take.
The Investment Firstar Investment Research & Management Company, LLC, which
Adviser is referred to in this prospectus as "FIRMCO" or the
"Adviser," serves as the investment adviser to each
Portfolio. FIRMCO is a subsidiary of Firstar Corporation, a
banking and financial services organization.
An investment in the Portfolios is not a deposit of Firstar
Bank, N.A. and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency.
You could lose money by investing in the Portfolios.
3
<PAGE>
[GRAPHIC] Risk/Return Summary Short-Intermediate Municipal Portfolio
- --------------------------------------------------------------------------------
What Are Municipal Securities?
State and local governments issue municipal securities to raise money to
finance public works, to repay outstanding obligations, to raise funds for
general operating expenses and to make loans to other public institutions. Some
municipal securities, known as private activity bonds, are backed by private
entities and are used to finance various non-public projects. Municipal
securities, which can be issued as bonds, notes or commercial paper, usually
have fixed interest rates, although some have interest rates that change from
time to time.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Average weighted maturity gives you the average time until all debt
obligations, including municipal securities, in a Portfolio come due or mature.
It is calculated by averaging the time to maturity of all debt obligations held
by a Portfolio with each maturity "weighted" according to the percentage of
assets which it represents.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is to seek as high a level of current
income, exempt from regular federal income tax, as is consistent with
preservation of capital.
Principal Investment Strategies
The Portfolio normally invests at least 80% of its total assets in municipal
securities that pay interest which is exempt from federal income tax. Municipal
securities purchased by the Portfolio may include general obligation
securities, revenue securities and private activity bonds. General obligation
securities are secured by the issuer's full faith, credit and taxing power.
Revenue securities are usually payable only from revenues derived from specific
facilities or revenue sources. Private activity bonds are usually revenue
obligations since they are typically payable by the private user of the
facilities financed by the bonds. The interest on private activity bonds may be
subject to the federal alternative minimum tax. Investments in private activity
bonds will not be treated as investments in municipal securities for purposes
of the 80% requirement stated above. Under normal conditions, the Portfolio's
investments in private activity bonds, together with any investments in taxable
obligations, will not exceed 20% of its total assets.
In selecting municipal securities for the Portfolio, the Adviser favors those
sectors of the municipal market that offer the most favorable returns. The
Adviser emphasizes municipal securities that offer both a high credit quality
rating and a high degree of liquidity. The Adviser also attempts to maintain a
broad geographic diversification for the Portfolio, with emphasis on no
particular state.
The Portfolio will invest only in investment grade municipal securities. These
are securities which have one of the four highest ratings assigned by a
national rating agency, such as Standard & Poor's Ratings Group or Moody's
Investors Service, Inc., or are unrated securities determined by the Adviser to
be of comparable quality. Short-term municipal securities purchased by the
Portfolio, such as municipal notes and tax-exempt commercial paper, will have
one of the two highest ratings assigned by a national rating agency or will be
unrated securities that the Adviser has determined to be of comparable quality.
Occasionally, the rating of a security held by the Portfolio may be downgraded
to below the minimum required rating. If that happens, the Portfolio does not
have to sell the security unless the Adviser determines that under the
circumstances the security is no longer an appropriate investment for the
Portfolio.
The Portfolio's average weighted maturity will generally be between two and
five years.
4
<PAGE>
Risk/Return Summary Short-Intermediate Municipal Portfolio
- --------------------------------------------------------------------------------
Portfolio Manager
Peter Merzian is the person primarily responsible for the day-to-day management
of the Portfolio. Mr. Merzian, a Senior Associate, has been with FIRMCO and its
affiliates since 1993 and has managed of the Portfolio since it commenced
operations in 1995.
- --------------------------------------------------------------------------------
Principal Risk Considerations
The prices of debt securities, including municipal securities, tend to move in
the opposite direction to interest rates. When rates are rising, the prices of
debt securities tend to fall. When rates are falling, the prices of debt
securities tend to rise. Generally, the longer the time until maturity, the
more sensitive the price of a debt security is to interest rate changes.
Changes in interest rates may cause certain municipal securities held by the
Portfolio to be paid off much sooner or later than expected. In the event that
a security is paid off sooner than expected because of a decline in interest
rates, the Portfolio may be unable to recoup all of its initial investment and
may also suffer from having to reinvest in lower-yielding securities. In the
event of a later than expected payment because of a rise in interest rates, the
value of the obligation will decrease, and the Portfolio may also suffer from
the inability to invest in higher-yielding securities.
The value of debt securities also depends on the ability of issuers to make
principal and interest payments. If an issuer can't meet its payment
obligations or if its credit rating is lowered, the value of its debt
securities will fall. The ability of a state or local government issuer to make
payments can be affected by many factors, including economic conditions, the
flow of tax revenues and changes in the level of federal, state or local aid.
Some municipal securities are payable only from limited revenue sources or by
private entities.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolio and how they may advance the Portfolio's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
5
<PAGE>
Risk/Return Summary
Return History
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Investor A Shares has varied from year to year. The table shows how the
Portfolio's average annual returns for one year and since inception compare to
those of a broad-based market index. Both the bar chart and table assume
reinvestment of all dividends and distributions. The Portfolio's past
performance does not necessarily indicate how it will perform in the future.
- --------------------------------------------------------------------------------
Know your index
The Lehman Brothers Municipal Bond Index - 3 Year is an unmanaged index that
tracks the performance of municipal bonds with remaining maturities of three
years or less.
- --------------------------------------------------------------------------------
Short-Intermediate Municipal Portfolio
Investor A Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1996 3.51%
1997 4.96%
1998 4.65%
1999 -0.22%
The bar chart does not reflect any sales charges on purchases of the
Portfolio's Investor A Shares. If sales charges were included, returns would be
lower than those shown.
<TABLE>
<S> <C>
Best quarter: 2.32% for the quarter
ending September 30, 1998
Worst quarter: -1.21% for the quarter
ending June 30, 1999
</TABLE>
-------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year Inception
--------------------------------
<S> <C> <C>
Investor A Shares (with 4.00% sales charge) -4.22% 2.12%/1/
--------------------------------
Lehman Brothers Municipal Bond Index - 3 Year 1.96% 4.28%/2/
- ------------------------------------------------------------------
</TABLE>
/1/ December 5, 1995 (date of initial public investment).
/2/ November 30, 1995.
6
<PAGE>
Risk/Return Summary Short-Intermediate Municipal Portfolio
The table on the right shows the fees and expenses that you pay if you buy and
hold Investor A Shares of the Short-Intermediate Municipal Portfolio.
Fees and Expenses
<TABLE>
<CAPTION>
Shareholder Fees Investor A Shares
(fees you pay directly)
<S> <C>
Maximum sales charge
(load) to buy
shares, shown as a % of
the offering price 4.00%/1/
---------------------------------------------
Maximum deferred sales
charge (load)
shown as a % of
the offering price or sale
price, whichever is less None
</TABLE>
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses
(expenses that are deducted from the
Portfolio's assets) Investor A Shares
<S> <C>
Management Fees .55%
-------------------------------------------------------------
Distribution (12b-1) and
Service Fees .30%/2/
-------------------------------------------------------------
Other Expenses .34%/2/
-------------------------------------------------------------
Total Annual Portfolio Operating Expenses 1.19%/2/
- --------------------------------------------------------------
</TABLE>
/1/ Reduced sales charges may be available. See "Distribution
Arrangements/Sales Charges" below.
/2/ Distribution (12b-1) and Service Fees, Other Expenses and Total Annual
Portfolio Operating Expenses for the Portfolio's Investor A Shares for the
current fiscal year are expected to be less than the amounts shown above
because certain of the Portfolio's service providers are voluntarily waiving a
portion of their fees and/or reimbursing the Portfolio for certain other
expenses. These fee waivers and/or reimbursements are being made in order to
keep the annual fees and expenses for the Portfolio's Investor A Shares at a
certain level. Distribution (12b-1) and Service Fees, Other Expenses and Total
Annual Portfolio Operating Expenses, after taking these fee waivers and
expense reimbursements into account, are expected to be .25%, .24% and 1.04%,
respectively for Investor A Shares. These fee waivers and expense
reimbursements may be revised or cancelled at any time.
7
<PAGE>
Risk/Return Summary Short-Intermediate Municipal Portfolio
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
Example
<TABLE>
<CAPTION>
1 3 5 10
year years years years
<S> <C> <C> <C> <C>
Investor A Shares $516 $763 $1,028 $1,785
- ---------------------------------------------
</TABLE>
8
<PAGE>
Risk/Return Summary Missouri Tax-Exempt Bond Portfolio
- --------------------------------------------------------------------------------
What Are Municipal Securities?
State and local governments issue municipal securities to raise money to
finance public works, to repay outstanding obligations, to raise funds for
general operating expenses and to make loans to other public institutions. Some
municipal securities, known as private activity bonds, are backed by private
entities and are used to finance various non-public projects. Municipal
securities, which can be issued as bonds, notes or commercial paper, usually
have fixed interest rates, although some have interest rates that change from
time to time.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Average weighted maturity gives you the average time until all debt
obligations, including municipal securities, in a Portfolio come due or mature.
It is calculated by averaging the time to maturity of all debt obligations held
by a Portfolio with each maturity "weighted" according to the percentage of
assets which it represents.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is to seek as high a level of interest
income exempt from federal income tax as is consistent with conservation of
capital.
Principal Investment Strategies
The Portfolio normally invests at least 80% of its total assets in municipal
securities that pay interest that is exempt from federal income tax, and at
least 65% of its total assets in Missouri municipal securities, which are
securities issued by the State of Missouri and other government issuers and
that pay interest which is exempt from both federal income tax and Missouri
state income tax.
Municipal securities purchased by the Portfolio may include general obligation
securities, revenue securities and private activity bonds. General obligation
securities are secured by the issuer's full faith, credit and taxing power.
Revenue securities are usually payable only from revenues derived from specific
facilities or revenue sources. Private activity bonds are usually revenue
obligations since they are typically payable by the private user of the
facilities financed by the bonds. The interest on private activity bonds may be
subject to the federal alternative minimum tax. Investments in private activity
bonds will not be treated as investments in municipal securities for purposes
of the 80% requirement stated above. Under normal conditions, the Portfolio's
investments in private activity bonds, together with any investments in taxable
obligations, will not exceed 20% of its total assets.
In selecting municipal securities for the Portfolio, the Adviser favors those
sectors of the municipal market that offer the most favorable returns. The
Adviser emphasizes municipal securities that offer both a high credit quality
rating and a high degree of liquidity.
The Portfolio will invest only in investment grade municipal securities. These
are securities which have one of the four highest ratings assigned by a
national rating agency, such as Standard & Poor's Ratings Group or Moody's
Investors Service, Inc., or are unrated securities determined by the Adviser to
be of comparable quality. Short-term municipal securities purchased by the
Portfolio, such as municipal notes and tax-exempt commercial paper, will have
one of the two highest ratings assigned by a national rating agency or will be
unrated securities that the Adviser has determined to be of comparable quality.
Occasionally, the rating of a security held by the Portfolio may be downgraded
to below the minimum required rating. If that happens, the Portfolio does not
have to sell the security unless the Adviser determines that under the
circumstances the security is no longer an appropriate investment for the
Portfolio.
The remaining maturity (i.e., length of time until an obligation must be
repaid) of the obligations held by the Portfolio will vary from one to 30
9
<PAGE>
Risk/Return Summary Missouri Tax-Exempt Bond Portfolio
- --------------------------------------------------------------------------------
Portfolio Manager
Peter Merzian is the person primarily responsible for the day-to-day management
of the Portfolio. Mr. Merzian, a Senior Associate, has been with FIRMCO and its
affiliates since 1993 and has managed the Portfolio since that time.
- --------------------------------------------------------------------------------
years. The Portfolio's average weighted maturity will vary from time to time
depending on current economic and market conditions and the Adviser's
assessment of probable changes in interest rates.
Principal Risk Considerations
The prices of debt securities, including municipal securities, tend to move in
the opposite direction to interest rates. When rates are rising, the prices of
debt securities tend to fall. When rates are falling, the prices of debt
securities tend to rise. Generally, the longer the time until maturity, the
more sensitive the price of a debt security is to interest rate changes.
Changes in interest rates also may cause certain municipal securities held by
the Portfolio to be paid off much sooner or later than expected. In the event
that a security is paid off sooner than expected because of a decline in
interest rates, the Portfolio may be unable to recoup all of its initial
investment and may also suffer from having to reinvest in lower-yielding
securities. In the event of a later than expected payment because of a rise in
interest rates, the value of the obligation will decrease, and the Portfolio
may also suffer from the inability to invest in higher-yielding securities.
The value of debt securities also depends on the ability of issuers to make
principal and interest payments. If an issuer can't meet its payment
obligations or if its credit rating is lowered, the value of its debt
securities will fall. The ability of a state or local government issuer to make
payments can be affected by many factors, including economic conditions, the
flow of tax revenues and changes in the level of federal, state or local aid.
Some municipal securities are payable only from limited revenue sources or by
private entities.
The Portfolio is not diversified, which means that it can invest a large
percentage of its assets in a small number of issuers. As a result, a change in
the value of any one investment held by the Portfolio may affect the overall
value of the Portfolio more than it would affect a diversified portfolio that
holds more investments.
Because the Portfolio invests primarily in Missouri municipal securities, it
also is likely to be especially susceptible to economic, political and
regulatory events that affect Missouri. Missouri's economy is largely comprised
of services, manufacturing (primarily defense, transportation and other durable
goods), wholesale and retail trade, and state and local government. The
exposure to these industries leaves Missouri vulnerable to an economic slowdown
associated with the business cycles of such industries. Because defense-related
business plays an important role in Missouri's economy, declining defense
appropriations and federal downsizing also may continue to have an adverse
impact on the State. From time to time, Missouri and its political subdivisions
have encountered financial difficulties.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolio and how they may advance the Portfolio's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
10
<PAGE>
Risk/Return Summary
Return History+
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Investor A Shares has varied from year to year. The table shows how the
Portfolio's average annual returns for one year, five years and since inception
compare to those of a broad-based market index. Both the bar chart and table
assume reinvestment of all dividends and distributions. The Portfolio's past
performance does not necessarily indicate how it will perform in the future.
- --------------------------------------------------------------------------------
Know your index
The Lehman Brothers Municipal Bond Index is an unmanaged index that tracks the
performance of municipal bonds.
- --------------------------------------------------------------------------------
Missouri Tax-Exempt Bond Portfolio
Investor A Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1991 11.52%
1992 8.75%
1993 11.63%
1994 -5.78%
1995 16.98%
1996 2.90%
1997 8.08%
1998 5.11%
1999 -3.08%
The returns for Investor B Shares differed from the returns shown in the bar
chart, because the two classes bear different expenses. The bar chart does not
reflect any sales charges on purchases of the Portfolio's Investor A Shares. If
sales charges were included, returns would be lower than those shown.
<TABLE>
<S> <C>
Best quarter: 7.53% for the quarter
ending March 31, 1995
Worst quarter: -5.61% for the quarter
ending March 31, 1994
</TABLE>
-------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year 5 Years Inception
-----------------------------------------------
<S> <C> <C> <C>
Investor A Shares (with 4.00% sales charge) -6.92% 4.93% 5.76%/1/
-----------------------------------------------
Investor B Shares (with applicable contingent
deferred sales charge) -8.47% N/A 3.60%/1/
-----------------------------------------------
Lehman Brothers Municipal Bond Index 2.06% 6.91% 5.91%/2/
7.14%/3/
- -------------------------------------------------------------------------------
</TABLE>
+ The Portfolio commenced operations on July 15, 1988 as a separate
investment portfolio (the "Predecessor Portfolio") of The ARCH Tax-Exempt
Trust. On October 2, 1995, the Predecessor Portfolio was reorganized as a
new portfolio of the Fund. Prior to the reorganization, the Predecessor
Portfolio offered and sold shares that were similar to the Fund's Investor
A Shares and Investor B Shares. Total returns for periods prior to October
2, 1995 reflect the performance of Investor A and Investor B Shares of the
Predecessor Portfolio.
/1/ September 28, 1990 for Investor A Shares; March 7, 1995 (date of initial
public investment) for Investor B Shares.
/2/ September 30, 1990.
/3/ February 28, 1995.
11
<PAGE>
Risk/Return Summary Missouri Tax-Exempt Bond Portfolio
The table on the right shows the fees and expenses that you pay if you buy and
hold Investor A Shares or Investor B Shares of the Missouri Tax-Exempt Bond
Portfolio.
Fees and Expenses
<TABLE>
<CAPTION>
Shareholder Fees Investor A Investor B
(fees you pay directly) Shares Shares
<S> <C> <C>
Maximum sales charge (load) to buy shares, shown as a
% of the offering price 4.00%/1/ None
- ------------------------------------------------------------------------------
Maximum deferred sales charge (load) shown as a % of
the offering price or sale price, whichever is less None 5.00%/2/
</TABLE>
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses
(expenses that are deducted from the Investor A Investor B
Portfolio's assets) Shares Shares
<S> <C> <C>
Management Fees .45% .45%
-------------------------------------------------------------------
Distribution (12b-1) and Service Fees .30%/3/ 1.00%
-------------------------------------------------------------------
Other Expenses .32%/3/ .32%/3/
-------------------------------------------------------------------
Total Annual Portfolio Operating Expenses 1.07%/3/ 1.77%/3/
- --------------------------------------------------------------------
</TABLE>
/1/Reduced sales charges may be available. See "Distribution
Arrangements/Sales Charges" below.
/2/This amount applies if you sell your shares in the first year after
purchase and gradually declines until it is eliminated after six years.
After six years, your Investor B Shares will automatically convert to
Investor A Shares. See "Distribution Arrangements/Sales Charges" below.
/3/Distribution (12b-1) and Service Fees for the Portfolio's Investor A Shares
and Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Investor A Shares and Investor B Shares for the current fiscal
year are expected to be less than the amounts shown above because certain of
the Portfolio's service providers are voluntarily waiving a portion of their
fees and/or reimbursing the Portfolio for certain other expenses. These fee
waivers and/or reimbursements are being made in order to keep the annual
fees and expenses for the Portfolio's Investor A Shares and Investor B
Shares at certain levels. Distribution (12b-1) and Service Fees, after
taking these fee waivers and expense reimbursements into account, are
expected to be .20% for Investor A Shares, and Other Expenses and Total
Annual Portfolio Operating Expenses, after taking these fee waivers and
expense reimbursements into account, are expected to be .22% and .87%,
respectively for Investor A Shares and .22% and 1.67%, respectively, for
Investor B Shares. These fee waivers and expense reimbursements may be
revised or cancelled at any time.
12
<PAGE>
Risk/Return Summary Missouri Tax-Exempt Bond Portfolio
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year, the
Portfolio's operating expenses remain the same and your Investor B Shares
automatically convert to Investor A Shares after six years. Although your
actual costs may be higher or lower, based on these assumptions your costs
would be:
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Investor A Shares $505 $727 $ 967 $1,653
- ----------------------------------------------------------
Investor B Shares $680 $857 $1,159 $1,730
If you hold
Investor B
Shares, you
would pay the
following
expenses if you
did not sell
your shares: $180 $557 $ 959 $1,730
</TABLE>
- --------------------------------------------------------------------------------
13
<PAGE>
[GRAPHIC] Risk/Return Summary National Municipal Bond Portfolio
- --------------------------------------------------------------------------------
What Are Municipal Securities?
State and local governments issue municipal securities to raise money to
finance public works, to repay outstanding obligations, to raise funds for
general operating expenses and to make loans to other public institutions. Some
municipal securities, known as private activity bonds, are backed by private
entities and are used to finance various non-public projects. Municipal
securities, which can be issued as bonds, notes or commercial paper, usually
have fixed interest rates, although some have interest rates that change from
time to time.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is to seek as high a level of current
income exempt from regular federal income tax as is consistent with
conservation of capital.
Principal Investment Strategies
The Portfolio normally invests at least 80% of its total assets in municipal
securities that pay interest which is exempt from federal income tax. Municipal
securities purchased by the Portfolio may include general obligation
securities, revenue securities and private activity bonds. General obligation
securities are secured by the issuer's full faith, credit and taxing power.
Revenue securities are usually payable only from revenues derived from specific
facilities or revenue sources. Private activity bonds are usually revenue
obligations since they are typically payable by the private user of the
facilities financed by the bonds. The interest on private activity bonds may be
subject to the federal alternative minimum tax. Investments in private activity
bonds will not be treated as investments in municipal securities for purposes
of the 80% requirement stated above. Under normal conditions, the Portfolio's
investments in private activity bonds, together with any investments in taxable
obligations, will not exceed 20% of its total assets.
In selecting municipal securities for the Portfolio, the Adviser favors those
sectors of the municipal market that offer the most favorable returns. The
Adviser emphasizes municipal securities that offer both a high credit quality
rating and a high degree of liquidity. The Adviser also attempts to maintain a
broad geographic diversification for the Portfolio, with emphasis on no
particular state.
The Portfolio will invest only in investment grade municipal securities. These
are securities which have one of the four highest ratings assigned by a
national rating agency, such as Standard & Poor's Ratings Group or Moody's
Investors Service, Inc., or are unrated securities determined by the Adviser to
be of comparable quality. Short-term municipal securities purchased by the
Portfolio, such as municipal notes and tax-exempt commercial paper, will have
one of the two highest ratings assigned by a national rating agency or will be
unrated securities that the Adviser has determined to be of comparable quality.
Occasionally, the rating of a security held by the Portfolio may be downgraded
to below the minimum required rating. If that happens, the Portfolio does not
have to sell the security unless the Adviser determines that under the
circumstances the security is no longer an appropriate investment for the
Portfolio.
The Portfolio's average weighted maturity will vary from time to time depending
on current economic and market conditions and the Adviser's assessment of
probable changes in interest rates. The Portfolio's average weighted maturity
generally will be longer (10 years or less) than that for the Short-
Intermediate Municipal Portfolio.
14
<PAGE>
Risk/Return Summary National Municipal Bond Portfolio
- --------------------------------------------------------------------------------
Portfolio Manager
Peter Merzian is the person primarily responsible for the day-to-day management
of the Portfolio. Mr. Merzian, a Senior Associate, has been with FIRMCO and its
affiliates since 1993 and has managed the Portfolio since it commenced
operations in 1996.
- --------------------------------------------------------------------------------
Principal Risk Considerations
The prices of debt securities, including municipal securities, tend to move in
the opposite direction to interest rates. When rates are rising, the prices of
debt securities tend to fall. When rates are falling, the prices of debt
securities tend to rise. Generally, the longer the time until maturity, the
more sensitive the price of a debt security is to interest rate changes.
Changes in interest rates also may cause certain municipal securities held by
the Portfolio to be paid off much sooner or later than expected. In the event
that a security is paid off sooner than expected because of a decline in
interest rates, the Portfolio may be unable to recoup all of its initial
investment and may also suffer from having to reinvest in lower-yielding
securities. In the event of a later than expected payment because of a rise in
interest rates, the value of the obligation will decrease, and the Portfolio
may also suffer from the inability to invest in higher-yielding securities.
The value of debt securities also depends on the ability of issuers to make
principal and interest payments. If an issuer can't meet its payment
obligations or if its credit rating is lowered, the value of its debt
securities will fall. The ability of a state or local government issuer to make
payments can be affected by many factors, including economic conditions, the
flow of tax revenues and changes in the level of federal, state or local aid.
Some municipal securities are payable only from limited revenue sources or by
private entities.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolio and how they may advance the Portfolio's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
15
<PAGE>
Risk/Return Summary National Municipal Bond Portfolio
Return History
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Investor A Shares has varied from year to year. The table shows how the
Portfolio's average annual returns for one year and since inception compare to
those of a broad-based market index. Both the bar chart and table assume
reinvestment of all dividends and distributions. The Portfolio's past
performance does not necessarily indicate how it will perform in the future.
- --------------------------------------------------------------------------------
Know your index
The Lehman Brothers Municipal Bond Index--10 Year is an unmanaged index that
tracks the performance of municipal bonds with remaining maturities of 10 years
or less.
- --------------------------------------------------------------------------------
Investor A Shares
Year-by-Year Total Returns
(as of December 31 each year)
[CHART]
1997 1998 1999
---- ---- ----
9.94% 5.94% -4.33%
The returns for Investor B Shares differed from the returns shown in the bar
chart because the two classes bear different expenses. The bar chart does not
reflect any sales charges on purchases of the Portfolio's Investor A Shares.
If sales charges were included, returns would be lower than those shown.
<TABLE>
<S> <C>
Best quarter: 3.72% for the quarter
ending September 30, 1997
Worst quarter: -2.76% for the quarter
ending June 30, 1999
</TABLE>
-------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended
December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year Inception
-------------------------------
<S> <C> <C>
Investor A Shares (with 4.00% sales charge) -8.12% 2.31%/1/
-------------------------------
Investor B Shares (with applicable contingent deferred
sales charge) -9.95% 1.94%/1/
-------------------------------
Lehman Brothers Municipal Bond Index - 10 Year -1.25% 4.53%/2/
- -----------------------------------------------------------------------
</TABLE>
/1/November 18, 1996.
/2/November 30, 1996.
16
<PAGE>
Risk/Return Summary National Municipal Bond Portfolio
The table on the right shows the fees and expenses that you pay if you buy and
hold Investor A Shares or Investor B Shares of the National Municipal Bond
Portfolio.
Fees and Expenses
<TABLE>
<CAPTION>
Shareholder Fees Investor A Investor B
(fees you pay directly) Shares Shares
<S> <C> <C>
Maximum sales charge (load) to buy shares, shown as a
% of the offering price 4.00%/1/ None
-----------------------------------------------------------------------------
Maximum deferred sales charge (load) shown as a % of
the offering price or sale price, whichever is less None 5.00%/2/
</TABLE>
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses
(expenses that are deducted from the Investor A Investor B
Portfolio's assets) Shares Shares
<S> <C> <C>
Management Fees .55% .55%
-------------------------------------------------------------------
Distribution (12b-1) and Service Fees .30%/3/ 1.00%
-------------------------------------------------------------------
Other Expenses .31%/3/ .31%/3/
-------------------------------------------------------------------
Total Annual Portfolio Operating Expenses 1.16%/3/ 1.86%/3/
- --------------------------------------------------------------------
</TABLE>
/1/Reduced sales charges may be available. See "Distribution
Arrangements/Sales Charges" below.
/2/This amount applies if you sell your shares in the first year after
purchase and gradually declines until it is eliminated after six years.
After six years, your Investor B Shares will automatically convert to
Investor A Shares. See "Distribution Arrangements/Sales Charges" below.
/3/Distribution (12b-1) and Service Fees for the Portfolio's Investor A Shares
and Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Investor A Shares and Investor B Shares for the current fiscal
year are expected to be less than the amounts shown above because certain of
the Portfolio's service providers are voluntarily waiving a portion of their
fees and/or reimbursing the Portfolio for certain other expenses. These fee
waivers and/or reimbursements are being made in order to keep the annual
fees and expenses for the Portfolio's Investor A Shares and Investor B
Shares at certain levels. Distribution (12b-1) and Service Fees, after
taking these fee waivers and expense reimbursements into account, are
expected to be .20% for Investor A Shares, and Other Expenses and Total
Annual Portfolio Operating Expenses, after taking these fee waivers and
expense reimbursements into account, are expected to be .21% and .96%,
respectively, for Investor A Shares and .21% and 1.76%, respectively, for
Investor B Shares. These fee waivers and expense reimbursements may be
revised or cancelled at any time.
17
<PAGE>
Risk/Return Summary National Municipal Bond Portfolio
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year, the
Portfolio's operating expenses remain the same and your Investor B Shares
automatically convert to Investor A Shares after six years. Although your
actual costs may be higher or lower, based on these assumptions your costs
would be:
Example
<TABLE>
<CAPTION>
1 3 5 10
year years years years
<S> <C> <C> <C> <C>
Investor A Shares $513 $754 $1,013 $1,753
------------------------------------------------------------------------------
Investor B Shares $689 $885 $1,206 $1,829
If you hold Investor B Shares, you would pay the
following expenses if you did not sell your shares: $189 $585 $1,006 $1,829
- -------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
[GRAPHIC] Risk/Return Summary Additional Information on Risk
The principal risks of investing in each Portfolio are described on the
previous pages. The following supplements that discussion.
Temporary Defensive Positions
Each Portfolio may temporarily hold investments that are not part of its main
investment strategy to try to avoid losses during unfavorable market
conditions. These investments may include cash (which will not earn any income)
and taxable obligations, including money market instruments and debt securities
issued or guaranteed by the U.S. Government or its agencies. This strategy
could prevent a Portfolio from achieving its investment objective.
Other Types of Investments
This prospectus describes each Portfolio's principal investment strategies and
the particular types of securities in which each Portfolio principally invests.
Each Portfolio may, from time to time, make other types of investments and
pursue other investment strategies in support of its overall investment goal.
These supplemental investment strategies - and the risks involved - are
described in detail in the Statement of Additional Information ("SAI"), which
is referred to on the back cover of this prospectus.
Year 2000 Risks
Over the past several years, the Adviser and the Portfolios' other major
service providers expended considerable time and money in addressing the
computer and technology problems associated with the transition to the Year
2000. As a result of those efforts, the Portfolios did not experience any
material disruptions in their operations as a result of the transition to the
21st century. The Adviser and the Portfolios' other major service providers are
continuing to monitor the Year 2000 or Y2K problem, however, and there can be
no assurances that there will be no adverse impact to the Portfolios as a
result of future computer-related Y2K difficulties.
19
<PAGE>
[GRAPHIC] Your Account Distribution Arrangements/Sales Charges
Share Classes
Each Portfolio offers Investor A Shares and each Portfolio except the Short-
Intermediate Municipal Portfolio offers Investor B Shares. The primary
difference between the share classes is the sales charge structure and
distribution/service fee arrangement.
<TABLE>
<CAPTION>
Types of Charges Investor A Shares Investor B Shares
<S> <C> <C>
Sales Charge (Load) A front-end sales charge A contingent deferred sales
is assessed at the time charge (CDSC) is assessed on
of your purchase. shares redeemed within six
years of purchase. Investor B
Shares automatically convert
to Investor A Shares six years
after purchase.
- --------------------------------------------------------------------------------
Distribution (12b-1) Subject to annual Subject to annual distribution
and Service Fees distribution and and shareholder servicing fees
shareholder servicing of up to 1.00% of a
fees of up to 0.30% of a Portfolio's average daily net
Portfolio's average assets attributable to its
daily net assets Investor B Shares.
attributable to its
Investor A Shares.
</TABLE>
20
<PAGE>
Your Account Distribution Arrangements/Sales Charges
Calculation of Sales Charges
Investor A Shares
<TABLE>
<CAPTION>
Sales Charge
Sales Charge as a % of Dealers'
as a % of the Net Asset Reallowance
Amount of Offering Price Value Per as a % of
Transaction Per Share Share Offering Price
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 4.00% 4.17% 3.75%
- -------------------------------------------------------------------------------
$50,000 but less than $100,000 3.50% 3.63% 3.25%
- -------------------------------------------------------------------------------
$100,000 but less than $250,000 3.00% 3.09% 2.75%
- -------------------------------------------------------------------------------
$250,000 but less than $500,000 2.50% 2.56% 2.25%
- -------------------------------------------------------------------------------
$500,000 but less than $1 million 2.00% 2.04% 1.75%
- -------------------------------------------------------------------------------
$1 million or more 0.50% 0.50% 0.40%
</TABLE>
- --------------------------------------------------------------------------------
The Fund's distributor reserves the right to pay the entire sales charge on
purchases of Investor A Shares to dealers. In addition, the Fund's distributor
may from time to time implement programs under which a broker-dealer's sales
force may be eligible to win nominal awards for certain sales efforts. If any
such program is made available to any broker-dealer, it will be made available
to all broker-dealers on the same terms. Payments made under such programs are
made by the Fund's distributor out of its own assets and not out of the assets
of the Portfolios. These programs will not change the price of Investor A
Shares or the amount that the Portfolios will receive from such sales.
21
<PAGE>
Your Account Distribution Arrangements/Sales Charges
Calculation of Sales Charges
Investor B Shares
For purposes of calculating the CDSC, all purchases made during a calendar
month are considered to be made on the first day of that month. The CDSC is
based on the value of the Investor B Shares on the date that they are sold or
the original cost of the shares, whichever is lower. To keep your CDSC as low
as possible each time you sell shares, the Fund will first sell any shares in
your account that are not subject to a CDSC. If there are not enough of these,
the Fund will sell the shares that have the lowest CDSC.
<TABLE>
<CAPTION>
Years CDSC as a % of
Since Dollar Amount
Purchase Subject to Charge
<S> <C>
0-1 5.0%
1-2 4.0%
2-3 3.0%
3-4 3.0%
4-5 2.0%
5-6 1.0%
more than 6 None
</TABLE>
- ---------------------------
Sales Charge Reductions
Investor A Shares
You may reduce the sales charge on Investor A Shares through:
. Rights of Accumulation. You can add the value of the Investor A Shares that
you already own in any Portfolio of the Fund that charges a sales load, as
well as the value of any existing Class A shares of any other fund in the
Firstar family of funds, to your next investment in Investor A Shares for
purposes of calculating the sales charge.
. Quantity Discounts. As the dollar amount of your purchase increases, your
sales charge may decrease (see the table on page 21). In addition, the Fund
will combine purchases made on the same day by you and your immediate family
members when calculating applicable sales charges.
. Letter of Intent. You can purchase Investor A Shares of any Portfolio of the
Fund or Class A shares of any fund in the Firstar family of funds that
charges a sales load over a 13-month period and pay the same sales charge you
would have paid if all shares were purchased at once. The Fund's transfer
agent will hold in escrow 5% of your total investment (for payment of a
higher sales load in case you do not purchase the full amount indicated on
the application) until the full amount is received. To participate, complete
the "Letter of Intent" section on your account application.
. Reinvestment Privilege. You can reinvest some or all of the money that you
receive when you sell Investor A Shares of a Portfolio in Investor A Shares
of any Portfolio of the Fund or in shares of any other fund in the Firstar
Family of funds within 60 days without paying a sales charge. You must notify
the Fund's transfer agent at the time of your reinvestment that you qualify
for this privilege.
22
<PAGE>
Your Account Distribution Arrangements/Sales Charges
- --------------------------------------------------------------------------------
Purchase of Investor A Shares at Net Asset Value
From time to time, the Fund's distributor may offer investors the option to
purchase Investor A Shares at net asset value without payment of a front-end
sales charge. To qualify, you must pay for the shares with the redemption
proceeds from a non-affiliated mutual fund. In addition, you must have paid a
front-end sales charge on the shares you redeem. The purchase of Investor
AShares must occur within 30 days of the prior redemption, and you must show
evidence of the redemption transaction. At the time of purchase, your broker-
dealer or other financial institution must notify the Fund that your
transaction qualifies for a purchase at net asset value.
- --------------------------------------------------------------------------------
Sales Charge Waivers
Investor A Shares
In addition, there's no sales charge when you buy Investor A Shares if:
. You buy shares by reinvesting your dividends and capital gains distributions.
. You're an officer or director of the Fund (or an immediate family member of
any such individual).
. You're a director, a current or retired employee or a participant in an
employee benefit or retirement plan of Firstar Corporation or the Fund's
distributor or any of their affiliates (or an immediate family member of any
such individual).
. You're a broker, dealer or agent who has a sales agreement with the Fund's
distributor (or an employee or immediate family member of any such
individual).
. You buy shares pursuant to a wrap-free program offered by a broker-dealer or
other financial institution.
. You buy shares with the proceeds of Trust Shares or Institutional Shares of a
Portfolio redeemed in connection with a rollover of benefits paid by a
qualified retirement or employee benefit plan or distribution on behalf of
any other qualified account administered by Firstar Bank, N.A. or its
affiliates or correspondents within 60 days of receipt of such payment.
. You buy shares through a payroll deduction program.
. You're an employee of any sub-adviser to the Fund.
. You were a holder of a Southwestern Bell VISA card formerly issued by
Mercantile Bank of Southern Illinois, N.A. and you participated in the Fund's
Automatic Investment Plan.
. You're exchanging Trust Shares of a Portfolio received from the distribution
of assets held in a qualified trust, agency or custodian account with Firstar
Bank, N.A. or any of its affiliates or correspondents.
. You're another investment company distributed by the Fund's distributor or
its affiliates.
If you think you qualify for any these waivers, please call the Fund at 1-800-
452-2724 before buying any shares.
23
<PAGE>
Your Account Distribution Arrangements/Sales Charges
Sales Charge Waivers
Investor B Shares
No CDSC is assessed on redemptions of Investor B Shares if:
. The shares were purchased with reinvested dividends or capital gains
distributions.
. The shares were purchased through an exchange of Investor B Shares of another
Portfolio.
. The redemption represents a distribution from a qualified retirement plan
under Section 403(b)(7) of the Internal Revenue Code, due to death,
disability or the attainment of a specified age.
. The redemption is in connection with the death or disability of the
shareholder.
. You participate in the Systematic Withdrawal Plan and your annual withdrawals
do not exceed 12% of your account's value.
. Your account falls below the Portfolio's minimum account size, and the Fund
liquidates your account (see page 30).
. The redemption results from a tax-free return of an excess contribution,
pursuant to Section 408(d)(4) or (5) of the Internal Revenue Code.
Distribution and Service Fees
Investor A Shares of the Portfolios pay distribution (12b-1) and shareholder
service fees at an annual rate of up to 0.30% of each Portfolio's Investor A
Share assets. Investor B Shares of the Missouri Tax-Exempt Bond and National
Municipal Bond Portfolios pay distribution (12b-1) and shareholder service fees
at an annual rate of up to 1.00% of each Portfolio's Investor B Share assets.
The Fund has adopted separate distribution and service plans under Rule 12b-1
that allow each Portfolio to pay fees from its Investor A Share or Investor B
Share assets for selling and distributing Investor A Shares or Investor B
Shares, as the case may be, and for services provided to shareholders. Because
12b-1 fees are paid on an ongoing basis, over time they increase the cost of
your investment and may cost more than other sales charges.
Converting Investor B Shares to Investor A Shares
Six years after you buy Investor B Shares of a Portfolio, they will
automatically convert to Investor A Shares of the Portfolio. This allows you to
benefit from the lower annual expenses of Investor A Shares.
Choosing Between Investor A Shares and Investor B Shares
In deciding whether to buy Investor A Shares or Investor B Shares, you should
consider how long you plan to hold the shares. Over time, the higher fees on
Investor B Shares may equal or exceed the initial sales charge and fees for
Investor A Shares. Investor A Shares may be a better choice if you qualify to
have the sales charges reduced or eliminated, or if you plan to sell your
shares within one or two years. Consult your financial adviser for help in
choosing the appropriate share class.
24
<PAGE>
Your Account Explanation of Sales Price
- --------------------------------------------------------------------------------
Business days defined
A business day is any day that both the New York Stock Exchange and the Federal
Reserve Banks' Fedline System are open for business. Currently, the Fund
observes the following holidays: New Year's Day, Martin Luther King Jr. Day,
Presidents' Day, Good Friday, Memorial Day (observed), Independence Day
(observed), Labor Day, Columbus Day, Veterans' Day, Thanksgiving and Christmas.
- --------------------------------------------------------------------------------
Shares of each class in a Portfolio are sold at their net asset value (NAV)
plus, in the case of Investor A Shares, a front-end sales charge, if
applicable. This is commonly referred to as the "public offering price."
The NAV for each class of shares of a Portfolio is determined as of the close
of regular trading on the New York Stock Exchange (currently 3:00 p.m., Central
time) on every business day. The NAV for a class of shares is determined by
adding the value of the Portfolio's investments, cash and other assets
attributable to a particular share class, subtracting the Portfolio's
liabilities attributable to that class and then dividing the result by the
total number of shares in the class that are outstanding.
. Each Portfolio's investments are valued according to market value. When a
market quote is not readily available, the security's value is based on "fair
value" as determined by FIRMCO under the supervision of the Fund's Board of
Directors.
. If you properly place a purchase order (see "How to Buy Shares" on page 26)
that is delivered to the Fund before 3:00 p.m. (Central time) on any business
day, the order receives the share price determined for your share class as of
3:00 p.m. (Central time) that day. If the order is received after 3:00 p.m.
(Central time), it will receive the price determined on the next business
day. You must pay for your shares no later than 3:00 p.m. (Central time)
three business days after placing the order, or the order will be cancelled.
25
<PAGE>
Your Account How to Buy Shares
Investing in the Mercantile Tax-Exempt Bond Portfolios is quick and convenient.
You can purchase Investor A Shares or Investor B Shares in any of the following
ways:
. Through a broker-dealer organization. You can purchase shares through any
broker-dealer organization that has a sales agreement with the Fund's
distributor. The broker-dealer organization is responsible for sending your
purchase order to the Fund.
. Through a financial organization. You can purchase shares through any
financial organization that has entered into a servicing agreement with the
Fund. The financial organization is responsible for sending your purchase
order to the Fund.
<TABLE>
<CAPTION>
Minimum To Open To Add to
Investments Your Account Your Account
<S> <C> <C>
Regular accounts $1,000 $50
- ----------------------------------------------
Sweep program
through your
financial
institution None None
- ----------------------------------------------
Wrap fee program
through your
financial
institution None None
- ----------------------------------------------
Payroll
Deduction
Program* None $25
- ----------------------------------------------
ConvertiFund* $5,000 $1,000 minimum
account balance
- ----------------------------------------------
Periodic
Investment
Plan* $50 $50
</TABLE>
- --------------------------------------------------------------------------------
* See Investor Programs below.
. Directly from the Fund by mail. Just complete an account application and send
it, along with a check for at least the minimum purchase amount, to:
Mercantile Mutual Funds, Inc. c/o Firstar Mutual Fund Services, LLC, P.O. Box
3011, Milwaukee, Wisconsin 53201-3011 (via overnight delivery to 615 E.
Michigan Street, Milwaukee, Wisconsin 53202). Remember to specify whether
you're buying Investor A Shares or Investor B Shares. To make additional
investments once you've opened your account, send your check to the address
above together with the detachable form that's included with your Fund
statement or confirmation of a prior transaction or a letter stating the
amount of your investment, the name of the Portfolio you want to invest in
and your account number.
In addition, you may call the Fund at 1-800-452-2724 for more information on
how to buy shares.
26
<PAGE>
Your Account How to Sell Shares
- --------------------------------------------------------------------------------
Selling recently purchased shares
If you attempt to sell shares you recently purchased with a personal check, the
Fund may delay processing your request until it collects payment for those
shares. This process may take up to 15 days, so if you plan to sell shares
shortly after purchasing them, you may want to consider purchasing shares via
electronic transfer to avoid delays.
- --------------------------------------------------------------------------------
You can arrange to get money out of your account by selling some or all of your
shares. This is known as "redeeming" your shares. You can redeem your shares in
the following ways:
Through a broker-dealer or other financial organization
If you purchased your shares through a broker-dealer or other financial
organization, your redemption order should be placed through the same
organization. The organization is responsible for sending your redemption order
to the Fund on a timely basis.
By mail
Send your written redemption request to: Mercantile Mutual Funds, Inc., c/o
Firstar Mutual Fund Services, LLC, P.O. Box 3011, Milwaukee, Wisconsin 53201-
3011 (via overnight delivery to 615 E. Michigan Street, Milwaukee, Wisconsin
53202). Your request must include the name of the Portfolio, the number of
shares or the dollar amount you want to sell, your account number, your social
security or tax identification number and the signature of each registered
owner of the account. Your request also must be accompanied by any share
certificates that are properly endorsed for transfer. Additional documents may
be required for certain types of shareholders, such as corporations,
partnerships, executors, trustees, administrators or guardians.
The Fund's transfer agent may require a signature guarantee unless the
redemption proceeds are payable to the shareholder of record and the redemption
is either mailed to the shareholder's address of record or electronically
transferred to the account designated on the original account application. A
signature guarantee helps prevent fraud, and you may obtain one from most banks
and broker-dealers. Contact your broker-dealer or other financial organization
or the Fund for more information on signature guarantees.
By telephone
You may redeem your shares by telephone if you have selected that option on
your account application and if there has been no change of address by
telephone within the preceding 15 days. Call the Fund at 1-800-452-2724 with
your request. You may have your proceeds mailed to your address or transferred
electronically to the bank account designated on your account application. If
you have not previously selected the telephone privilege, you may add this
feature by providing written instructions to the Fund's transfer agent. If you
have difficulty getting through to the Fund because of unusual market
conditions, consider selling your shares by mail.
You may sell your Portfolio shares at any time. Your shares will be sold at the
NAV next determined after the Fund accepts your order (see above). The proceeds
of the sale of Investor B Shares will be reduced by the applicable CDSC. Your
proceeds ordinarily are sent electronically or mailed by check within three
business days. If your account holds both Investor A Shares and Investor B
Shares, be sure to specify which shares you are selling. Otherwise, Investor A
Shares will be sold first.
27
<PAGE>
Your Account Investor Programs
It's also easy to buy or sell shares of the Portfolios by using one of the
programs described below.
Periodic Investment Plan
You may open an account or make additional investments in an existing account
for as little as $50 a month with the Fund's Periodic Investment Plan (PIP).
Under the PIP (which was formerly known as the Automatic Investment Program),
you specify the dollar amount to be automatically withdrawn each month from
your bank checking account and invested in your Portfolio account. Purchases of
Investor A Shares or Investor B Shares will occur on the day of the month
designated by you (or the next business day after the designated day) of each
month at the net asset value plus any front-end sales charge, if applicable,
next determined on the day the order is effected. To take advantage of the PIP,
complete the PIP authorization form included with your account application or
contact your broker-dealer or other financial organization.
PIP lets you take advantage of "dollar cost averaging", a long-term investment
technique designed to help investors reduce their average cost per share over
time. Instead of trying to time the market, you can invest a fixed dollar
amount each month. So, you buy fewer Portfolio shares when prices are high and
more when prices are low. Because dollar cost averaging involves regular
investing over time, regardless of share price, it may not be appropriate for
all investors.
In addition, dollar cost averaging does not guarantee a profit or protect
against loss in a steadily declining market. To be effective, dollar cost
averaging usually should be followed on a sustained, consistent basis. Even
then, however, there can be no guarantee of the success of this technique, and
it will not prevent a loss if an investor ultimately redeems his or her shares
at a price that is lower than the original purchase price.
Exchanges
The exchange privilege enables you to exchange Investor A Shares of one
Portfolio for Investor A Shares (or in certain limited circumstances described
in the SAI, Trust or Institutional Shares) of another Portfolio and to exchange
Investor B Shares of one Portfolio for Investor B Shares of another Portfolio.
Just sign up for the exchange privilege on your account application and contact
your broker-dealer or other financial organization when you want to exchange
shares. You also may exchange shares by telephoning the Fund directly (call 1-
800-452-2724) if you have elected this privilege on your account application.
The exchange privilege may be exercised only in those states where the class of
shares of the Portfolio being acquired may be legally sold.
When exchanging Investor A Shares of a Portfolio that has no sales charge or a
lower sales charge for Investor A Shares of a Portfolio with a higher sales
charge, you will pay the difference.
You may exchange Investor B Shares without paying a CDSC on the exchange. The
holding period of the shares originally held and redeemed will be added to the
holding period of the new shares acquired through the exchange.
Shares of the Portfolios also may be exchanged for shares of corresponding
classes of the Firstar Funds and the Firstar Stellar Funds. Please read the
prospectuses for those Funds before investing.
28
<PAGE>
Your Account Investor Programs
ConvertiFund
This program (which was formerly known as the Automatic Exchange Program) lets
you automatically exchange shares of one Portfolio for shares of another
Portfolio on a regular basis, as long as the shares are of the same class.
Because you're making regular purchases, ConvertiFund enables you to take
advantage of dollar cost averaging. (See "Periodic Investment Plan" above.)
To participate, you must make a minimum initial purchase of $5,000 and maintain
a minimum account balance of $1,000. In addition, you must complete the
authorization form included with your account application or available from
your broker-dealer or other financial organization. In order to change
instructions with respect to ConvertiFund or to discontinue the program, you
must send written instructions to your broker-dealer or other financial
organization or to the Fund.
Systematic Withdrawal Plan
If the net asset value of your account equals $10,000 or more, you may take
advantage of the Fund's Systematic Withdrawal Plan (SWP). With the SWP (which
was formerly known as the Automatic Withdrawal Plan), you can have monthly,
quarterly, semi-annual or annual redemptions of at least $50 from your
Portfolio account sent to you via check or to your bank account electronically
on the day of the month designated by you (or the next business day after the
designated day) of the applicable month of withdrawal. No CDSC will be charged
on withdrawals of Investor B Shares made through the SWP that don't annually
exceed 12% of your account's value.
To participate in the SWP, complete the SWP application included with your
account application or contact your broker-dealer or other financial
organization. A signature guarantee will be required. You may terminate your
participation in the SWP upon 30 days' notice to your broker-dealer or other
financial organization or to the Fund.
Payroll Deduction Program
You can make regular investments from your paycheck. The minimum investment is
$25 per pay period. Call the Fund at 1-800-452-2724 for an application and
further information. The Fund may terminate the program at any time.
Internet Transactions
You generally can request purchases, exchanges and redemptions of Investor A
Shares and Investor B Shares of the Portfolios on-line via the Internet after
an account is opened. Redemption requests of up to $25,000 will be accepted
through the Internet. Payment for shares purchased on-line must be made by
electronic funds transfer from your banking institution. To authorize this
service, call the Fund's transfer agent at 1-800-452-2724.
The Fund and its agents will not be responsible for any losses resulting from
unauthorized on-line transactions when procedures are followed which are
designed to confirm that the on-line transaction request is genuine. Statements
of accounts shall be conclusive if not objected to in writing within 10 days
after transmitted by mail. During periods of significant economic or market
change, it may be difficult to reach the Fund on-line. If this happens, you may
initiate transactions in your share accounts by mail or otherwise as described
above.
29
<PAGE>
Your Account General Transaction Policies
The Fund reserves the right to:
. Vary or waive any minimum investment requirement.
. Refuse any order to buy shares.
. Reject any exchange request.
. Change or cancel the procedures for selling or exchanging shares by telephone
at any time.
. Redeem all shares in your account if your balance falls below $500. If,
within 60 days of the Fund's written request, you have not increased your
account balance, you may be required to redeem your shares. The Fund will not
require you to redeem shares if the value of your account drops below $500
due to fluctuations in net asset value.
. Send redemption proceeds within seven days after receiving a request, if an
earlier payment could adversely affect a Portfolio.
. Modify or terminate the Periodic Investment Plan, ConvertiFund and Systematic
Withdrawal Plan programs at any time.
. Modify or terminate the exchange privilege after 60 days' written notice to
shareholders.
. Make a "redemption in kind." Under abnormal conditions that may make payment
in cash unwise, the Fund may offer partial or complete payment in portfolio
securities rather than cash at such securities' then-market-value equal to
the redemption price. In such cases, you may incur brokerage costs in
converting these securities to cash.
If you elect telephone privileges on the account application or in a letter to
the Fund, you may be responsible for any fraudulent telephone orders as long as
the Fund has taken reasonable precautions to verify your identity.
Also, your broker-dealer or other financial organization may establish policies
that differ from those of the Fund. For example, the organization may charge
transaction fees, set higher minimum investments, or impose certain limitations
on purchasing or redeeming shares in addition to those identified in this
prospectus. Contact your broker-dealer or other financial organization for
details.
30
<PAGE>
[GRAPHIC] Distributions and Taxes
Dividends and Distributions
The Portfolios pay their shareholders dividends from the Portfolios' respective
net investment income and distribute any net capital gains the Portfolios have
realized.
Dividends are declared daily and paid monthly. Capital gains, if any, are
distributed once a year. It's expected that each Portfolio's annual
distributions will be primarily income dividends.
Dividends on each share class of the Portfolios are determined in the same
manner and are paid in the same amount. However, each share class bears all
expenses associated with that particular class. So, because Investor B Shares
have higher distribution and service fees than Investor A Shares, the dividends
paid to Investor B shareholders will be lower than those paid to Investor A
shareholders.
All of your dividends and capital gains distributions with respect to a
particular Portfolio will be reinvested in additional shares of the same class
unless you instruct otherwise on your account application or have redeemed all
shares you held in the Portfolio. In such cases, dividends and distributions
will be paid in cash.
31
<PAGE>
Distributions and Taxes
- --------------------------------------------------------------------------------
You will be advised at least annually regarding the federal income tax
treatment and, if you own shares of the Missouri Tax-Exempt Bond Portfolio, the
Missouri state income tax treatment, of dividends and distributions made to
you. You should save your account statements because they contain information
you will need to calculate your capital gains or losses, if any, upon your
ultimate sale or exchange of shares in the Portfolios.
- --------------------------------------------------------------------------------
Taxation
As with any investment, you should consider the tax implications of an
investment in the Portfolios. The following is only a brief summary of some of
the important tax considerations generally affecting the Portfolios and their
shareholders under current law, which may be subject to change in the future.
Consult your tax adviser with specific reference to your own tax situation.
. It is expected that the Portfolios will distribute dividends derived from
interest earned on exempt securities, and these "exempt-interest dividends"
will be exempt income for shareholders for federal income tax purposes.
However, the Portfolios are likely from time to time to make taxable
distributions. Distributions derived from net long-term capital gains will
generally be taxable to you as long-term capital gains. Dividends derived
from short-term capital gains and income attributable to "market discount" on
bonds acquired by the Portfolios will be taxable to you as ordinary income.
. You should note that if you purchase shares just prior to a capital gain
distribution, the purchase price will reflect the amount of the upcoming
distribution, but you will be taxed on the entire amount of the distribution
received, even though, as an economic matter, the distribution simply
constitutes a return of capital. This is known as "buying into a dividend."
. You will recognize taxable gain or loss on a sale, exchange or redemption of
your shares, including an exchange for shares of another Portfolio, based on
the difference between your tax basis in the shares and the amount you
receive for them. Generally, this gain or loss will be long-term or short-
term depending on whether your holding period for the shares exceeds 12
months, except that any loss realized on shares held for six months or less
will be treated as a long-term capital loss to the extent that any long-term
capital gain distributions were received with respect to the shares. If you
receive an exempt-interest dividend with respect to any share and the share
is held by you for six months or less, any loss on the sale or exchange of
the share will be disallowed to the extent of such dividend amount.
. You should note that a portion of the exempt-interest dividends paid by each
Portfolio may constitute an item of tax preference for purposes of
determining federal alternative minimum tax liability. Exempt-interest
dividends will also be considered along with other adjusted gross income in
determining whether any Social Security or railroad retirement payments
received by you are subject to federal income taxes.
. The Missouri Tax-Exempt Bond Portfolio anticipates that the dividends that it
pays that are attributable to interest earned by the Portfolio will also be
exempt from Missouri state income taxes. Dividends paid by the Short-
Intermediate Municipal and National Municipal Bond Portfolios that are
attributable to interest earned by the Portfolios may be taxable to
shareholders under state or local law.
32
<PAGE>
Distributions and Taxes
Shareholders may also be subject to state and local taxes on distributions and
redemptions. State income taxes may not apply however, to the portions of each
Portfolio's distributions, if any, that are attributable to interest on U.S.
Government securities or interest on securities of a particular state or
localities within the state.
The foregoing is only a summary of certain tax considerations under current
law, which may be subject to change in the future. Shareholders who are
nonresident aliens, foreign trusts or estates, or foreign corporations or
partnerships, may be subject to different U.S. federal income tax treatment.
For more information regarding the taxation of the Portfolios, consult the SAI
under the heading "Additional Information Concerning Taxes." You should also
consult your tax adviser for further information regarding federal, state,
local and/or foreign tax consequences relevant to your specific situation.
33
<PAGE>
[GRAPHIC] Management of the Fund
The Adviser
FIRMCO serves as the investment adviser to each Portfolio as a result of
FIRMCO's acquisition of all of the assets and liabilities of the Portfolio's
former adviser, Mississippi Valley Advisors Inc. ("MVA"), on March 1, 2000.
FIRMCO, with its main office at Firstar Center, 777 East Wisconsin Avenue,
Suite 800, Milwaukee, Wisconsin 53202, has been providing advisory services
since 1986. As of December 31, 1999, FIRMCO had approximately $35.3 billion in
assets under management.
FIRMCO, subject to the general supervision of the Fund's Board of Directors, is
responsible for the day-to-day management of the Portfolios in accordance with
each Portfolio's respective investment objective and policies. This includes
making investment decisions, buying and selling securities and overseeing the
administration and recordkeeping for each Portfolio.
In exchange for these services, FIRMCO receives an investment advisory fee,
which is calculated daily and paid monthly, according to the average daily net
assets of each Portfolio. For the fiscal year ended November 30, 1999, the
Portfolios paid MVA advisory fees as follows:
<TABLE>
<CAPTION>
Investment advisory fees
Portfolio as a % of net assets
-------------------------
<S> <C>
Short-Intermediate Municipal
Portfolio .55%
-------------------------
Missouri Tax-Exempt Bond
Portfolio .45%
-------------------------
National Municipal Bond
Portfolio .55%
- -------------------------------------------------------
</TABLE>
34
<PAGE>
[GRAPHIC] Financial Highlights
Introduction
The financial highlights tables presented below are intended to help you
understand the financial performance of each Portfolio's Investor A Shares
and/or Investor B Shares for the past five years (or, if shorter, the period
since the Portfolio began operations or the particular shares were first
offered). Certain information reflects financial results for a single Investor
A Share or Investor B Share in each Portfolio. The total returns in the tables
represent the rate that an investor would have earned (or lost) on an
investment in either Investor A Shares or Investor B Shares, assuming
reinvestment of all dividends and distributions. This information has been
audited by KPMG LLP, independent auditors, whose report, along with the
Portfolios' financial statements, are included in the Fund's Annual Report to
Shareholders, and are incorporated by reference into the SAI.
35
<PAGE>
Financial Highlights Short-Intermediate Municipal Portfolio
<TABLE>
<CAPTION>
Investor A Shares
(For a Share outstanding throughout each
period)
For the years ended July 10, 1995 to
November 30, November 30,
1999 1998 1997 1996 1995(a)
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $10.26 $10.11 $10.08 $10.08 $10.00
-----------------------------------------------------------------------------
Investment Activities
Net investment income 0.35 0.35 0.37 0.40 --
Net realized and
unrealized gains
(losses) from
investments (0.30) 0.15 0.03 -- 0.08
-----------------------------------------------------------------------------
Total from Investment
Activities 0.05 0.50 0.40 0.40 0.08
-----------------------------------------------------------------------------
Distributions
Net investment income (0.35) (0.35) (0.37) (0.40) --
Net realized gains -- (e) -- -- -- --
-----------------------------------------------------------------------------
Total Distributions (0.35) (0.35) (0.37) (0.40) --
-----------------------------------------------------------------------------
Net Asset Value, End of
Period $ 9.96 $10.26 $10.11 $10.08 $10.08
-----------------------------------------------------------------------------
Total Return (excludes
sales charge) 0.41% 5.16% 4.12% 4.02% 0.80%(b)
Ratios/Supplementary
Data:
Net Assets at end of
period (000) $ 20 $ 32 $ 16 $ 51 $ -- (c)
Ratio of expenses to
average net assets 1.02% 0.89% 0.62% 0.56% -- (d)
Ratio of net investment
income to average net
assets 3.43% 3.54% 3.78% 3.83% -- (d)
Ratio of expenses to
average net assets* 1.19% 1.21% 1.32% 1.26% -- (d)
Portfolio turnover** -- 18.58% -- -- --
</TABLE>
- --------------------------------------------------------------------------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Only one Investor A Share, worth $10.08, was outstanding as of November
30, 1995.
(d) Annualized.
(e) Distribution per share from net realized gain was less than $0.005.
36
<PAGE>
Financial Highlights Missouri Tax-Exempt Bond Portfolio
<TABLE>
<CAPTION>
Investor A Shares
(For a Share outstanding throughout each
period)
For the Six For the
For the years ended November Months Ended year ended
30, November 30, May 31,
1999 1998 1997 1996 1995(d) 1995(a)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 12.08 $ 11.87 $ 11.69 $ 11.74 $ 11.52 $ 11.13
-----------------------------------------------------------------------------------------
Investment Activities
Net investment income 0.50 0.52 0.53 0.55 0.27 0.55
Net realized and
unrealized gains
(losses) from
investments (0.74) 0.21 0.18 (0.05) 0.22 0.40
-----------------------------------------------------------------------------------------
Total from Investment
Activities (0.24) 0.73 0.71 0.50 0.49 0.95
-----------------------------------------------------------------------------------------
Distributions
Net investment income (0.51) (0.52) (0.53) (0.55) (0.27) (0.55)
Net realized gains (0.02) -- -- -- -- (0.01)
-----------------------------------------------------------------------------------------
Total Distributions (0.53) (0.52) (0.53) (0.55) (0.27) (0.56)
-----------------------------------------------------------------------------------------
Net Asset Value, End of
Period $ 11.31 $ 12.08 $ 11.87 $ 11.69 $ 11.74 $ 11.52
-----------------------------------------------------------------------------------------
Total Return (excludes
sales charge) (2.09)% 6.31% 6.27% 4.41% 4.32%(b) 8.91%
Ratios/Supplementary
Data:
Net Assets at end of
period (000) $21,242 $23,611 $23,722 $25,144 $24,726 $24,318
Ratio of expenses to
average net assets 0.86% 0.86% 0.86% 0.85% 0.95%(c) 0.84%
Ratio of net investment
income to average net
assets 4.30% 4.38% 4.57% 4.75% 4.64%(c) 5.02%
Ratio of expenses to
average net assets* 1.07% 1.06% 1.06% 1.05% 1.18%(c) 1.18%
Portfolio turnover** 0.76% 6.14% 3.50% 3.66% 1.55% --
</TABLE>
- --------------------------------------------------------------------------------
* During the period, certain fees were voluntary reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) On September 27, 1994, the Portfolio redesignated the Investor Shares as
"Investor A" Shares, and authorized the issuance of a series of shares
designated as "Investor B" Shares.
(b) Not annualized.
(c) Annualized.
(d) Upon reorganizing as a Portfolio of The ARCH Fund, Inc. on October 2,
1995, the Missouri Tax-Exempt Bond Portfolio changed its fiscal year-end
from May 31 to November 30.
37
<PAGE>
Financial Highlights Missouri Tax-Exempt Bond Portfolio
<TABLE>
<CAPTION>
Investor B Shares
(For a Share outstanding throughout each period)
For the
Six Months March 1,
Ended 1995 to
For year ended November 30, November 30, May 31,
1999 1998 1997 1996 1995(e) 1995(a)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $12.07 $11.86 $11.68 $11.74 $11.52 $11.19
-------------------------------------------------------------------------------------
Investment Activities
Net Investment Income 0.41 0.43 0.44 0.45 0.22 0.11
Net realized and
unrealized gains
(losses) from
investments (0.73) 0.21 0.18 (0.06) 0.22 0.33
-------------------------------------------------------------------------------------
Total from Investment
Activities (0.32) 0.64 0.62 0.39 0.44 0.44
-------------------------------------------------------------------------------------
Distributions
Net investment income (0.42) (0.43) (0.44) (0.45) (0.22) (0.11)
Net realized gains (0.02) -- -- -- -- --
-------------------------------------------------------------------------------------
Total Distributions (0.44) (0.43) (0.44) (0.45) (0.22) (0.11)
-------------------------------------------------------------------------------------
Net Asset Value, End of
Period $11.31 $12.07 $11.86 $11.68 $11.74 $11.52
-------------------------------------------------------------------------------------
Total Return (excludes
redemption charges) (2.79)% 5.47% 5.43% 3.48% 3.88%(b) 8.61%(c)
Ratios/Supplementary
Data:
Net Assets at end of
period (000) $3,519 $2,496 $1,398 $ 675 $ 433 $ 94
Ratio of expenses to
average net assets 1.66% 1.66% 1.66% 1.65% 1.77%(d) 1.76(d)
Ratio of net investment
income to average net
assets 3.51% 3.57% 3.76% 3.96% 3.82%(d) 4.00%(d)
Ratio of expenses to
average net assets* 1.77% 1.76% 1.76% 1.75% 1.87%(d) 1.88%(d)
Portfolio turnover
rate** 0.76% 6.14% 3.50% 3.66% 1.55% --
</TABLE>
- --------------------------------------------------------------------------------
* During the period, certain fees were voluntary reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) On September 27, 1994, the Portfolio redesignated Investor Shares as
"Investor A" shares and authorized the issuance of a third series of
shares designated as "Investor B" shares. These financial highlights of
Investor B shares cover the period from March 1, 1995 (commencement of
operations) through May 31, 1995.
(b) Not annualized.
(c) Represents total return for the Investor A Shares from June 1, 1994 to
February 28, 1995, plus the total return for the Investor B Shares for
the period from March 1, 1995 to May 31, 1995.
(d) Annualized.
(e) Upon reorganizing as a Portfolio of The ARCH Fund, Inc., the Missouri
Tax-Exempt Bond Portfolio changed its fiscal year-end from May 31 to
November 30.
38
<PAGE>
Financial Highlights National Municipal Bond Portfolio
<TABLE>
<CAPTION>
Investor A Shares
(For a Share outstanding throughout each period)
November 18,
1996, to
For the years ended November 30, November 30,
1999 1998 1997 1996(a)
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 10.22 $ 10.27 $ 10.05 $ 10.00
------------------------------------------------------------------------------------------
Investment Activities
Net Investment Income 0.41 0.44 0.52 0.02
Net realized and
unrealized gains
(losses) from
investments (0.69) 0.30 0.22 0.05
------------------------------------------------------------------------------------------
Total from Investment
Activities (0.28) 0.74 0.74 0.07
------------------------------------------------------------------------------------------
Distributions
Net investment income (0.40) (0.44) (0.52) (0.02)
In excess of net
investment income (0.01) -- -- --
Net realized gains (0.09) (0.35) -- --
In excess of net
realized gains (0.01) -- -- --
------------------------------------------------------------------------------------------
Total Distributions (0.51) (0.79) (0.52) (0.02)
------------------------------------------------------------------------------------------
Net Asset Value, End of
Period $ 9.43 $ 10.22 $ 10.27 $ 10.05
------------------------------------------------------------------------------------------
Total Return (excludes
sales charge) (2.87)%+ 7.56% 7.61% 0.73%(b)
Ratios/Supplementary
Data:
Net Assets at end of
period (000) $ 1,582 $ 1,162 $ 717 $ 1
Ratio of expenses to
average net assets 0.96% 0.85% 0.35% 0.37%(c)
Ratio of net investment
income to average net
assets 4.14% 4.18% 4.71% 9.08%(c)
Ratio of expenses to
average net assets* 1.16% 1.16% 1.17% 1.07%(c)
Portfolio turnover** -- 18.30% 83.94% --
- -------------------------------------------------------------------------------------------
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
+ Incurred class specific gains. The total return excluding this would have
been (3.14%).
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
39
<PAGE>
Financial Highlights National Municipal Bond Portfolio
<TABLE>
<CAPTION>
Investor B Shares
(For a Share outstanding throughout
each period)
For the years ended November 18, 1996
November 30, to November 30,
1999 1998 1997 1996(a)
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $10.24 $10.29 $10.05 $10.00
-------------------------------------------------------------------------------
Investment Activities
Net Investment Income 0.33 0.36 0.44 0.02
Net realized and unrealized gains
(losses) from investments (0.72) 0.30 0.24 0.05
-------------------------------------------------------------------------------
Total from Investment Activities (0.39) 0.66 0.68 0.07
-------------------------------------------------------------------------------
Distributions
Net investment income (0.33) (0.36) (0.44) (0.02)
In excess of net investment
income (0.01) -- -- --
Net realized gains (0.09) (0.35) -- --
In excess of net realized gains (0.01) -- -- --
-------------------------------------------------------------------------------
Total Distributions (0.44) (0.71) (0.44) (0.02)
-------------------------------------------------------------------------------
Net Asset Value, End of Period $ 9.41 $10.24 $10.29 $10.05
-------------------------------------------------------------------------------
Total Return (excludes
redemption charge) (4.03)% 6.69% 7.01% 0.70%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000) $ 747 $ 503 $ 408 $ 1
Ratio of expenses to average net
assets 1.76% 1.56% 1.17% 1.10%(c)
Ratio of net investment income to
average net assets 3.34% 3.51% 4.08% 8.35%(c)
Ratio of expenses to average net
assets* 1.86% 1.86% 1.89% 1.80%(c)
Portfolio turnover** -- 18.30% 83.94% --
</TABLE>
- --------------------------------------------------------------------------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
40
<PAGE>
Where to find more information
You'll find more information about the Portfolios in the following documents:
Annual and semi-annual reports
The Fund's annual and semi-annual reports contain information about each
Portfolio and a discussion about the market conditions and investment strategies
that had a significant effect on each Portfolio's performance during the last
fiscal year.
Statement of Additional Information (SAI)
The SAI contains detailed information about the Portfolios and their policies.
By law, it's incorporated by reference into (considered to be part of) this
prospectus.
You can get a free copy of these documents, request other information about the
Portfolios and make shareholder inquiries by calling the Fund at 1-800-452-2724
or by writing to:
Mercantile Mutual Funds, Inc.
c/o Firstar Mutual Fund Services, LLC
615 E. Michigan Street
P.O. Box 3011
Milwaukee, WI 53201-3011
If you buy your shares through a broker-dealer or other financial institution,
you may contact your institution for more information.
You can write to the Securities and Exchange Commission (SEC) Public Reference
Section and ask them to mail you information about the Portfolios, including the
SAI. They'll charge you a fee for this service. You can also visit the SEC
Public Reference Room and copy the documents while you're there. For more
information about the operation of the Public Reference Room, call the SEC.
Public Reference Section of the SEC
Washington, D.C. 20549-0102
1-202-942-8090
Reports and other information about the Portfolios are also available on the
EDGAR database on the SEC's website at http://www.sec.gov. Copies of this
-------------------
information may also be obtained, after paying a duplicating fee, by electronic
request to the SEC's e-mail address at [email protected].
-------------------
The Fund's Investment Company Act File No. is 811-3567
Form #MFINVTFB-00
<PAGE>
MERCANTILE MUTUAL FUNDS
INVESTOR SHARES
[PHOTO]
Prospectus
March 31, 2000
STOCK PORTFOLIOS
Balanced Portfolio
Equity Income Portfolio
Equity Index Portfolio
Growth & Income Equity Portfolio
Growth Equity Portfolio
Small Cap Equity Portfolio
Small Cap Equity Index Portfolio
International Equity Portfolio
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved these Securities or passed upon the adequacy of this
prospectus. Any representation to the contrary is a criminal offense.
[LOGO OF FIRSTAR]
<PAGE>
Contents
Introduction
- --------------------------------------------------------------
3 Overview
Risk/Return Summary
- --------------------------------------------------------------
4 Balanced Portfolio
9 Equity Income Portfolio
13 Equity Index Portfolio
18 Growth & Income Equity Portfolio
22 Growth Equity Portfolio
26 Small Cap Equity Portfolio
31 Small Cap Equity Index Portfolio
36 International Equity Portfolio
41 Additional Information on Risk
Your Account
- --------------------------------------------------------------
42 Distribution Arrangements/Sales Charges
47 Explanation of Sales Price
48 How to Buy Shares
49 How to Sell Shares
50 Investor Programs
52 General Transaction Policies
Distributions and Taxes
- --------------------------------------------------------------
53 Dividends and Distributions
54 Taxation
Management of the Fund
- --------------------------------------------------------------
56 The Adviser
56 The Sub-Adviser
Financial Highlights
- --------------------------------------------------------------
57 Introduction
58 Balanced Portfolio
60 Equity Income Portfolio
62 Equity Index Portfolio
63 Growth & Income Equity Portfolio
65 Growth Equity Portfolio
67 Small Cap Equity Portfolio
69 Small Cap Equity Index Portfolio
70 International Equity Portfolio
2
<PAGE>
Introduction Overview
This prospectus describes the Mercantile Stock Portfolios,
eight investment portfolios offered by Mercantile Mutual
Funds, Inc. (the "Fund"). On the following pages, you will
find important information about each Portfolio, including:
. A description of the Portfolio's investment objective
(sometimes referred to as its goal);
. The Portfolio's principal investment strategies (the steps
it takes to try to meet its goal);
. The principal risks associated with the Portfolio (factors
that may prevent it from meeting its goal);
. The Portfolio's past performance (how successful it's been
in meeting its goal); and
. The fees and expenses (including sales charges) you pay as
an investor in the Portfolio.
Who may want The Mercantile Stock Portfolios may be appropriate for
to invest in investors who seek capital growth over the long term and are
the comfortable with the risks of stock markets. The Portfolios
Mercantile may not be appropriate for investors who are investing for
Stock short-term goals or are mainly seeking current income.
Portfolios?
Before investing in a Portfolio, you should carefully
consider:
. Your own investment goals
. The amount of time you are willing to leave your money
invested
. How much risk you are willing to take.
The Firstar Investment Research & Management Company, LLC which
Investment is referred to in this prospectus as "FIRMCO" or the
Adviser "Adviser," serves as the investment adviser to each
Portfolio. FIRMCO is a subsidiary of Firstar Corporation, a
banking and financial services organization.
An investment in the Portfolios is not a deposit of Firstar
Bank, N.A. and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency.
You could lose money by investing in the Portfolios.
3
<PAGE>
Risk/Return Summary Balanced Portfolio
- --------------------------------------------------------------------------------
Total return consists of net income (dividend and/or interest income from
Portfolio securities, less expenses of the Portfolio) and capital gains and
losses, both realized and unrealized, from Portfolio securities.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Investment grade bonds are those of medium credit quality or better as
determined by a national rating agency, such as Standard & Poor's Ratings Group
(bonds rated BBB or better) and Moody's Investors Service, Inc. (bonds rated
Baa or higher). The higher the credit rating, the less likely it is that the
bond issuer will default on its principal and interest payments.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is to maximize total return through a
combination of growth of capital and current income consistent with the
preservation of capital.
Principal Investment Strategies
The Portfolio invests in a combination of equity securities (such as stocks),
fixed-income securities (such as bonds) and money market instruments in
weightings the Adviser believes will offer attractive total returns over time.
In making asset allocation decisions, the Adviser evaluates forecasts for
inflation, interest rates and long-term corporate earnings growth. The Adviser
then examines the potential effect of these factors on each asset group over a
one- to three-year time period using its own dynamic computer models. These
models show the statistical impact of the Adviser's economic outlook upon the
future returns of each asset group. The Adviser periodically will increase or
decrease the Portfolio's allocations to equities and fixed-income securities
based on which class appears relatively more attractive than the other. For
example, if the Adviser expects more rapid economic growth leading to better
corporate earnings, it will increase the Portfolio's holdings of equity
securities and reduce its holdings of fixed-income securities and money market
instruments.
In selecting equity securities, the Adviser considers historical and projected
earnings, the price/earnings relationship and company growth and asset value.
In selecting fixed-income securities, the Adviser seeks those issues
representing the best value among various sectors, and also considers credit
quality, prevailing interest rates and liquidity.
Under normal market conditions, the Portfolio invests at least 25% of its total
assets in fixed-income securities and no more than 75% of its total assets in
equity securities. The actual percentages will vary from time to time based on
the Adviser's economic and market outlooks. The Portfolio's equity securities
will consist mainly of common stocks of companies with large market
capitalizations, and its fixed-income securities will consist mainly of
investment grade bonds, including U.S. Government securities. Occasionally, the
rating of a fixed-income security held by the Portfolio may be downgraded to
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 Portfolio may emphasize, from time to time, particular companies or market
sectors, such as technology, in attempting to achieve its investment objective.
4
<PAGE>
Risk/Return Summary Balanced Portfolio
- --------------------------------------------------------------------------------
Portfolio Manager
Peter Merzian, a Senior Associate of FIRMCO, is responsible for the day-to-day
management of the Portfolio. He has been with FIRMCO and its affiliates since
1993 and has managed the Portfolio since May 1996. He also manages the Fund's
three municipal bond portfolios.
- --------------------------------------------------------------------------------
Principal Risk Considerations
The Portfolio invests in stocks and other equity securities, which may decline
in value over short or extended periods of time. Equity markets tend to be
cyclical; there are times when stock prices generally increase, and other times
when they generally decrease. This could cause the value of your investment in
the Portfolio to fluctuate.
The Portfolio also invests in fixed-income securities, which lose value when
interest rates increase (but increase in value when interest rates decline).
Longer-term fixed-income securities are more susceptible to these fluctuations
in interest rates than short-term fixed-income securities.
To the extent that the Portfolio emphasizes particular companies or market
sectors, such as technology, it will be especially susceptible to the risks
associated with investments in those companies or market sectors. Stocks of
technology companies may be subject to greater price volatility than stocks of
companies in other sectors. Technology companies may produce or use products or
services that prove commercially unsuccessful, become obsolete or become
adversely impacted by government regulation. Technology stocks may experience
significant price movements caused by disproportionate investor optimism or
pessimism.
Changes in interest rates may cause certain fixed-income securities, such as
callable securities and mortgage-backed securities, to be paid off much sooner
or later than expected. In the event that a security is paid off sooner than
expected because of a decline in interest rates, the Portfolio may be unable to
recoup all of its initial investment and will also suffer from having to
reinvest in lower-yielding securities. In the event of a later than expected
payment because of a rise in interest rates, the value of the obligation will
decrease, and the Portfolio may suffer from the inability to invest in higher-
yielding securities.
Fixed-income securities are subject to other risks, including the risk that the
issuer will be unable to make payments of principal and interest.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolio and how they may advance the Portfolio's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
5
<PAGE>
Risk/Return Summary Balanced Portfolio
Return History
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Investor A Shares has varied from year to year. The table shows how the
Portfolio's average annual returns for one year, five years and since inception
compare to those of broad-based market indexes. Both the bar chart and table
assume reinvestment of all dividends and distributions. The Portfolio's past
performance does not necessarily indicate how it will perform in the future.
- --------------------------------------------------------------------------------
Know your index
The S&P 500 Index is an unmanaged index comprised of 500 widely held common
stocks listed on the New York Stock Exchange, the American Stock Exchange and
NASDAQ.
The Lehman Brothers Aggregate Bond Index is an unmanaged index made up of
Lehman Brothers' Government/Corporate Bond Index, its Mortgage Backed
Securities Index and its Asset Backed Securities Index.
- --------------------------------------------------------------------------------
Investor A Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1994 -2.11%
1995 26.30%
1996 11.93%
1997 18.02%
1998 11.34%
1999 7.76%
The returns for Investor B Shares differed from the returns shown in the bar
chart because the two classes bear different expenses. The bar chart does not
reflect any sales charges on purchases of the Portfolio's Investor A Shares.
If sales charges were included, returns would be lower than those shown.
<TABLE>
<S> <C>
Best quarter: 11.01% for the quarter ending
December 31, 1998
Worst quarter: -7.40% for the quarter ending
September 30, 1998
</TABLE>
-------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended
December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year 5 Years Inception
-----------------------------------------------
<S> <C> <C> <C>
Investor A Shares
(with 5.50% sales charge) 1.85% 13.59% 10.29%/1/
-----------------------------------------------
Investor B Shares
(with applicable contingent deferred sales charge) 2.67% N/A 13.13%/1/
-----------------------------------------------
S&P 500 Index 21.04% 28.56% 21.63%/2/
27.94%/3/
-----------------------------------------------
Lehman Brothers Aggregate Bond Index -0.82% 7.73% 6.03%/2/
7.04%/3/
- -------------------------------------------------------------------------------
</TABLE>
/1/April 1, 1993 for Investor A Shares; March 6, 1995 (date of initial public
investment) for Investor B Shares.
/2/March 31, 1993.
/3/February 28, 1995.
6
<PAGE>
Risk/Return Summary Balanced Portfolio
The table on this page shows the fees and expenses that you pay if you buy and
hold Investor A Shares or Investor B Shares of the Balanced Portfolio.
Fees and Expenses
<TABLE>
<CAPTION>
Shareholder Fees Investor A Investor B
(fees you pay directly) Shares Shares
<S> <C> <C>
Maximum sales charge (load) to buy shares, shown as a
% of the offering price 5.50%/1/ None
-----------------------------------------------------------------------------
Maximum deferred sales charge (load) shown as a % of
the offering price or sale price, whichever is less None 5.00%/2/
</TABLE>
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses
(expenses that are deducted from the Investor A Investor B
Portfolio's assets) Shares Shares
<S> <C> <C>
Management Fees .75% .75%
-----------------------------------------------------------------
Distribution (12b-1) and Service Fees .30% 1.00%
-----------------------------------------------------------------
Other Expenses .33%/3/ .33%/3/
-----------------------------------------------------------------
Total Annual Portfolio Operating Expenses 1.38%/3/ 2.08%/3/
- ------------------------------------------------------------------
</TABLE>
/1/Reduced sales charges may be available. See "Distribution
Arrangements/Sales Charges" below.
/2/This amount applies if you sell your shares in the first year after
purchase and gradually declines until it is eliminated after six years.
After six years, your Investor B Shares will automatically convert to
Investor A Shares. See "Distribution Arrangements/Sales Charges" below.
/3/Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Investor A Shares and Investor B Shares for the current fiscal
year are expected to be less than the amounts shown above because certain of
the Portfolio's service providers are voluntarily waiving a portion of their
fees and/or reimbursing the Portfolio for certain other expenses. These fee
waivers and/or reimbursements are being made in order to keep the annual
fees and expenses for the Portfolio's Investor A Shares and Investor B
Shares at certain levels. Other Expenses and Total Annual Portfolio
Operating Expenses, after taking these fee waivers and expense
reimbursements into account, are expected to be .23% and 1.28%,
respectively, for Investor A Shares and .23% and 1.98%, respectively, for
Investor B Shares. These fee waivers and expense reimbursements may be
revised or cancelled at any time.
7
<PAGE>
Risk/Return Summary Balanced Portfolio
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year, the
Portfolio's operating expenses remain the same and your Investor B Shares
automatically convert to Investor A Shares after six years. Although your
actual costs may be higher or lower, based on these assumptions your costs
would be:
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Investor A Shares $683 $963 $1,264 $2,116
------------------------------------------------------------------------------
Investor B Shares $711 $952 $1,319 $2,067
If you hold Investor B Shares, you would pay the
following expenses if you did not sell your shares: $211 $652 $1,119 $2,067
- -------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
Risk/Return Summary Equity Income Portfolio
- --------------------------------------------------------------------------------
Market capitalization is a common measure of the size of a company. It is the
market price of a share of the company's stock multiplied by the number of
outstanding shares.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Value stocks are those that appear to be underpriced based on valuation
measures, such as lower price-to-earnings and price-to-book value ratios.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Portfolio Manager
FIRMCO's Equity Committee is responsible for the day-to-day management of the
Portfolio. The Committee and its predecessor have managed the Portfolio since
1998.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is to seek to provide an above-average
level of income consistent with long-term capital appreciation.
Principal Investment Strategies
The Portfolio invests primarily in the common stocks of value companies with
large market capitalizations (generally, $5 billion or higher). In selecting
these stocks, the Adviser evaluates a number of quantitative factors, including
dividend yield, current and future earnings potential compared to stock prices
and total return potential. The Adviser also examines other measures of
valuation, including cash flow, asset value and book value.
Under normal market conditions, the Portfolio invests at least 65% of its total
assets in income-producing (dividend-paying) equity securities, primarily
common stocks. These stocks generally will be listed on a national stock
exchange or will be unlisted stocks with established over-the-counter markets.
Many such stocks may offer above-average dividend yields, with corresponding
above-average levels of income, in each case as compared to the S&P 500 Index.
The Portfolio may emphasize, from time to time, particular companies or market
sectors, such as technology, in attempting to achieve its investment objective.
Principal Risk Considerations
The Portfolio invests in stocks and other equity securities, which may decline
in value over short or extended periods of time. Equity markets tend to be
cyclical; there are times when stock prices generally increase, and other times
when they generally decrease. This could cause the value of your investment in
the Portfolio to fluctuate. In addition, the Portfolio is subject to the
additional risk that the value stocks it typically holds may not perform as
well as other types of stocks, such as growth stocks.
To the extent that the Portfolio emphasizes particular companies or market
sectors, such as technology, it will be especially susceptible to the risks
associated with investments in those companies or market sectors. Stocks of
technology companies may be subject to greater price volatility than stocks of
companies in other sectors. Technology companies may produce or use products or
services that prove commercially unsuccessful, become obsolete or become
adversely impacted by government regulation. Technology stocks may experience
significant price movements caused by disproportionate investor optimism or
pessimism.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolio and how they may advance the Portfolio's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
9
<PAGE>
Risk/Return Summary Equity Income Portfolio
Return History
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Investor A Shares has varied from year to year. The table shows how the
Portfolio's average annual returns for one year and since inception compare to
those of a broad-based market index. Both the bar chart and table assume
reinvestment of all dividends and distributions. The Portfolio's past
performance does not necessarily indicate how it will perform in the future.
- --------------------------------------------------------------------------------
Know your index
The Russell 1000 Value Index is an unmanaged index that measures the
performance of the stocks in the Russell 1000 Index with less than average
growth orientation. Companies in this Index generally have low price-to-book
and price-to-earnings ratios, higher dividend yields and lower forecasted
growth values. The Russell 1000 Index consists of the 1,000 largest U.S.
companies as ranked by total market capitalization.
- --------------------------------------------------------------------------------
Investor A Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1998 10.82%
1999 -2.98%
The returns for Investor B Shares differed from the returns shown in the bar
chart, because the two classes bear different expenses. The bar chart does not
reflect any sales charges on purchases of the Portfolio's Investor A Shares.
If sales charges were included, returns would be lower than those shown.
<TABLE>
<S> <C>
Best quarter: 14.36% for the quarter
ending June 30, 1997
Worst quarter: -8.77% for the quarter
ending September 30, 1998
</TABLE>
-------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year Inception
---------------------------------
<S> <C> <C>
Investor A Shares
(with 5.50% sales charge) -8.36% 7.66%/1/
---------------------------------
Investor B Shares
(with applicable contingent deferred sales charge) -7.85% 8.42%/1/
---------------------------------
Russell 1000 Value Index 7.35% 17.41%/2/
- ----------------------------------------------------------------------
</TABLE>
/1/February 27, 1997.
/2/February 28, 1997.
10
<PAGE>
Risk/Return Summary Equity Income Portfolio
The table on the right shows the fees and expenses that you pay if you buy and
hold Investor A Shares or Investor B Shares of the Equity Income Portfolio.
Fees and Expenses
<TABLE>
<CAPTION>
Shareholder Fees Investor A Investor B
(fees you pay directly) Shares Shares
<S> <C> <C>
Maximum sales charge (load) to buy shares, shown as a
% of the offering
price 5.50%/1/ None
-----------------------------------------------------------------------------
Maximum deferred sales charge (load) shown as a % of
the offering price or sale price, whichever is less None 5.00%/2/
</TABLE>
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses
(expenses that are deducted from the Investor A Investor B
Portfolio's assets) Shares Shares
<S> <C> <C>
Management Fees .75% .75%
-----------------------------------------------------------------
Distribution (12b-1) and Service Fees .30% 1.00%
-----------------------------------------------------------------
Other Expenses .33%/3/ .33%/3/
-----------------------------------------------------------------
Total Annual Portfolio Operating Expenses 1.38%/3/ 2.08%/3/
- ------------------------------------------------------------------
</TABLE>
/1/Reduced sales charges may be available. See "Distribution
Arrangements/Sales Charges" below.
/2/This amount applies if you sell your shares in the first year after
purchase and gradually declines until it is eliminated after six years.
After six years, your Investor B Shares will automatically convert to
Investor A Shares. See "Distribution Arrangements/Sales Charges" below.
/3/Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Investor A Shares and Investor B Shares for the current fiscal
year are expected to be less than the amounts shown above because certain of
the Portfolio's service providers are voluntarily waiving a portion of their
fees and/or reimbursing the Portfolio for certain other expenses. These fee
waivers and/or reimbursements are made in order to keep the annual fees and
expenses for the Portfolio's Investor A Shares and Investor B Shares at
certain levels. Other Expenses and Total Annual Portfolio Operating
Expenses, after taking these fee waivers and expense reimbursements into
account, are expected to be .23% and 1.28%, respectively, for Investor A
Shares, and .23% and 1.98%, respectively, for Investor B Shares. These fee
waivers and expense reimbursements may be revised or cancelled at any time.
11
<PAGE>
Risk/Return Summary Equity Income Portfolio
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year, the
Portfolio's operating expenses remain the same and your Investor B Shares
automatically convert to Investor A Shares after six years. Although your
actual costs may be higher or lower, based on these assumptions your costs
would be:
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Investor A Shares $683 $963 $1,264 $2,116
---------------------------------------------------------------------------
Investor B Shares $711 $952 $1,319 $2,067
If you hold Investor B Shares, you would pay the
following expenses if you did not sell
your shares: $211 $652 $1,119 $2,067
- ----------------------------------------------------------------------------
</TABLE>
12
<PAGE>
Risk/Return Summary Equity Index Portfolio
- --------------------------------------------------------------------------------
Indexing is a strategy whereby a Portfolio attempts to weight its securities to
match those of a broadly-based securities index in an attempt to approximate
the index's performance.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The S&P 500 Index is an unmanaged index comprised of 500 widely held common
stocks listed on the New York Stock Exchange, the American Stock Exchange, and
NASDAQ. The S&P 500 Index is heavily weighted with the stocks of large
capitalization companies. S&P does not endorse any stock in the S&P 500 Index
and is not a sponsor of, or affiliated in any way with, the Portfolio.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is to seek to provide investment results
that, before the deduction of operating expenses, approximate the price and
yield performance of U.S. publicly traded common stocks with large stock market
capitalizations, as represented by the Standard & Poor's 500 Index, which is
referred to in this prospectus as the "S&P 500 Index."
The Portfolio's investment objective can be changed by the Fund's Board of
Directors without shareholder approval. Shareholders will be given at least 30
days' written notice before any such change occurs.
Principal Investment Strategies
The Portfolio uses an "indexing" strategy through the use of computer models to
approximate the investment performance of the S&P 500 Index. The Portfolio
invests substantially all (at least 80%) of its assets in securities listed in
the S&P 500 Index and typically will hold all 500 stocks represented in the
Index. In general, each stock's percentage weighting in the Portfolio is based
on its weighting in the Index. When stocks are removed from or added to the
Index, those changes are reflected in the Portfolio. The Portfolio periodically
"rebalances" its holdings as dictated by changes in cash flow and in the
composition of the S&P 500 Index.
To the extent that, from time to time, the stocks in a particular market
sector, such as technology, comprise a significant proportion of the S&P 500
Index, those stocks will be represented in substantially the same proportion in
the Portfolio.
Under normal market conditions, it is expected that the quarterly performance
of the Portfolio, before expenses, will track the performance of the S&P 500
Index within a .95 correlation coefficient.
13
<PAGE>
Risk/Return Summary Equity Index Portfolio
Principal Risk Considerations
The Portfolio invests in stocks and other equity securities, which may decline
in value over short or extended periods of time. Equity markets tend to be
cyclical; there are times when stock prices generally increase, and other times
when they generally decrease. This could cause the value of your investment in
the Portfolio to fluctuate. In addition, the Portfolio is subject to the
additional risk that the large-capitalization stocks it typically holds may not
perform as well as other types of stocks, such as small-capitalization stocks.
To the extent that the stocks in a particular market sector, such as
technology, comprise a significant portion of the S&P 500 Index and,
correspondingly, of the Portfolio's holdings, the Portfolio will be especially
susceptible to the risks associated with investments in those market sectors.
Technology companies may produce or use products or services that prove
commercially unsuccessful, become obsolete or become adversely impacted by
government regulation. Technology stocks may experience significant price
movements caused by disproportionate investor optimism or pessimism.
There is the additional risk that the Portfolio's investment results may fail
to match those of the S&P 500 Index as a result of shareholder purchase and
redemption activity, transaction costs, expenses and other factors.
14
<PAGE>
Risk/Return Summary Equity Index Portfolio
Return History
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Investor A Shares has varied from year to year. The table shows how the
Portfolio's average annual returns for one year and since inception compare to
those of the S&P 500 Index. Both the bar chart and table assume reinvestment of
all dividends and distributions. The Portfolio's past performance does not
necessarily indicate how it will perform in the future.
Investor A Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1998 27.81%
1999 20.21%
The bar chart does not reflect any sales charges on purchases of the
Portfolio's Investor A Shares. If sales charges were included, the returns
would be lower than those shown.
<TABLE>
<S> <C>
Best quarter: 21.02% for the quarter
ending December 31, 1998
Worst quarter: -9.96% for the quarter
ending September 30, 1998
</TABLE>
-------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year Inception
---------
<S> <C> <C>
Investor A Shares
(with 5.50% sales charge) 13.61% 23.98%/1/
---------
S&P 500 Index 21.04% 27.35%/2/
- ----------------------------------------------
</TABLE>
/1/May 1, 1997.
/2/April 30, 1997.
15
<PAGE>
Risk/Return Summary Equity Index Portfolio
The table on this page shows the fees and expenses that you pay if you buy and
hold Investor A Shares of the Equity Index Portfolio.
Fees and Expenses
<TABLE>
<CAPTION>
Shareholder Fees
(fees you pay directly) Investor A Shares
<S> <C>
Maximum sales charge (load) to buy shares, shown as a % of
the offering price 5.50%/1/
------------------------------------------------------------------------------
Maximum deferred sales charge (load) shown as a % of the
offering price or
sale price, whichever is less None
</TABLE>
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses
(expenses that are deducted from the
Portfolio's assets) Investor A Shares
<S> <C>
Management Fees .30%
-------------------------------------------------------------
Distribution (12b-1) and Service Fees .30%
-------------------------------------------------------------
Other Expenses .35%/2/
-------------------------------------------------------------
Total Annual Portfolio Operating Expenses .95%/2/
- --------------------------------------------------------------
</TABLE>
/1/Reduced sales charges may be available. See "Distribution
Arrangements/Sales Charges" below.
/2/Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Investor A Shares for the current fiscal year are expected to be
less than the amounts shown above because certain of the Portfolio's service
providers are voluntarily waiving a portion of their fees and/or reimbursing
the Portfolio for certain other expenses. These fee waivers and/or
reimbursements are being made in order to keep the annual fees and expenses
for the Portfolio's Investor A Shares at a certain level. Other Expenses and
Total Annual Portfolio Operating Expenses, after taking these fee waivers
and expense reimbursements into account, are expected to be .25% and .85%,
respectively, for Investor A Shares. These fee waivers and expense
reimbursements may be revised or cancelled at any time.
16
<PAGE>
Risk/Return Summary Equity Index Portfolio
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Investor A Shares $642 $836 $1,047 $1,652
- ---------------------------------------------
</TABLE>
17
<PAGE>
Risk/Return Summary Growth & Income Equity Portfolio
- --------------------------------------------------------------------------------
Portfolio Manager
FIRMCO's Equity Committee is responsible for the day-to-day management of the
Portfolio. The Committee and its predecessor have managed the Portfolio since
1998.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is to provide long-term capital growth,
with income a secondary consideration.
Principal Investment Strategies
The Portfolio invests primarily in common stocks. The Adviser selects stocks
based on a number of factors related to historical and projected earnings and
the price/earnings relationship as well as company growth and asset value,
consistency of earnings growth and earnings quality. The Adviser favors the
stocks of those companies which are believed to have superior revenue and
earnings growth prospects relative to their peers and to their price/earnings
ratios.
Stocks purchased for the Portfolio generally will be listed on a national stock
exchange or will be unlisted securities with an established over-the-counter
market. These stocks tend to pay dividends, so many of the Portfolio's
investments may produce some income. Nevertheless, income is not a major factor
in the stock selection process.
The Portfolio may emphasize, from time to time, particular companies or market
sectors, such as technology, in attempting to achieve its investment objective.
Principal Risk Considerations
The Portfolio invests in stocks and other equity securities, which may decline
in value over short or extended periods of time. Equity markets tend to be
cyclical; there are times when stock prices generally increase, and other times
when they generally decrease. This could cause the value of your investment in
the Portfolio to fluctuate.
To the extent that the Portfolio emphasizes particular companies or market
sectors, such as technology, it will be especially susceptible to the risks
associated with investments in those companies or market sectors. Stocks of
technology companies may be subject to greater price volatility than stocks of
companies in other sectors. Technology companies may produce or use products or
services that prove commercially unsuccessful, become obsolete or become
adversely impacted by government regulation. Technology stocks may experience
significant price movements caused by disproportionate investor optimism or
pessimism.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolio and how they may advance the Portfolio's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
18
<PAGE>
Risk/Return Summary Growth & Income Equity Portfolio
Return History
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Investor A Shares has varied from year to year. The table shows how the
Portfolio's average annual returns for one year, five years, ten years and
since inception compare to those of a broad-based market index. Both the bar
chart and table assume reinvestment of all dividends and distributions. The
Portfolio's past performance does not necessarily indicate how it will perform
in the future.
- --------------------------------------------------------------------------------
Know your index
The S&P 500 Index is an unmanaged index comprised of 500 widely held common
stocks listed on the New York Stock Exchange, the American Stock Exchange, and
NASDAQ.
- --------------------------------------------------------------------------------
Investor A Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1990 -1.40%
1991 26.66%
1992 10.61%
1993 9.61%
1994 -0.42%
1995 34.12%
1996 18.88%
1997 27.21%
1998 13.12%
1999 13.48%
The returns for Investor B Shares differed from the returns shown in the bar
chart, because the two classes bear different expenses. The bar chart does
not reflect any sales charges on purchases of the Portfolio's Investor A
Shares. If sales charges were included, returns would be lower than those
shown.
<TABLE>
<S> <C>
Best quarter: 18.52% for the quarter ending
December 31, 1998
Worst quarter: -14.41% for the quarter ending
September 30, 1998
</TABLE>
-------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year 5 Years 10 Years Inception
-----------------------------------------------------
<S> <C> <C> <C> <C>
Investor A Shares
(with 5.50% sales charge) 7.27% 19.73% 14.01% 14.88%/1/
-----------------------------------------------------
Investor B Shares
(with applicable contingent deferred sales
charge) 7.80% N/A N/A 19.48%/1/
-----------------------------------------------------
S&P 500 Index 21.04% 28.56% 18.21% 19.12%/2/
27.94%/3/
- -------------------------------------------------------------------------------
</TABLE>
/1/ June 2, 1988 for Investor A Shares; March 7, 1995 (date of initial public
investment) for Investor B Shares.
/2/ May 31, 1988.
/3/ February 28, 1995.
19
<PAGE>
Risk/Return Summary Growth & Income Equity Portfolio
The table on this page shows the fees and expenses that you pay if you buy and
hold Investor A Shares or Investor B Shares of the Growth & Income Equity
Portfolio.
Fees and Expenses
<TABLE>
<CAPTION>
Shareholder Fees Investor A Investor B
(fees you pay directly) Shares Shares
<S> <C> <C>
Maximum sales charge (load) to buy shares, shown as a
% of the offering price 5.50%/1/ None
-----------------------------------------------------------------------------
Maximum deferred sales charge (load) shown as a % of
the offering price or sale price, whichever is less None 5.00%/2/
</TABLE>
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses
(expenses that are deducted from the Investor A Investor B
Portfolio's assets) Shares Shares
<S> <C> <C>
Management Fees .55% .55%
-----------------------------------------------------------------
Distribution (12b-1) and Service Fees .30% 1.00%
-----------------------------------------------------------------
Other Expenses .31%/3/ .31%/3/
-----------------------------------------------------------------
Total Annual Portfolio Operating Expenses 1.16%/3/ 1.86%/3/
- ------------------------------------------------------------------
</TABLE>
/1/Reduced sales charges may be available. See "Distribution
Arrangements/Sales Charges" below.
/2/This amount applies if you sell your shares in the first year after
purchase and gradually declines until it is eliminated after six years.
After six years, your Investor B Shares will automatically convert to
Investor A Shares. See "Distribution Arrangements/Sales Charges" below.
/3/Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Investor A Shares and Investor B Shares for the current fiscal
year are expected to be less than the amounts shown above because certain of
the Portfolio's service providers are voluntarily waiving a portion of their
fees and/or reimbursing the Portfolio for certain other expenses. These fee
waivers and/or reimbursements are being made in order to keep the annual
fees and expenses for the Portfolio's Investor A Shares and Investor B
Shares at certain levels. Other Expenses and Total Annual Portfolio
Operating Expenses, after taking these fee waivers and expense
reimbursements into account, are expected to be .19% and 1.04%,
respectively, for Investor A Shares and .19% and 1.74%, respectively, for
Investor B Shares. These fee waivers and expense reimbursements may be
revised or cancelled at any time.
20
<PAGE>
Risk/Return Summary Growth & Income Equity Portfolio
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year, the
Portfolio's operating expenses remain the same and your Investor B Shares
automatically convert to Investor A Shares after six years. Although your
actual costs may be higher or lower, based on these assumptions your costs
would be:
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Investor A Shares $662 $898 $1,153 $1,881
---------------------------------------------------------------------------
Investor B Shares $689 $885 $1,206 $1,829
If you hold Investor B Shares, you would pay the
following expenses if you did not sell
your shares: $189 $585 $1,006 $1,829
- ----------------------------------------------------------------------------
</TABLE>
21
<PAGE>
Risk/Return Summary Growth Equity Portfolio
- --------------------------------------------------------------------------------
Growth stocks may offer above-average revenue and earnings potential and
accompanying capital growth, typically with a lower dividend yield than value
stocks.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Portfolio Manager
Walter Dewey, Chartered Financial Analyst, is responsible for the day-to-day
management of the Portfolio. He has been with FIRMCO and its affiliates for 16
years and has managed the Portfolio since February 2000.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is capital appreciation.
Principal Investment Strategies
The Portfolio invests primarily in the common stocks of growth companies. In
selecting securities for the Portfolio, the Adviser evaluates a company's
earnings history and the risk and volatility of the company's business. The
Adviser also considers other factors, such as product position and the ability
to increase market share, but the ability to increase company earnings is the
primary consideration.
Under normal market conditions, the Portfolio invests at least 65% of its total
assets in stocks or other equity securities, such as preferred stocks, rights,
and warrants. Typically, the Portfolio's stocks are those of large- and medium-
capitalization companies that are listed on the New York Stock Exchange, the
American Stock Exchange or NASDAQ.
The Portfolio may emphasize, from time to time, particular companies or market
sectors, such as technology, in attempting to achieve its investment objective.
Principal Risk Considerations
The Portfolio invests in stocks and other equity securities, which may decline
in value over short or extended periods of time. Equity markets tend to be
cyclical; there are times when stock prices generally increase, and other times
when they generally decrease. This could cause the value of your investment in
the Portfolio to fluctuate. In addition, the Portfolio is subject to the
additional risk that the growth stocks it typically holds may not perform as
well as other types of stocks, such as value stocks.
To the extent that the Portfolio emphasizes particular companies or market
sectors, such as technology, it will be especially susceptible to the risks
associated with investments in those companies or market sectors. Stocks of
technology companies may be subject to greater price volatility than stocks of
companies in other sectors. Technology companies may produce or use products or
services that prove commercially unsuccessful, become obsolete or become
adversely impacted by government regulation. Technology stocks may experience
significant price movements caused by disproportionate investor optimism or
pessimism.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolio and how they may advance the Portfolio's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
22
<PAGE>
Risk/Return Summary Growth Equity Portfolio
Return History+
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Investor A Shares has varied from year to year. The table shows how the
Portfolio's average annual returns for one year, five years and since inception
compare to those of a broad-based market index. Both the bar chart and table
assume reinvestment of all dividends and distributions. The Portfolio's past
performance does not necessarily indicate how it will perform in the future.
- --------------------------------------------------------------------------------
Know your index
The S&P 500 Index is an unmanaged index comprised of 500 widely held common
stocks listed on the New York Stock Exchange, the American Stock Exchange, and
NASDAQ.
- --------------------------------------------------------------------------------
Investor A Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1994 -2.06%
1995 44.17%
1996 17.49%
1997 26.98%
1998 30.02%
1999 24.16%
The returns for Investor B Shares differed from the returns shown in the bar
chart, because the two classes bear different expenses. The bar chart does not
reflect any sales charges on purchases of the Portfolio's Investor A Shares.
If sales charges were included, returns would be lower than those shown.
<TABLE>
<S> <C>
Best quarter: 25.64% for the quarter ending
December 31, 1998
Worst quarter: -11.84% for the quarter ending
September 30, 1998
</TABLE>
-------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year 5 Years Inception
----------------------------------------------
<S> <C> <C> <C>
Investor A Shares
(with 5.50% sales charge) 17.32% 26.83% 18.19%/1/
----------------------------------------------
Investor B Shares
(with applicable contingent deferred sales charge) 18.34% N/A 21.21%/1/
----------------------------------------------
S&P 500 Index 21.04% 28.56% 21.53%/2/
21.74%/3/
- ------------------------------------------------------------------------------
</TABLE>
+ The Portfolio commenced operations on January 4, 1993 as the Arrow Equity
Portfolio, a separate investment portfolio (the "Predecessor Portfolio") of
Arrow Funds. On November 24, 1997, the Predecessor Portfolio was
reorganized as a new portfolio of the Fund. Prior to the reorganization,
the Predecessor Portfolio offered and sold shares that were similar to the
Fund's Investor A Shares. Annual returns for periods prior to November 24,
1997 reflect the performance of the Predecessor Portfolio.
/1/January 4, 1993 for Investor A Shares; February 23, 1998 for Investor B
Shares.
/2/December 31, 1992.
/3/February 28, 1998.
23
<PAGE>
Risk/Return Summary Growth Equity Portfolio
The table on this page shows the fees and expenses that you pay if you buy and
hold Investor A Shares or Investor B Shares of the Growth Equity Portfolio.
Fees and Expenses
<TABLE>
<CAPTION>
Shareholder Fees Investor A Investor B
(fees you pay directly) Shares Shares
<S> <C> <C>
Maximum sales charge (load) to buy shares, shown as a
% of the offering price 5.50%/1/ None
-----------------------------------------------------------------------------
Maximum deferred sales charge (load) shown as a % of
the offering price or sale price, whichever is less None 5.00%/2/
</TABLE>
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses
(expenses that are deducted from the Investor Investor
Portfolio's assets) A Shares B Shares
<S> <C> <C>
Management Fees .75% .75%
-------------------------------------------------------------
Distribution (12b-1) and Service Fees .30% 1.00%
-------------------------------------------------------------
Other Expenses .32%/3/ .32%/3/
-------------------------------------------------------------
Total Annual Portfolio Operating Expenses 1.37%/3/ 2.07%/3/
- --------------------------------------------------------------
</TABLE>
/1/Reduced sales charges may be available. See "Distribution Arrangements/Sales
Charges" below.
/2/This amount applies if you sell your shares in the first year after purchase
and gradually declines until it is eliminated after six years. After six
years, your Investor B Shares will automatically convert to Investor A
Shares. See "Distribution Arrangements/Sales Charges" below.
/3/Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Investor A Shares and Investor B Shares for the current fiscal
year are expected to be less than the amounts shown above because certain of
the Portfolio's service providers are voluntarily waiving a portion of their
fees and/or reimbursing the Portfolio for certain other expenses. These fee
waivers and/or reimbursements are being made in order to keep the annual fees
and expenses for the Portfolio's Investor A Shares and Investor B Shares at
certain levels. Other Expenses and Total Annual Portfolio Operating Expenses,
after taking these fee waivers and expense reimbursements into account, are
expected to be .22% and 1.27%, respectively, for Investor A Shares and .22%
and 1.97%, respectively, for Investor B Shares. These fee waivers and expense
reimbursements may be revised or cancelled at any time.
24
<PAGE>
Risk/Return Summary Growth Equity Portfolio
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year, the
Portfolio's operating expenses remain the same and your Investor B Shares
automatically convert to Investor A Shares after six years. Although your
actual costs may be higher or lower, based on these assumptions your costs
would be:
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Investor A Shares $682 $960 $1,259 $2,106
- -------------------------------------------------------------------------------
Investor B Shares $710 $949 $1,314 $2,057
If you hold Investor B Shares, you would pay the
following expenses if you did not sell your shares: $210 $649 $1,114 $2,057
- -------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
Risk/Return Summary Small Cap Equity Portfolio
- --------------------------------------------------------------------------------
Portfolio Manager
Robert J. Anthony, Senior Associate at FIRMCO, and Gregory Glidden, Senior
Portfolio Manager at FIRMCO, are responsible for the day-to-day management of
the Portfolio. Mr. Anthony has been with FIRMCO and its affiliates for 27 years
and has managed the Portfolio since its inception in 1992. Mr. Glidden has been
with FIRMCO and its affiliates for 17 years and has co-managed the Portfolio
since February 2000.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is capital appreciation.
Principal Investment Strategies
Under normal conditions, the Portfolio invests at least 65% of its total assets
in small- to medium-sized companies with market capitalizations from $100
million to $2 billion at the time of purchase and which the Adviser believes
have above-average prospects for capital appreciation. Stocks purchased by the
Portfolio may be listed on a national securities exchange or may be unlisted
securities with or without an established over-the-counter market.
The Portfolio also may invest a portion of its assets in larger companies that
the Adviser believes offer improved growth possibilities because of rejuvenated
management, product changes or other developments likely to stimulate earnings
or asset growth. The Portfolio also invests in stocks the Adviser believes are
undervalued or to a limited extent in initial public offerings (IPOs) of new
companies that demonstrate the potential for price appreciation. The Adviser
selects stocks based on a number of factors, including historical and projected
earnings, asset value, potential for price appreciation and earnings growth,
and quality of the products manufactured or services offered. The Adviser uses
a screening process involving a variety of quantitative techniques in
evaluating prospects for capital appreciation.
The Portfolio may emphasize, from time to time, particular companies or market
sectors, such as technology, in attempting to achieve its investment objective.
26
<PAGE>
Risk/Return Summary Small Cap Equity Portfolio
Principal Risk Considerations
The Portfolio invests in stocks and other equity securities, which may decline
in value over short or extended periods of time. Equity markets tend to be
cyclical; there are times when stock prices generally increase, and other times
when they generally decrease. This could cause the value of your investment in
the Portfolio to fluctuate.
Compared to larger-capitalization stocks, small-capitalization stocks tend to
carry greater risk and exhibit greater price volatility because their
businesses may not be well-established. In addition, some smaller companies may
have specialized or limited product lines, markets or financial resources and
may be dependent on one-person management. All of these factors increase risk
and may result in more significant losses than the other Mercantile Stock
Portfolios. In an effort to reduce the risks inherent in smaller-company
stocks, the Portfolio's holdings are diversified over a number of companies and
industry groups.
To the extent that the Portfolio emphasizes particular companies or market
sectors, such as technology, it will be especially susceptible to the risks
associated with investments in those companies or market sectors. Stocks of
technology companies may be subject to greater price volatility than stocks of
companies in other sectors. Technology companies may produce or use products or
services that prove commercially unsuccessful, become obsolete or become
adversely impacted by government regulation. Technology stocks may experience
significant price movements caused by disproportionate investor optimism or
pessimism.
The Portfolio's performance results may reflect periods of above-average
performance attributable to its investing a portion of its assets in the
securities of companies offering shares in IPOs. It is possible that the above-
average performance of such companies may not be repeated in the future.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolio and how they may advance the Portfolio's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
27
<PAGE>
Risk/Return Summary Small Cap Equity Portfolio
Return History
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Investor A Shares has varied from year to year. The table shows how the
Portfolio's average annual returns for one year, five years and since inception
compare to those of a broad-based market index. Both the bar chart and the
table assume reinvestment of all dividends and distributions. The Portfolio's
past performance does not necessarily indicate how it will perform in the
future.
- --------------------------------------------------------------------------------
Know your index
The Russell 2000 Index is an unmanaged index comprised of the 2,000 smallest of
the 3,000 largest U.S. companies based on market capitalization.
- --------------------------------------------------------------------------------
Investor A Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1993 23.58%
1994 2.26%
1995 17.14%
1996 10.50%
1997 20.51%
1998 -8.07%
1999 16.70%
The returns for Investor B Shares differed from the returns shown in the
bar chart, because the two classes bear different expenses. The bar chart
does not reflect any sales charges on purchases of the Portfolio's Investor
A Shares. If these sales charges were included, returns would be lower than
those shown.
<TABLE>
<S> <C>
Best quarter: 18.56% for the quarter ending
December 31, 1992
Worst quarter: -24.80% for the quarter ending
September 30, 1998
</TABLE>
-------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year 5 Years inception
----------------------------------------------
<S> <C> <C> <C>
Investor A Shares
(with 5.50% sales charge) 10.30% 9.61% 11.66%/1/
----------------------------------------------
Investor B Shares
(with applicable contingent deferred sales charge) 11.05% N/A 9.20%/1/
----------------------------------------------
Russell 2000 Index 21.26% 16.69% 14.80%/2/
16.61%/3/
- ------------------------------------------------------------------------------
</TABLE>
1 May 6, 1992 for Investor A Shares; March 6, 1995 (date of initial public
investment) for Investor B Shares.
2 April 30, 1992.
3 February 28, 1995.
28
<PAGE>
Risk/Return Summary Small Cap Equity Portfolio
The table on this page shows the fees and expenses that you pay if you buy and
hold Investor A Shares or Investor B Shares of the Small Cap Equity Portfolio.
Fees and Expenses
<TABLE>
<CAPTION>
Shareholder Fees (fees Investor A Investor B
you pay directly) Shares Shares
<S> <C> <C>
Maximum sales charge
(load) to buy shares,
shown as a % of the
offering price 5.50%/1/ None
------------------------------------------------
Maximum deferred sales
charge (load) shown as a
% of the offering price
or sale price, whichever
is less None 5.00%/2/
</TABLE>
<TABLE>
<CAPTION>
Annual Portfolio
Operating Expenses
(expenses that are
deducted from the Investor A Investor B
Portfolio's assets) Shares Shares
<S> <C> <C>
Management Fees .75% .75%
------------------------------------------------
Distribution (12b-1) and
Service Fees .30% 1.00%
------------------------------------------------
Other Expenses .31%/3/ .31%/3/
------------------------------------------------
Total Annual Portfolio
Operating Expenses 1.36%/3/ 2.06%/3/
- -------------------------------------------------
</TABLE>
/1/Reduced sales charges may be available. See "Distribution
Arrangements/Sales Charges" below.
/2/This amount applies if you sell your shares in the first year after
purchase and gradually declines until it is eliminated after six years.
After six years, your Investor B Shares will automatically convert to
Investor A Shares. See "Distribution Arrangements/Sales Charges" below.
/3/Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Investor A Shares and Investor B Shares for the current fiscal
year are expected to be less than the amounts shown above because certain of
the Portfolio's service providers are voluntarily waiving a portion of their
fees and/or reimbursing the Portfolio for certain other expenses. These fee
waivers and/or reimbursements are being made in order to keep the annual
fees and expenses for the Portfolio's Investor A Shares and Investor B
Shares at certain levels. Other Expenses and Total Annual Portfolio
Operating Expenses, after taking these fee waivers and expense
reimbursements into account, are expected to be .21% and 1.26%,
respectively, for Investor A Shares and .21% and 1.96%, respectively, for
Investor B Shares. These fee waivers and expense reimbursements may be
revised of cancelled at any time.
29
<PAGE>
Risk/Return Summary Small Cap Equity Portfolio
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year, the
Portfolio's operating expenses remain the same and your Investor B Shares
automatically convert to Investor A Shares after six years. Although your
actual costs may be higher or lower, based on these assumptions your costs
would be:
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Investor A Shares $681 $957 $1,254 $2,095
------------------------------------------------------------------------------
Investor B Shares $709 $946 $1,308 $2,046
If you hold Investor B Shares,
you would pay the following expenses if you did not
sell
your shares: $209 $646 $1,108 $2,046
- -------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
Risk/Return Summary Small Cap Equity Index Portfolio
- --------------------------------------------------------------------------------
Indexing is a strategy whereby a Portfolio attempts to weight its securities to
match those of a broadly-based securities index in an attempt to approximate
the index's performance.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The S&P SmallCap 600 Index is an unmanaged index that tracks the performance of
600 domestic companies traded on the New York Stock Exchange, the American
Stock Exchange and NASDAQ. The S&P SmallCap 600 Index is heavily weighted with
the stocks of small companies with market capitalizations that currently range
between $28 million and $4.2 billion. S&P does not endorse any stock in the S&P
SmallCap 600 Index and is not a sponsor of,or affiliated in any way with, the
Portfolio.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is to provide investment results that,
before deduction of operating expenses, approximate the price and yield
performance of U.S. common stocks with smaller stock market capitalizations, as
represented by the S&P SmallCap 600 Index.
The Portfolio's investment objective can be changed by the Fund's Board of
Directors without shareholder approval. Shareholders will be given at least 30
days' written notice before any such change occurs.
Principal Investment Strategies
The Portfolio uses an "indexing" strategy through the use of computer models to
approximate the investment performance of the S&P SmallCap 600 Index. The
Portfolio will invest at least 80% of its total assets in securities listed in
the S&P SmallCap 600 Index and typically will hold all 600 stocks represented
in the Index. Under certain circumstances, however, the Portfolio may not hold
all 600 stocks in the Index because of shareholder activity or changes in the
Index. In general, each stock's percentage weighting in the Portfolio is based
on its weighting in the S&P SmallCap 600 Index. When stocks are removed from or
added to the Index, those changes are reflected in the Portfolio. The Portfolio
periodically "rebalances" its holdings as dictated by changes in shareholder
purchase and redemption activity and in the composition of the S&P SmallCap 600
Index.
To the extent that, from time to time, the stocks in a particular market
sector, such as technology, comprise a significant portion of the S&P SmallCap
600 Index, those stocks will be represented in substantially the same
proportion in the Portfolio.
Under normal market conditions, it is expected that the quarterly performance
of the Portfolio, before expenses, will track the performance of the S&P
SmallCap 600 Index within a .95 correlation coefficient.
31
<PAGE>
Risk/Return Summary Small Cap Equity Index Portfolio
Principal Risk Considerations
The Portfolio invests in stocks and other equity securities, which may decline
in value over short or extended periods of time. Equity markets tend to be
cyclical; there are times when stock prices generally increase, and other times
when they generally decrease. This could cause the value of your investment in
the Portfolio to fluctuate.
In addition, the Portfolio is subject to the additional risk that the small-
capitalization stocks that it holds may not perform as well as other types of
stocks. Compared to larger-capitalization stocks, small-capitalization stocks
tend to carry greater risk and exhibit greater price volatility because their
businesses may not be well-established. In addition, some smaller companies may
have specialized or limited product lines, markets or financial resources and
may be dependent on one-person management. All of these factors increase risk
and may result in more significant losses than the other Mercantile Stock
Portfolios. By typically investing in all 600 stocks in the Index, the
Portfolio remains broadly diversified, which may reduce some of this risk.
To the extent that the stocks in a particular market sector, such as
technology, comprise a significant portion of the S&P SmallCap 600 Index and,
correspondingly, of the Portfolio's holdings, the Portfolio will be especially
susceptible to the risks associated with investments in those market sectors.
Technology companies may produce or use products or services that prove
commercially unsuccessful, become obsolete or become adversely impacted by
government regulation. Technology stocks may experience significant price
movements caused by disproportionate investor optimism or pessimism.
There is the additional risk that the Portfolio's investment results may fail
to match those of the S&P SmallCap 600 Index as a result of shareholder
purchase and redemption activity, transaction costs, expenses and other
factors.
32
<PAGE>
Risk/Return Summary Small Cap Equity Index Portfolio
Return History
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows the performance of the Portfolio's
Investor A Shares during the last calendar year. The table shows how the
Portfolio's average annual returns for one year and since inception compare to
those of the S&P SmallCap 600 Index. Both the bar chart and table assume
reinvestment of all dividends and distributions. The Portfolio's past
performance does not necessarily indicate how it will perform in the future.
Investor A Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1999 7.66%
The bar chart does not reflect any sales charges on purchases of the
Portfolio's Investor A Shares. If sales charges were included, the return would
be lower than that shown.
<TABLE>
<S> <C>
Best quarter: 15.13% for the quarter ending
June 30, 1999
Worst quarter: -10.88% for the quarter ending
March 31, 1999
</TABLE>
-------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year inception
-----------------
<S> <C> <C>
Investor A Shares
(with 5.50% sales charge) 1.70% 4.19%/1/
-----------------
S&P SmallCap 600 Index 12.40% 12.40%/2/
- ---------------------------------------------
</TABLE>
/1/December 30, 1998.
/2/December 31, 1998.
33
<PAGE>
Risk/Return Summary Small Cap Equity Index Portfolio
The table on the right shows the fees and expenses that you pay if you buy and
hold Investor A Shares of the Small Cap Equity Index Portfolio.
Fees and Expenses
<TABLE>
<CAPTION>
Shareholder Fees Investor A
(fees you pay directly) Shares
<S> <C>
Maximum sales charge (load) to buy
shares, shown as a % of the offering
price 5.50%/1/
--------------------------------------------------
Maximum deferred sales charge (load)
shown as a % of the offering price or
sale price, whichever is less None
</TABLE>
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses
(expenses that are deducted from the Investor A
Portfolio's assets) Shares
<S> <C>
Management Fees .40%
------------------------------------------------------
Distribution (12b-1) and Service Fees .30%
------------------------------------------------------
Other Expenses .44%/2/
------------------------------------------------------
Total Annual Portfolio Operating Expenses 1.14%/2/
- -------------------------------------------------------
</TABLE>
/1/Reduced sales charges may be available. See "Distribution
Arrangements/Sales Charges" below.
/2/Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Investor A Shares for the current fiscal year are expected to
be less than the amounts shown above because certain of the Portfolio's
service providers are voluntarily waiving a portion of their fees and/or
reimbursing the Portfolio for certain other expenses. These fee waivers
and/or reimbursements are being made in order to keep the annual fees and
expenses for the Portfolio's Investor A Shares at a certain level. Other
Expenses and Total Annual Portfolio Operating Expenses, after taking these
fee waivers and expense reimbursements into account, are expected to be
.34% and 1.04%, respectively, for Investor A Shares. These fee waivers and
expense reimbursements may be revised or cancelled at any time.
34
<PAGE>
Risk/Return Summary Small Cap Equity Index Portfolio
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Investor A Shares $660 $892 $1,143 $1,860
- ---------------------------------------------
</TABLE>
35
<PAGE>
Risk/Return Summary International Equity Portfolio
- --------------------------------------------------------------------------------
Sub-Adviser/Portfolio Manager
FIRMCO has appointed Clay Finlay Inc. ("Clay Finlay" or the "Sub-Adviser") as
sub-adviser to assist in the day-to-day management of the Portfolio. Frances
Dakers, a principal and senior portfolio manager of Clay Finlay, is responsible
for the management of the Portfolio. Ms. Dakers has been with Clay Finlay since
January 1982 and has managed the Portfolio since it began operations in 1994.
- --------------------------------------------------------------------------------
Investment Objective
The Portfolio's investment objective is to provide capital growth consistent
with reasonable investment risk.
Principal Investment Strategies
The Portfolio invests primarily in foreign common stocks, most of which will be
denominated in foreign currencies. During normal market conditions, the
Portfolio will invest substantially all (at least 80%) of its total assets in
the securities of companies that derive more than 50% of their gross revenues
outside the United States or have more than 50% of their assets outside the
United States. Under normal market conditions, the Portfolio invests in equity
securities from at least three foreign countries. Generally, at least 50% of
the Portfolio's total assets will be invested in securities of companies
located either in the developed countries of Western Europe or in Japan. The
Portfolio also may invest in other developed countries in the Far East and in
countries with emerging markets or economies.
By investing in various foreign stocks, the Portfolio attempts to achieve broad
diversification and to take advantage of differences between economic trends
and the performance of securities markets in different countries, regions and
geographic areas. In selecting stocks, the Sub-Adviser determines which
companies represent the best values relative to their long-term growth
prospects and local markets through the use of a screening tool which focuses
on valuation ranges. The Sub-Adviser focuses on companies with steady,
sustainable earnings growth rates that sell at a multiple lower than the
average for that growth rate in the local market. The Sub-Adviser also uses
fundamental analysis by evaluating balance sheets, market share and strength of
management.
36
<PAGE>
Risk/Return Summary International Equity Portfolio
Principal Risk Considerations
Investing in foreign companies involves different risks than investing in U.S.
companies due to such factors as foreign government restrictions, different
accounting standards and political instability. Although the multinational
character of the Portfolio's investments should reduce the effect that events
in any one country or geographic area will have on overall performance,
negative results in one foreign market may offset gains in, or negatively
affect, other foreign markets.
The risks associated with foreign investments are heightened when investing in
emerging markets. The governments and economies of emerging market countries
feature greater instability than those of more developed countries. Such
investments tend to fluctuate in price more widely and to be less liquid than
other foreign investments.
The Portfolio is also subject to currency risk, which is the potential for
price fluctuations in the dollar value of the foreign securities which the
Portfolio holds because of changing currency exchange rates.
As with U.S. equity markets, foreign equity markets tend to be cyclical. There
are times when stock prices generally increase, and other times when they
generally decrease.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Portfolio and how they may advance the Portfolio's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
37
<PAGE>
Risk/Return Summary International Equity Portfolio
Return History
The bar chart and table on this page show the Portfolio's annual returns and
long-term performance, thereby giving some indication of the risk of investing
in the Portfolio. The bar chart shows how the performance of the Portfolio's
Investor A Shares has varied from year to year. The table shows how the
Portfolio's average annual returns for one year, five years and since inception
compare to those of a broad-based market index. Both the bar chart and table
assume reinvestment of all dividends and distributions. The Portfolio's past
performance does not necessarily indicate how it will perform in the future.
- --------------------------------------------------------------------------------
Know your index
The Morgan Stanley Capital International Europe, Australasia and Far East
Index, or EAFE Index, is an unmanaged index consisting of companies in
Australia, New Zealand, Europe and the Far East.
- --------------------------------------------------------------------------------
Investor A Shares
Year-by-Year Total Returns
(as of December 31 each year)
[GRAPH]
1995 9.41%
1996 9.98%
1997 4.68%
1998 17.42%
1999 50.47%
The returns for Investor B Shares differed from the returns shown in the bar
chart, because the two classes bear different expenses. The bar chart does not
reflect any sales charges on purchases of the Portfolio's Investor A shares. If
sales charges were included, returns would be lower than those shown.
<TABLE>
<S> <C>
Best quarter: 27.41% for the quarter ending
December 31, 1999
Worst quarter: -17.12% for the quarter ending
September 30, 1998
</TABLE>
-------------------------------------------------------------------------
Average Annual Total Returns
for the periods ended December 31, 1999
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Since
1 Year 5 Years inception
---------------------------------------------------
<S> <C> <C> <C>
Investor A Shares
(with 5.50% sales charge) 42.22% 16.03% 13.78%/1/
---------------------------------------------------
Investor B Shares
(with applicable contingent deferred sales charge) 44.31% N/A 18.05%/1/
---------------------------------------------------
EAFE Index 26.96% 12.83% 11.21%/2/
14.28%/3/
- -------------------------------------------------------------------------------
</TABLE>
/1/ May 2, 1994 for Investor A Shares; March 6, 1995 (date of initial public
investment) for Investor B Shares.
/2/ April 30, 1994.
/3/ February 28, 1995.
38
<PAGE>
Risk/Return Summary International Equity Portfolio
The table on this page shows the fees and expenses that you pay if you buy and
hold Investor A Shares or Investor B Shares of the International Equity
Portfolio.
Fees and Expenses
<TABLE>
<CAPTION>
Shareholder Fees Investor A Investor B
(fees you pay directly) Shares Shares
<S> <C> <C>
Maximum sales charge (load) to buy shares, shown as a
% of the offering price 5.50%/1/ None
-----------------------------------------------------------------------------
Maximum deferred sales charge (load) shown as a % of
the offering price or sale price, whichever is less None 5.00%/2/
</TABLE>
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses
(expenses that are deducted from the Investor A Investor B
Portfolio's assets) Shares Shares
<S> <C> <C>
Management Fees 1.00% 1.00%
-----------------------------------------------------------------
Distribution (12b-1) and Service Fees .30% 1.00%
-----------------------------------------------------------------
Other Expenses .45%/3/ .45%/3/
-----------------------------------------------------------------
Total Annual Portfolio Operating Expenses 1.75%/3/ 2.45%/3/
- ------------------------------------------------------------------
</TABLE>
/1/Reduced sales charges may be available. See "Distribution
Arrangements/Sales Charges" below.
/2/This amount applies if you sell your shares in the first year after
purchase and gradually declines until it is eliminated after six years.
After six years, your Investor B Shares will automatically convert to
Investor A Shares. See "Distribution Arrangements/Sales Charges" below.
/3/Other Expenses and Total Annual Portfolio Operating Expenses for the
Portfolio's Investor A Shares and Investor B Shares for the current fiscal
year are expected to be less than the amounts shown above because certain
of the Portfolio's service providers are voluntarily waiving a portion of
their fees and/or reimbursing the Portfolio for certain other expenses.
These fee waivers and/or reimbursements are being made in order to keep the
annual fees and expenses for the Portfolio's Investor A Shares and Investor
B Shares at certain levels. Other Expenses and Total Annual Portfolio
Operating Expenses, after taking these fee waivers and expense
reimbursements into account, are expected to be .26% and 1.56%,
respectively, for Investor A Shares and .26% and 2.26%, respectively, for
Investor B Shares. These fee waivers and expense reimbursements may be
revised or cancelled at any time.
39
<PAGE>
Risk/Return Summary International Equity Portfolio
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year, the
Portfolio's operating expenses remain the same and your Investor B Shares
automatically convert to Investor A Shares after six years. Although your
actual costs may be higher or lower, based on these assumptions your costs
would be:
Example
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Investor A Shares $718 $1,071 $1,447 $2,499
---------------------------------------------------------------------------
Investor B Shares $748 $1,064 $1,506 $2,456
If you hold Investor B Shares,
you would pay the following expenses if you did
not sell
your shares: $248 $ 764 $1,306 $2,456
- ----------------------------------------------------------------------------
</TABLE>
40
<PAGE>
Risk/Return Summary Additional Information on Risk
The principal risks of investing in each Portfolio are described on the
previous pages. The following supplements that discussion.
Securities Lending
To obtain interest income, the Portfolios may lend their securities to broker-
dealers, banks or institutional borrowers pursuant to agreements requiring that
the loans be continuously secured by collateral equal at all times in value to
at least the market value of the securities loaned. There is the risk that,
when lending portfolio securities, the securities may not be available to the
Portfolio on a timely basis. Therefore, the Portfolio may lose the opportunity
to sell the securities at a desirable price. Additionally, in the event that a
borrower of securities would file for bankruptcy or become insolvent,
disposition of the securities may be delayed pending court action.
Temporary Defensive Positions
Each Portfolio may temporarily hold investments that are not part of its main
investment strategy to try to avoid losses during unfavorable market
conditions. These investments may include cash (which will not earn any
income), money market instruments, short-term debt securities issued or
guaranteed by the U.S. Government or its agencies and, in the case of the
International Equity Portfolio, debt obligations of U.S. companies having their
principal business activities in the U.S. This strategy could prevent a
Portfolio from achieving its investment objective and could reduce the
Portfolio's return and affect its performance during a market upswing.
Other Types of Investments
This prospectus describes each Portfolio's principal investment strategies and
the particular types of securities in which each Portfolio principally invests.
Each Portfolio may, from time to time, make other types of investments and
pursue other investment strategies in support of its overall investment goal.
These supplemental investment strategies--and the risks involved--are described
in detail in the Statement of Additional Information ("SAI"), which is referred
to on the back cover of this prospectus.
Year 2000 Risks
Over the past several years, the Adviser and the Portfolios' other major
service providers expended considerable time and money in addressing the
computer and technology problems associated with the transition to the Year
2000. As a result of those efforts, the Portfolios did not experience any
material disruptions in their operations as a result of the transition to the
21st century. The Adviser and the Portfolios' other major service providers are
continuing to monitor the Year 2000 or Y2K problem, however, and there can be
no assurances that there will be no adverse impact to the Portfolios as a
result of future computer-related Y2K difficulties.
41
<PAGE>
Your Account Distribution Arrangements/Sales Charges
Share Classes
Each Portfolio offers Investor A Shares and each Portfolio except the Equity
Index Portfolio and Small Cap Equity Index Portfolio offers Investor B Shares.
The primary difference between the share classes is the sales charge structure
and distribution/service fee arrangement.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Types of Charges Investor A Shares Investor B Shares
<S> <C> <C>
Sales Charge (Load) A front-end sales charge A contingent deferred
is assessed at the time of sales charge (CDSC) is
your purchase. assessed on shares
redeemed within six years
of purchase. Investor B
Shares automatically
convert to Investor A
Shares six years after
purchase.
- -----------------------------------------------------------------------------
Distribution (12b-1) Subject to annual Subject to annual
and Service Fees distribution and distribution and
shareholder servicing fees shareholder servicing fees
of up to 0.30% of a of up to 1.00% of a
Portfolio's average daily Portfolio's average daily
net assets attributable to net assets attributable to
its Investor A Shares. its Investor B Shares.
</TABLE>
- --------------------------------------------------------------------------------
42
<PAGE>
Your Account Distribution Arrangements/Sales Charges
Calculation of Sales Charges
Investor A Shares
<TABLE>
<CAPTION>
Sales Charge Sales Charge Dealers'
as a % of the as a % of Reallowance
Amount of Offering Price Net Asset Value as a % of
Transaction Per Share Per Share Offering Price
<S> <C> <C> <C>
Less than $50,000 5.50% 5.82% 5.00%
- --------------------------------------------------------------------------------
$50,000 but less than $100,000 4.50% 4.71% 4.00%
- --------------------------------------------------------------------------------
$100,000 but less than $250,000 3.50% 3.63% 3.00%
- --------------------------------------------------------------------------------
$250,000 but less than $500,000 2.50% 2.56% 2.00%
- --------------------------------------------------------------------------------
$500,000 but less than $1
million 2.00% 2.04% 1.50%
- --------------------------------------------------------------------------------
$1 million or more 0.50% 0.50% 0.40%
- --------------------------------------------------------------------------------
</TABLE>
The Fund's distributor reserves the right to pay the entire sales charge on
purchases of Investor A Shares to dealers. In addition, the Fund's distributor
may from time to time implement programs under which a broker-dealer's sales
force may be eligible to win nominal awards for certain sales efforts. If any
such program is made available to any broker-dealer, it will be made available
to all broker-dealers on the same terms. Payments made under such programs are
made by the Fund's distributor out of its own assets and not out of the assets
of the Portfolios. These programs will not change the price of Investor A
Shares or the amount that the Portfolios will receive from such sales.
43
<PAGE>
Your Account Distribution Arrangements/Sales Charges
Calculation of Sales Charges
Investor B Shares
For purposes of calculating the CDSC, all purchases made during a calendar month
are considered to be made on the first day of that month. The CDSC is based on
the value of the Investor B Shares on the date that they are sold or the
original cost of the shares, whichever is lower. To keep your CDSC as low as
possible each time you sell shares, the Fund will first sell any shares in your
account that are not subject to a CDSC. If there are not enough of these, the
Fund will sell the shares that have the lowest CDSC.
<TABLE>
<CAPTION>
Number of CDSC as a % of
Years Since Dollar Amount
Purchase Subject to the Charge
<C> <S>
0-1 5.0%
1-2 4.0%
2-3 3.0%
3-4 3.0%
4-5 2.0%
5-6 1.0%
More than 6 None
</TABLE>
----------------------------
Sales Charge Reductions
Investor A Shares
You may reduce the sales charge on Investor A Shares through:
. Rights of Accumulation. You can add the value of the Investor A Shares that
you already own in any Portfolio of the Fund that charges a sales load, as
well as the value of any existing Class A shares of any other fund in the
Firstar family of funds, to your next investment in Investor A Shares for
purposes of calculating the sales charge.
. Quantity Discounts. As the dollar amount of your purchase increases, your
sales charge may decrease (see the table on page 43). In addition, the Fund
will combine purchases made on the same day by you and your immediate family
members when calculating applicable sales charges.
. Letter of Intent. You can purchase Investor A Shares of any Portfolio of the
Fund or Class A shares of any fund in the Firstar family of funds that
charges a sales load over a 13-month period and pay the same sales charge you
would have paid if all shares were purchased at once. The Fund's transfer
agent will hold in escrow 5% of your total investment (for payment of a
higher sales load in case you do not purchase the full amount indicated on
the application) until the full amount is received. To participate, complete
the "Letter of Intent" section on your account application.
. Reinvestment Privilege. You can reinvest some or all of the money that you
receive when you sell Investor A Shares of a Portfolio in Investor A Shares
of any Portfolio of the Fund or in shares of any other fund in the Firstar
family of funds within 60 days without paying a sales charge. You must notify
the Fund's transfer agent at the time of your reinvestment that you qualify
for this privilege.
44
<PAGE>
Your Account Distribution Arrangements/Sales Charges
- --------------------------------------------------------------------------------
Purchase of Investor A Shares at Net Asset Value
From time to time, the Fund's distributor may offer investors the option to
purchase Investor A Shares at net asset value without payment of a front-end
sales charge. To qualify, you must pay for the shares with the redemption
proceeds from a non-affiliated mutual fund. In addition, you must have paid a
front-end sales charge on the shares you redeem. The purchase of Investor A
Shares must occur within 30 days of the prior redemption, and you must show
evidence of the redemption transaction. At the time of purchase, your broker-
dealer or other financial institution must notify the Fund that your
transaction qualifies for a purchase at net asset value.
- --------------------------------------------------------------------------------
Sales Charge Waivers
Investor A Shares
In addition, there's no sales charge when you buy Investor A Shares if:
. You buy shares by reinvesting your dividends and capital gains distributions.
. You're an officer or director of the Fund (or an immediate family member of
any such individual).
. You're a director, a current or retired employee or a participant in an
employee benefit or retirement plan of Firstar Corporation or the Fund's
distributor or any of their affiliates (or an immediate family member of any
such individual).
. You're a broker, dealer or agent who has a sales agreement with the Fund's
distributor (or an employee or immediate family member of any such
individual).
. You buy shares pursuant to a wrap-free program offered by a broker-dealer or
other financial institution.
. You buy shares with the proceeds of Trust Shares or Institutional Shares of a
Portfolio redeemed in connection with a rollover of benefits paid by a
qualified retirement or employee benefit plan or a distribution on behalf of
any other qualified account administered by Firstar Bank, N.A. or its
affiliates or correspondents within 60 days of receipt of such payment.
. You buy shares through a payroll deduction program.
. You're an employee of any sub-adviser to the Fund.
. You were a holder of a Southwestern Bell VISA card formerly issued by
Mercantile Bank of Southern Illinois, N.A. and you participated in the Fund's
Automatic Investment Program.
. You're exchanging Trust Shares of a Portfolio received from the distribution
of assets held in a qualified trust, agency or custodian account with Firstar
Bank, N.A. or any of its affiliates or correspondents.
. You're another investment company distributed by the Fund's distributor or
its affiliates.
If you think you qualify for any of these waivers, please call the Fund at
1-800-452-2724 before buying any shares.
45
<PAGE>
Your Account Distribution Arrangements/Sales Charges
Sales Charge Waivers
Investor B Shares
No CDSC is assessed on redemptions of Investor B Shares if:
. The shares were purchased with reinvested dividends or capital gains
distributions.
. The shares were purchased through an exchange of Investor B Shares of another
Portfolio.
. The redemption represents a distribution from a qualified retirement plan
under Section 403(b)(7) of the Internal Revenue Code, due to death,
disability or the attainment of a specified age.
. The redemption is in connection with the death or disability of the
shareholder.
. You participate in the Systematic Withdrawal Plan and your annual withdrawals
do not exceed 12% of your account's value.
. Your account falls below the Portfolio's minimum account size, and the Fund
liquidates your account (see page 52).
. The redemption results from a tax-free return of an excess contribution,
pursuant to Section 408(d)(4) or (5) of the Internal Revenue Code.
Distribution and Service Fees
Investor A Shares of the Portfolios pay distribution (12b-1) and shareholder
service fees at an annual rate of up to 0.30% of each Portfolio's Investor A
Share assets. Investor B Shares of the Portfolios pay distribution (12b-1) and
shareholder service fees at an annual rate of up to 1.00% of each Portfolio's
Investor B Share assets. The Fund has adopted separate distribution and service
plans under Rule 12b-1 that allow each Portfolio to pay fees from its Investor
A Share or Investor B Share assets for selling and distributing Investor A
Shares or Investor B Shares, as the case may be, and for services provided to
shareholders. Because 12b-1 fees are paid on an ongoing basis, over time they
increase the cost of your investment and may cost more than other sales
charges.
Converting Investor B Shares to Investor A Shares
Six years after you buy Investor B Shares of a Portfolio, they will
automatically convert to Investor A Shares of the Portfolio. This allows you to
benefit from the lower annual expenses of Investor A Shares.
Choosing Between Investor A Shares and Investor B Shares
In deciding whether to buy Investor A Shares or Investor B Shares, you should
consider how long you plan to hold the shares. Over time, the higher fees on
Investor B Shares may equal or exceed the initial sales charge and fees for
Investor A Shares. Investor A Shares may be a better choice if you qualify to
have the sales charges reduced or eliminated, or if you plan to sell your
shares within one or two years. Consult your financial adviser for help in
choosing the appropriate share class.
46
<PAGE>
Your Account Explanation of Sales Price
- --------------------------------------------------------------------------------
Business days defined
A business day is any day that the New York Stock Exchange is open for
business. Currently, the Fund observes the following holidays: New Year's Day,
Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day
(observed), Independence Day (observed), Labor Day, Thanksgiving and Christmas.
- --------------------------------------------------------------------------------
Shares of each class in a Portfolio are sold at their net asset value (NAV)
plus, in the case of Investor A Shares, a front-end sales charge, if
applicable. This is commonly referred to as the "public offering price."
The NAV for each class of shares of a Portfolio is determined as of the close
of regular trading on the New York Stock Exchange (currently 3:00 p.m., Central
time) on every business day. The NAV for a class of shares is determined by
adding the value of the Portfolio's investments, cash and other assets
attributable to a particular share class, subtracting the Portfolio's
liabilities attributable to that class and then dividing the result by the
total number of shares in the class that are outstanding.
. Each Portfolio's investments are valued according to market value. When a
market quote is not readily available, the security's value is based on "fair
value" as determined by FIRMCO (or Clay Finlay, with respect to the
International Equity Portfolio) under the supervision of the Fund's Board of
Directors. Foreign securities acquired by the International Equity Fund may
be valued in foreign markets on days when the Portfolio's NAV is not
calculated. In such cases, the NAV of the Portfolio's shares may be
significantly affected on days when investors cannot buy and sell Portfolio
shares.
. If you properly place a purchase order (see "How to Buy Shares" on page 48)
that is delivered to the Fund before 3:00 p.m. (Central time) on any business
day, the order receives the share price determined for your share class as of
3:00 p.m. (Central time) that day. If the order is received after 3:00 p.m.
(Central time), it will receive the price determined on the next business
day. You must pay for your shares no later than 3:00 p.m. (Central time)
three business days after placing the order, or the order will be canceled.
47
<PAGE>
Your Account How to Buy Shares
Investing in the Mercantile Stock Portfolios is quick and convenient. You can
purchase Investor A Shares or Investor B Shares in any of the following ways:
. Through a broker-dealer organization. You can purchase shares through any
broker-dealer organization that has a sales agreement with the Fund's
distributor. The broker-dealer organization is responsible for sending your
purchase order to the Fund.
. Through a financial organization. You can purchase shares through any
financial organization that has entered into a servicing agreement with the
Fund. The financial organization is responsible for sending your purchase
order to the Fund.
<TABLE>
<CAPTION>
To Open To Add to
Minimum Investments Your Account Your Account
<S> <C> <C>
Regular accounts $1,000 $50
- -------------------------------------------------
Sweep program
through your
financial
institution None None
- -------------------------------------------------
Wrap fee program
through your
financial
institution None None
- -------------------------------------------------
Payroll Deduction
Program* None $25
- -------------------------------------------------
ConvertiFund* $5,000 $ 1,000 minimum
account balance
- -------------------------------------------------
Periodic Investment
Plan* $50 $50
- -------------------------------------------------
</TABLE>
* See Investor Programs below.
. Directly from the Fund by mail. Just complete an account application and send
it, along with a check for at least the minimum purchase amount, to:
Mercantile Mutual Funds, Inc., c/o Firstar Mutual Fund Services, LLC, P.O.
Box 3011, Milwaukee, Wisconsin 53201-3011 (via overnight delivery to 615 E.
Michigan Street, Milwaukee, Wisconsin 53202). Remember to specify whether
you're buying Investor A Shares or Investor B Shares. To make additional
investments once you've opened your account, send your check to the address
above together with the detachable form that's included with your Fund
statement or confirmation of a prior transaction or a letter stating the
amount of your investment, the name of the Portfolio you want to invest in
and your account number.
In addition, you may call the Fund at 1-800-452-2724 for more information on
how to buy shares.
48
<PAGE>
Your Account How to Sell Shares
- --------------------------------------------------------------------------------
Selling recently purchased shares
If you attempt to sell shares you recently purchased with a personal check, the
Fund may delay processing your request until it collects payment for those
shares. This process may take up to 15 days, so if you plan to sell shares
shortly after purchasing them, you may want to consider purchasing shares via
electronic transfer to avoid delays.
- --------------------------------------------------------------------------------
You can arrange to get money out of your account by selling some or all of your
shares. This is known as "redeeming" your shares. You can redeem your shares in
the following ways:
. Through a broker-dealer or other financial organization. If you purchased
your shares through a broker-dealer or other financial organization, your
redemption order should be placed through the same organization. The
organization is responsible for sending your redemption order to the Fund on
a timely basis.
. By mail. Send your written redemption request to: Mercantile Mutual Funds,
Inc., c/o Firstar Mutual Fund Services, LLC, P.O. Box 3011, Milwaukee,
Wisconsin 53201-3011 (via overnight delivery to 615 E. Michigan Street,
Milwaukee, Wisconsin 53202). Your request must include the name of the
Portfolio, the number of shares or the dollar amount you want to sell, your
account number, your social security or tax identification number and the
signature of each registered owner of the account. Your request also must be
accompanied by any share certificates that are properly endorsed for
transfer. Additional documents may be required for certain types of
shareholders, such as corporations, partnerships, executors, trustees,
administrators or guardians.
The Fund's transfer agent may require a signature guarantee unless the
redemption proceeds are payable to the shareholder of record and the
redemption is either mailed to the shareholder's address of record or
electronically transferred to the account designated on the original account
application. A signature guarantee helps prevent fraud, and you may obtain
one from most banks and broker-dealers. Contact your broker-dealer or other
financial organization or the Fund for more information on signature
guarantees.
. By telephone. You may redeem your shares by telephone if you have selected
that option on your account application and if there has been no change of
address by telephone within the preceding 15 days. Call the Fund at 1-800-
452-2724 with your request. You may have your proceeds mailed to your address
or transferred electronically to the bank account designated on your account
application. If you have not previously selected the telephone privilege, you
may add this feature by providing written instructions to the Fund's transfer
agent. If you have difficulty getting through to the Fund because of unusual
market conditions, consider selling your shares by mail.
You may sell your Portfolio shares at any time. Your shares will be sold at the
NAV next determined after the Fund accepts your order (see above). The proceeds
of the sale of Investor B Shares will be reduced by the applicable CDSC. Your
proceeds ordinarily are sent electronically or mailed by check within three
business days. If your account holds both Investor A Shares and Investor B
Shares, be sure to specify which shares you are selling. Otherwise, Investor A
Shares will be sold first.
49
<PAGE>
Your Account Investor Programs
It's also easy to buy or sell shares of the Portfolios by using one of the
programs described below.
Periodic Investment Plan
You may open an account or make additional investments to an existing account
for as little as $50 a month with the Fund's Periodic Investment Plan (PIP).
Under the PIP (which was formerly known as the Automatic Investment Program),
you specify the dollar amount to be automatically withdrawn each month from
your bank checking account and invested in your Portfolio account. Purchases of
Investor A Shares or Investor B Shares will occur on the day of the month
designated by you (or the next business day after the designated day) of each
month at the net asset value plus any front-end sales charge, if applicable,
next determined on the day the order is effected. To take advantage of the PIP,
complete the PIP authorization form included with your account application or
contact your broker-dealer or other financial organization.
PIP lets you take advantage of "dollar cost averaging", a long-term investment
technique designed to help investors reduce their average cost per share over
time. Instead of trying to time the market, you can invest a fixed dollar
amount each month. So, you buy fewer Portfolio shares when prices are high and
more when prices are low. Because dollar cost averaging involves regular
investing over time, regardless of share price, it may not be appropriate for
all investors.
In addition, dollar cost averaging does not guarantee a profit or protect
against loss in a steadily declining market. To be effective, dollar cost
averaging usually should be followed on a sustained, consistent basis. Even
then, however, there can be no guarantee of the success of this technique, and
it will not prevent a loss if an investor ultimately redeems his or her shares
at a price that is lower than the original purchase price.
Exchanges
The exchange privilege enables you to exchange Investor A Shares of one
Portfolio for Investor A Shares (or in certain limited circumstances described
in the SAI, Trust or Institutional Shares) of another Portfolio and to exchange
Investor B Shares of one Portfolio for Investor B Shares of another Portfolio.
Just sign up for the exchange privilege on your account application and contact
your broker-dealer or other financial organization when you want to exchange
shares. You also may exchange shares by telephoning the Fund directly (call 1-
800-452-2724) if you have elected this privilege on your account application.
The exchange privilege may be exercised only in those states where the class of
shares of the Portfolio being acquired may be legally sold.
When exchanging Investor A Shares of a Portfolio that has no sales charge or a
lower sales charge for Investor A Shares of a Portfolio with a higher sales
charge, you will pay the difference.
You may exchange Investor B Shares without paying a CDSC on the exchange. The
holding period of the shares originally held and redeemed will be added to the
holding period of the new shares acquired through the exchange.
Shares of the Portfolios also may be exchanged for shares of corresponding
classes of the Firstar Funds and the Firstar Stellar Funds. Please read the
prospectuses for those Funds before investing.
50
<PAGE>
Your Account Investor Programs
ConvertiFund
This program (which was formerly known as the Automatic Exchange Program) lets
you automatically exchange shares of one Portfolio for shares of another
Portfolio on a regular basis, as long as the shares are of the same class.
Because you're making regular purchases, ConvertiFund enables you to take
advantage of dollar cost averaging. (See "Periodic Investment Plan" above.)
To participate, you must make a minimum initial purchase of $5,000 and maintain
a minimum account balance of $1,000. In addition, you must complete the
authorization form included with your account application or available from
your broker-dealer or other financial organization. In order to change
instructions with respect to ConvertiFund or to discontinue the program, you
must send written instructions to your broker-dealer or other financial
organization or to the Fund.
Systematic Withdrawal Plan
If the net asset value of your account equals $10,000 or more, you may take
advantage of the Fund's Systematic Withdrawal Plan (SWP). With the SWP (which
was formerly known as the Automatic Withdrawal Plan), you can have monthly,
quarterly, semi-annual or annual redemptions of at least $50 from your
Portfolio account sent to you via check or to your bank account electronically
on the day of the month designated by you (or the next business day after the
designated day) of the applicable month of withdrawal. No CDSC will be charged
on withdrawals of Investor B Shares made through the SWP that don't annually
exceed 12% of your account's value.
To participate in the SWP, complete the SWP application included with your
account application or contact your broker-dealer or other financial
organization. A signature guarantee will be required. You may terminate your
participation in the SWP upon 30 days' notice to your broker-dealer or other
financial organization or to the Fund.
Payroll Deduction Program
You can make regular investments from your paycheck. The minimum investment is
$25 per pay period. Call the Fund at 1-800-452-2724 for an application and
further information. The Fund may terminate the program at any time.
Internet Transactions
You generally can request purchases, exchanges and redemptions of Investor A
Shares and Investor B Shares of the Portfolios on-line via the Internet after
an account is opened. Redemption requests of up to $25,000 will be accepted
through the Internet. Payment for shares purchased on-line must be made by
electronic funds transfer from your banking institution. To authorize this
service, call the Fund's transfer agent at 1-800-452-2724.
The Fund and its agents will not be responsible for any losses resulting from
unauthorized on-line transactions when procedures are followed which are
designed to confirm that the on-line transaction request is genuine. Statements
of accounts shall be conclusive if not objected to in writing within 10 days
after transmitted by mail. During periods of significant economic or market
change, it may be difficult to reach the Fund on-line. If this happens, you may
initiate transactions in your share accounts by mail or otherwise as described
above.
51
<PAGE>
Your Account General Transaction Policies
General Transaction Policies
The Fund reserves the right to:
. Vary or waive any minimum investment requirement.
. Refuse any order to buy shares.
. Reject any exchange request.
. Change or cancel the procedures for selling or exchanging shares by telephone
at any time.
. Redeem all shares in your account if your balance falls below $500. If,
within 60 days of the Fund's written request, you have not increased your
account balance, you may be required to redeem your shares. The Fund will not
require you to redeem shares if the value of your account drops below $500
due to fluctuations in net asset value.
. Send redemption proceeds within seven days after receiving a request, if an
earlier payment could adversely affect a Portfolio.
. Modify or terminate the Periodic Investment Plan, ConvertiFund and Systematic
Withdrawal Plan programs at any time.
. Modify or terminate the exchange privilege after 60 days' written notice to
shareholders.
. Make a "redemption in kind." Under abnormal conditions that may make payment
in cash unwise, the Fund may offer partial or complete payment in portfolio
securities rather than cash at such securities' then-market-value equal to
the redemption price. In such cases, you may incur brokerage costs in
converting these securities to cash.
If you elect telephone privileges on the account application or in a letter to
the Fund, you may be responsible for any fraudulent telephone orders as long as
the Fund has taken reasonable precautions to verify your identity.
Also, your broker/dealer or other financial organization may establish policies
that differ from those of the Fund. For example, the organization may charge
transaction fees, set higher minimum investments, or impose certain limitations
on purchasing or redeeming shares in addition to those identified in this
prospectus. Contact your broker/dealer or other financial organization for
details.
52
<PAGE>
Distributions and Taxes
Dividends and Distributions
The Portfolios pay their shareholders dividends from the Portfolios' respective
net investment income and distribute any net capital gains the Portfolios have
realized.
Dividends for the Balanced, Equity Income, Equity Index, Growth & Income Equity
and Growth Equity Portfolios are declared and paid monthly. Dividends for the
Small Cap Equity, Small Cap Equity Index and International Equity Portfolios
are declared and paid quarterly. Capital gains, if any, for all of the
Portfolios are distributed at least once a year. It's expected that each
Portfolio's annual distributions will normally--but not always--consist
primarily of capital gains and not ordinary income.
Dividends on each share class of the Portfolios are determined in the same
manner and are paid in the same amount. However, each share class bears all
expenses associated with that particular class. So, because Investor B Shares
have higher distribution and service fees than Investor A Shares, the dividends
paid to Investor B shareholders will be lower than those paid to Investor A
shareholders.
All of your dividends and capital gains distributions with respect to a
particular Portfolio will be reinvested in additional shares of the same class
unless you instruct otherwise on your account application or have redeemed all
shares you held in the Portfolio. In such cases, dividends and distributions
will be paid in cash.
53
<PAGE>
Distributions and Taxes
Taxation
As with any investment, you should consider the tax implications of an
investment in the Portfolios. The following is only a brief summary of some of
the important tax considerations, generally affecting the Portfolios and their
shareholders under current law, which may be subject to change in the future.
Consult your tax adviser with specific reference to your own tax situation.
. Each Portfolio contemplates declaring as dividends each year all or
substantially all of its taxable income, including its net capital gains (the
excess of long-term capital gain over short-term capital loss). Distributions
attributable to the net capital gain of a Portfolio will be taxable to you as
long-term capital gain, regardless of how long you will have held your
shares. Other Portfolio distributions will generally be taxable as ordinary
income. You will be subject to income tax on distributions regardless of
whether they are paid in cash or reinvested in additional shares.
. If you purchase shares just prior to a distribution, the purchase price will
reflect the amount of the upcoming distribution, but you will be taxed on the
entire amount of the distribution received even though, as an economic
matter, the distribution simply constitutes a return of capital. This is
known as "buying into a dividend."
. You will recognize a taxable gain or loss on a sale, exchange or redemption
of your shares, including an exchange for shares of another Portfolio, based
on the difference between your tax basis in the shares and the amount you
receive for them. Generally, this gain or loss will be long-term or short-
term depending on whether your holding period for the shares exceeds 12
months, except that any loss realized on shares held for six months or less
will be treated as a long-term capital loss to the extent that any long-term
capital gain distributions were received with respect to the shares.
. Distributions on, and sales, exchanges and redemptions of, shares held in an
IRA or other tax-qualified plan will not be currently taxable.
. The International Equity Portfolio is expected to be subject to foreign
withholding taxes with respect to dividends or interest received from sources
in foreign countries. The Portfolio may make an election to treat a
proportionate amount of these taxes as a distribution to each shareholder.
This will allow each shareholder to either (1) credit such proportionate
amount of taxes against U.S. federal income tax liability, or (2) take such
amount as an itemized deduction.
A Portfolio's dividends that are paid to its corporate shareholders and are
attributable to qualifying dividends the Portfolio receives from U.S. domestic
corporations may be eligible, in the hands of the corporate shareholders, for
the corporate dividends-received deduction, subject to certain holding period
requirements and debt financing limitations.
54
<PAGE>
Distributions and Taxes
- --------------------------------------------------------------------------------
You will be advised at least annually regarding the federal income tax
treatment of dividends and distributions made to you. You should save your
account statements because they contain information you will need to calculate
your capital gains or losses, if any, upon your ultimate sale or exchange of
shares in the Portfolios.
- --------------------------------------------------------------------------------
Shareholders may also be subject to state and local taxes on distributions and
redemptions. State income taxes may not apply however, to the portions of each
Portfolio's distributions, if any, that are attributable to interest on U.S.
Government securities or interest on securities of a particular state or
localities within a state.
The foregoing is only a summary of certain tax considerations under current
law, which may be subject to change in the future. Shareholders who are
nonresident aliens, foreign trusts or estates, or foreign corporations or
partnerships, may be subject to different U.S. federal income tax treatment.
For more information regarding the taxation of the Portfolios, consult the SAI
under the heading "Additional Information Concerning Taxes." You should also
consult your tax adviser for further information regarding federal, state,
local and/or foreign tax consequences relevant to your specific situation.
55
<PAGE>
Management of the Fund
The Adviser
FIRMCO serves as the 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, with its main office at Firstar Center, 777 East Wisconsin Avenue,
Suite 800, Milwaukee, Wisconsin 53202, has been providing advisory services
since 1986. As of December 31, 1999, FIRMCO had approximately $35.3 billion in
assets under management.
FIRMCO, subject to the general supervision of the Fund's Board of Directors, is
responsible for the day-to-day management of the Portfolios in accordance with
each Portfolio's respective investment objective and policies. This includes
making investment decisions, buying and selling securities and overseeing the
administration and recordkeeping for each Portfolio.
In exchange for these services, FIRMCO receives an investment advisory fee,
which is calculated daily and paid monthly, according to the average daily net
assets of each Portfolio. For the fiscal year ended November 30, 1999, the
Portfolios paid MVA advisory fees as follows:
<TABLE>
<CAPTION>
Investment advisory fees
Portfolio as a % of net assets
-------------------------
<S> <C>
Balanced Portfolio .75%
-------------------------
Equity Income Portfolio .75%
-------------------------
Equity Index Portfolio .30%
-------------------------
Growth Equity Portfolio .75%
-------------------------
Growth & Income Equity
Portfolio .55%
-------------------------
Small Cap Equity Portfolio .75%
-------------------------
Small Cap Equity Index
Portfolio .32%
-------------------------
International Equity Portfolio 1.00%
- -------------------------------------------------
</TABLE>
The Sub-Adviser
Clay Finlay Inc., an experienced international investment manager, serves as
sub-adviser to the International Equity Portfolio and is responsible for the
management of the Portfolio's assets. Clay Finlay manages the Portfolio under
the guidance and direction of FIRMCO and according to its sub-advisory
agreement with FIRMCO. For its services, Clay Finlay receives from FIRMCO a
monthly fee based on a percentage of the Portfolio's average daily net assets.
Founded in 1982, Clay Finlay is a registered investment adviser and a
subsidiary of United Asset Management Corporation, a financial services holding
company. Clay Finlay's principal office is located at 200 Park Avenue, 56th
Floor, New York, NY 10166.
56
<PAGE>
Financial Highlights
Introduction
The financial highlights tables presented below are intended to help you
understand the financial performance of each Portfolio's Investor A Shares
and/or Investor B Shares for the past five years (or, if shorter, the period
since the Portfolio began operations or the particular shares were first
offered). Certain information reflects financial results for a single Investor
A Share or Investor B Share in each Portfolio. The total returns in the tables
represent the rate that an investor would have earned (or lost) on an
investment in either Investor A Shares or Investor B Shares, assuming
reinvestment of all dividends and distributions. This information has been
audited by KPMG LLP, independent auditors, whose report, along with the
Portfolios' financial statements, are included in the Fund's Annual Report to
Shareholders, and is incorporated by reference into the SAI.
57
<PAGE>
Financial Highlights Balanced Portfolio
<TABLE>
<CAPTION>
Investor A Shares
(For a Share outstanding throughout
each period)
Year Ended November 30
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $ 12.63 $ 13.26 $12.58 $11.65 $ 9.61
------------------------------------------------------------------------------
Investment Activities
Net investment income 0.27 0.28 0.32 0.32 0.32
Net realized and unrealized gains
from investments 0.69 0.84 1.47 1.34 2.02
------------------------------------------------------------------------------
Total from Investment Activities 0.96 1.12 1.79 1.66 2.34
------------------------------------------------------------------------------
Distributions
Net investment income (0.27) (0.28) (0.40) (0.31) (0.30)
Net realized gains (0.88) (1.47) (0.71) (0.42) --
------------------------------------------------------------------------------
Total Distributions (1.15) (1.75) (1.11) (0.73) (0.30)
------------------------------------------------------------------------------
Net Asset Value, End of Period $ 12.44 $ 12.63 $13.26 $12.58 $11.65
------------------------------------------------------------------------------
Total Return (excludes sales
charge) 8.30% 9.43% 15.38% 15.10% 24.85%
Ratios/Supplementary Data:
Net Assets at end of period (000) $11,416 $10,659 $9,923 $9,328 $8,348
Ratio of expenses to average net
assets 1.28% 1.26% 1.27% 1.27% 1.27%
Ratio of net investment income to
average net assets 2.21% 2.23% 2.57% 2.79% 2.98%
Ratio of expenses to average
net assets* 1.38% 1.36% 1.37% 1.37% 1.37%
Portfolio turnover** 34.80% 47.79% 43.60% 85.16% 58.16%
</TABLE>
- --------------------------------------------------------------------------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a
whole without distinguishing between the classes of shares issued.
58
<PAGE>
Financial Highlights Balanced Portfolio
<TABLE>
<CAPTION>
Investor B Shares
(For a Share outstanding throughout each
period)
March 1, 1995
to
Year Ended November 30, November 30,
1999 1998 1997 1996 1995(a)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $12.50 $13.15 $12.49 $11.59 $10.13
------------------------------------------------------------------------------
Investment Activities
Net investment income 0.20 0.21 0.25 0.25 0.22
Net realized and unrealized
gains
from investments 0.69 0.81 1.43 1.33 1.44
------------------------------------------------------------------------------
Total from Investment
Activities 0.89 1.02 1.68 1.58 1.66
------------------------------------------------------------------------------
Distributions
Net investment income (0.19) (0.20) (0.26) (0.26) (0.20)
In excess of net investment
income -- -- (0.05) -- --
Net realized gains (0.88) (1.47) (0.71) (0.42) --
------------------------------------------------------------------------------
Total Distributions (1.07) (1.67) (1.02) (0.68) (0.20)
------------------------------------------------------------------------------
Net Asset Value, End of Period $12.32 $12.50 $13.15 $12.49 $11.59
------------------------------------------------------------------------------
Total Return (excludes
redemption charge) 7.75% 8.63% 14.57% 14.35% 23.92%(b)
Ratios/Supplementary Data:
Net Assets at end of period
(000) $2,380 $1,285 $ 522 $ 321 $ 36
Ratio of expenses to average
net assets 1.98% 1.96% 1.96% 1.96% 1.93%(c)
Ratio of net investment
income to average net assets 1.51% 1.57% 1.85% 2.09% 2.28%(c)
Ratio of expenses to average
net assets* 2.08% 2.06% 2.06% 2.06% 2.03%(c)
Portfolio turnover** 34.80% 47.79% 43.60% 85.16% 58.16%
</TABLE>
- --------------------------------------------------------------------------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a
whole without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Represents the total return for Investor A Shares from December 1, 1994
to February 28, 1995 plus the total return for Investor B Shares from
March 1, 1995 through November 30, 1995.
(c) Annualized.
59
<PAGE>
Financial Highlights Equity Income Portfolio
<TABLE>
<CAPTION>
Investor A Shares
(For a Share
outstanding throughout
each period)
February
27, 1997
to
Year Ended November
November 30, 30,
1999 1998 1997(a)
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $10.24 $11.56 $10.00
------------------------------------------------------------------------------
Investment Activities
Net investment income 0.13 0.17 0.16
Net realized and unrealized gains (losses) from
investments (0.18) 0.98 1.57
------------------------------------------------------------------------------
Total from Investment Activities (0.05) 1.15 1.73
------------------------------------------------------------------------------
Distributions
Net investment income (0.13) (0.18) (0.16)
In excess of net investment income -- -- (0.01)
Net realized gains (2.23) (2.29) --
------------------------------------------------------------------------------
Total Distributions (2.36) (2.47) (0.17)
------------------------------------------------------------------------------
Net Asset Value, End of Period $ 7.83 $10.24 $11.56
------------------------------------------------------------------------------
Total Return (excludes sales charge) (0.05)% 11.69% 17.42%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000) $1,336 $1,709 $ 173
Ratio of expenses to average net assets 1.28% 1.15% 0.45%(c)
Ratio of net investment income to average net
assets 1.60% 1.51% 2.29%(c)
Ratio of expenses to average net assets* 1.38% 1.38% 1.38%(c)
Portfolio turnover** 81.84% 98.32% 48.33%
</TABLE>
- --------------------------------------------------------------------------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a
whole without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
60
<PAGE>
Financial Highlights Equity Income Portfolio
<TABLE>
<CAPTION>
Investor B Shares
(For a Share outstanding
throughout each period)
February 27, 1997
Year Ended to
November 30, November 30,
1999 1998 1997(a)
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $10.23 $11.55 $10.00
---------------------------------------------------------------------------
Investment Activities
Net investment income 0.08 0.11(d) 0.10
Net realized and unrealized gains
(losses) from investments (0.19) 0.97 1.57
---------------------------------------------------------------------------
Total from Investment Activities (0.11) 1.08 1.67
---------------------------------------------------------------------------
Distributions
Net investment income (0.08) (0.11) (0.10)
In excess of net investment income -- -- (0.02)
Net realized gains (2.23) (2.29) --
---------------------------------------------------------------------------
Total Distributions (2.31) (2.40) (0.12)
---------------------------------------------------------------------------
Net Asset Value, End of Period $ 7.81 $10.23 $11.55
---------------------------------------------------------------------------
Total Return (excludes redemption
charge) (0.85)% 10.98% 16.75%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000) $ 766 $ 520 $ 131
Ratio of expenses to average net
assets 1.98% 1.84% 1.14%(c)
Ratio of net investment income to
average net assets 0.89% 0.83% 1.53%(c)
Ratio of expenses to average net
assets* 2.08% 2.08% 2.07%(c)
Portfolio turnover** 81.84% 98.32% 48.33%
</TABLE>
- --------------------------------------------------------------------------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a
whole without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Per share net investment income has been calculated using the daily
average share method.
61
<PAGE>
Financial Highlights Equity Index Portfolio
<TABLE>
<CAPTION>
Investor A Shares
(For a Share outstanding throughout each
period)
May 1, 1997
Year Ended November 30, to
1999 1998 November 30, 1997(a)
<S> <C> <C> <C>
Net Asset Value, Beginning of
Period $ 14.54 $ 11.93 $10.00
-------------------------------------------------------------------------------
Investment Activities
Net investment income 0.09 0.09 0.07
Net realized and unrealized
gains from investments 2.74 2.64 1.94
-------------------------------------------------------------------------------
Total from Investment
Activities 2.83 2.73 2.01
-------------------------------------------------------------------------------
Distributions
Net investment income (0.08) (0.10) (0.07)
In excess of net investment
income -- -- (0.01)
Net realized gains (0.18) (0.02) --
-------------------------------------------------------------------------------
Total Distributions (0.26) (0.12) (0.08)
-------------------------------------------------------------------------------
Net Asset Value, End of
Period $ 17.11 $ 14.54 $11.93
-------------------------------------------------------------------------------
Total Return (excludes sales
charge) 19.84% 23.01% 20.14%(b)
Ratios/Supplementary Data:
Net Assets at end of period
(000) $ 3,385 $ 914 $ 206
Ratio of expenses to average
net assets 0.85% 0.86% 0.78%(c)
Ratio of net investment
income to average net
assets 0.50% 0.70% 1.02%(c)
Ratio of expenses to average
net assets* 0.95% 1.03% 1.21%(c)
Portfolio turnover** 27.84% 14.83% 1.66%
</TABLE>
- --------------------------------------------------------------------------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a
whole without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
62
<PAGE>
Financial Highlights Growth & Income Equity Portfolio
<TABLE>
<CAPTION>
Investor A Shares
(For a Share outstanding throughout
each period)
Year Ended November 30,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $ 19.13 $ 21.12 $ 18.67 $ 16.30 $ 12.70
------------------------------------------------------------------------------
Investment Activities
Net investment income 0.09 0.12 0.11 0.20 0.23
Net realized and unrealized
gains
from investments 2.29 1.58 3.96 3.32 3.74
------------------------------------------------------------------------------
Total from Investment
Activities 2.38 1.70 4.07 3.52 3.97
------------------------------------------------------------------------------
Distributions
Net investment income (0.09) (0.11) (0.13) (0.20) (0.23)
In excess of net investment
income -- (0.01) (0.03) (0.01) --
Net realized gains (1.48) (3.57) (1.46) (0.94) (0.14)
------------------------------------------------------------------------------
Total Distributions (1.57) (3.69) (1.62) (1.15) (0.37)
------------------------------------------------------------------------------
Net Asset Value, End of Period $ 19.94 $ 19.13 $ 21.12 $ 18.67 $ 16.30
------------------------------------------------------------------------------
Total Return (excludes sales
charge) 13.65% 9.35% 23.90% 22.99% 31.95%
Ratios/Supplementary Data:
Net Assets at end of period
(000) $51,302 $48,868 $46,372 $38,229 $25,082
Ratio of expenses to average
net
assets 1.04% 1.04% 1.04% 1.05% 1.05%
Ratio of net investment income
to average net assets 0.44% 0.59% 0.60% 1.20% 1.59%
Ratio of expenses to average
net
assets* 1.16% 1.14% 1.14% 1.15% 1.15%
Portfolio turnover** 60.31% 91.23% 57.11% 63.90% 58.50%
</TABLE>
- --------------------------------------------------------------------------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a
whole without distinguishing between the classes of shares issued.
63
<PAGE>
Financial Highlights Growth & Income Equity Portfolio
<TABLE>
<CAPTION>
Investor B Shares
(For a Share outstanding throughout each
period)
March 1, 1995
Year Ended November 30, to
1999 1998 1997 1996 Nov. 30, 1995(a)
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 18.89 $20.94 $18.58 $16.23 $13.43
---------------------------------------------------------------------------------
Investment Activities
Net investment income
(loss) (0.04) (0.02)(d) (0.02) 0.11 0.14
Net realized and
unrealized gains
from investments 2.24 1.57 3.93 3.30 2.81
---------------------------------------------------------------------------------
Total from Investment
Activities 2.20 1.55 3.91 3.41 2.95
---------------------------------------------------------------------------------
Distributions
Net investment income (0.02) -- -- (0.11) (0.15)
In excess of net
investment income -- (0.03) (0.09) (0.01) --
Net realized gains (1.48) (3.57) (1.46) (0.94) --
---------------------------------------------------------------------------------
Total Distributions (1.50) (3.60) (1.55) (1.06) (0.15)
---------------------------------------------------------------------------------
Net Asset Value, End of
Period $ 19.59 $18.89 $20.94 $18.58 $16.23
---------------------------------------------------------------------------------
Total Return (excludes
redemption
charge) 12.79% 8.59% 23.04% 22.29% 31.20%(b)
Ratios/Supplementary
Data:
Net Assets at end of
period (000) $10,110 $9,040 $6,349 $3,537 $ 781
Ratio of expenses to
average
net assets 1.74% 1.74% 1.73% 1.75% 1.75%(c)
Ratio of net investment
income
(loss) to average net
assets (0.26)% (0.10)% (0.11)% 0.49% 0.87%(c)
Ratio of expenses to
average
net assets* 1.86% 1.84% 1.83% 1.85% 1.85%(c)
Portfolio turnover** 60.31% 91.23% 57.11% 63.90% 58.50%
</TABLE>
- --------------------------------------------------------------------------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a
whole without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Represents the total return for Investor A Shares from December 1, 1994
to February 28, 1995 plus the total return for Investor B Shares from
March 1, 1995 to November 30, 1995.
(c) Annualized.
(d) Per share net investment income has been calculated using the daily
average share method.
64
<PAGE>
Financial Highlights Growth Equity Portfolio
<TABLE>
<CAPTION>
Investor A Shares
(For a share outstanding throughout each period)
Year Ended October 1, 1997 Year Ended September
November 30, to November 30, 30,
1999 1998 1997(a) 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $19.92 $16.26 $18.75 $ 15.06 $ 13.80 $ 9.74
-----------------------------------------------------------------------------------------
Investment Activities
Net investment income
(loss) (0.04) (0.04) (0.01) 0.08 0.12 0.10
Net realized and
unrealized gains
(losses) on
investments 4.79 3.70 (0.24) 4.75 1.32 4.05
-----------------------------------------------------------------------------------------
Total from Investment
Activities 4.75 3.66 (0.25) 4.83 1.44 4.15
-----------------------------------------------------------------------------------------
Distributions
Net investment income -- (d) -- -- (0.09) (0.11) (0.09)
Net realized gains (2.03) -- (2.24) (1.05) (0.07) --
-----------------------------------------------------------------------------------------
Total Distributions (2.03) -- (2.24) (1.14) (0.18) (0.09)
-----------------------------------------------------------------------------------------
Net Asset Value, End of
Period $22.64 $19.92 $16.26 $ 18.75 $ 15.06 $ 13.80
-----------------------------------------------------------------------------------------
Total Return (excludes
sales charge) 26.67% 22.53% (1.25)%(b) 33.85% 10.48% 42.90%
Ratios/Supplementary
Data:
Net Assets at end of
period (000) $8,893 $4,832 $3,467 $68,965 $55,573 $43,708
Ratio of expenses to
average net assets 1.27% 1.35% 1.17%(c) 1.14% 1.17% 1.28%
Ratio of net investment
income (loss) to
average net assets (0.34)% (0.26)% (0.27)%(c) 0.44% 0.86% 0.90%
Ratio of expenses to
average net assets* 1.37% 1.45% 1.42%(c) 1.39% 1.45% 1.58%
Portfolio turnover** 21.85% 54.33% 24.45% 42.00% 45.00% 45.00%
</TABLE>
- --------------------------------------------------------------------------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Upon reorganizing as a Portfolio of The Arch Fund, Inc., the Arrow
Equity Portfolio became the Growth Equity Portfolio and changed its
year-end to November 30. Financial Highlights for the periods prior to
November 24, 1997 represent financial highlights of the Arrow Equity
Portfolio.
(b) Not annualized.
(c) Annualized.
(d) Distributions per share was less than $0.005.
65
<PAGE>
Financial Highlights Growth Equity Portfolio
<TABLE>
<CAPTION>
Investor B Shares
(For a share outstanding throughout
each period)
Feb. 23, 1998
Year Ended to
November 30, 1999 November 30, 1998(a)
<S> <C> <C>
Net Asset Value, Beginning of Period $19.81 $16.27
-----------------------------------------------------------------------------
Investment Activities
Net investment loss (0.22)(d) (0.07)
Net realized and unrealized gains
from investments 4.78 3.61
-----------------------------------------------------------------------------
Total from Investment Activities 4.56 3.54
-----------------------------------------------------------------------------
Distributions
Net realized gains (2.03) --
-----------------------------------------------------------------------------
Total distributions (2.03) --
-----------------------------------------------------------------------------
Net Asset Value, end of period $22.34 $19.81
-----------------------------------------------------------------------------
Total return (excludes redemption
charge) 25.77% 9.87%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000) $2,020 $ 252
Ratio of expenses to average net
assets 1.97% 2.11%(c)
Ratio of net investment loss to
average net assets (1.07)% (1.08)%(c)
Ratio of expenses to average net
assets* 2.07% 2.22%(c)
Portfolio turnover** 21.85% 54.33%
</TABLE>
- --------------------------------------------------------------------------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Per share net investment income has been calculated using the daily
average share method.
66
<PAGE>
Financial Highlights Small Cap Equity Portfolio
<TABLE>
<CAPTION>
Investor A Shares
(For a Share outstanding throughout
each period)
Year Ended November 30,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $11.86 $ 15.03 $ 13.40 $ 13.44 $ 11.99
-----------------------------------------------------------------------------
Investment Activities
Net investment loss (0.07)(a) (0.06) (0.05) (0.01) --
Net realized and
unrealized gains
(losses) from
investments 2.10 (1.89) 2.50 1.03 2.36
-----------------------------------------------------------------------------
Total from Investment
Activities 2.03 (1.95) 2.45 1.02 2.36
-----------------------------------------------------------------------------
Distributions
In excess of net
investment income -- -- -- (0.01) --
Net realized gains (0.05) (1.19) (0.82) (1.05) (0.91)
In excess of net
realized gains -- (0.03) -- -- --
-----------------------------------------------------------------------------
Total Distributions (0.05) (1.22) (0.82) (1.06) (0.91)
-----------------------------------------------------------------------------
Net Asset Value, End of
Period $13.84 $ 11.86 $ 15.03 $ 13.40 $ 13.44
-----------------------------------------------------------------------------
Total Return (excludes
sales charge) 17.21% (14.19)% 19.45% 8.36% 21.47%
Ratios/Supplementary
Data:
Net assets at end of
Period (000) $8,885 $11,601 $14,213 $13,889 $15,056
Ratio of expenses to
average net assets 1.26% 1.25% 1.25% 1.26% 1.26%
Ratio of net investment
loss to average net
assets (0.57)% (0.45)% (0.29)% (0.13)% (0.12)%
Ratio of expenses to
average net assets* 1.36% 1.35% 1.35% 1.36% 1.36%
Portfolio turnover** 72.08% 69.72% 80.23% 65.85% 83.13%
</TABLE>
- --------------------------------------------------------------------------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Per share net investment loss has been calculated using the daily
average share method.
67
<PAGE>
Financial Highlights Small Cap Equity Portfolio
<TABLE>
<CAPTION>
Investor B Shares
(For a Share outstanding throughout each
period)
March 1,
1995 to
Year Ended November 30, November 30,
1999 1998 1997 1996 1995(a)
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $11.53 $14.74 $13.24 $13.37 $11.83
-------------------------------------------------------------------------------
Investment Activities
Net investment loss (0.16)(d) (0.14) (0.13) (0.07) (0.03)
Net realized and
unrealized gains
(losses) from
investments 2.06 (1.85) 2.45 0.99 1.57
-------------------------------------------------------------------------------
Total from Investment
Activities 1.90 (1.99) 2.32 0.92 1.54
-------------------------------------------------------------------------------
Distributions
Net realized gains (0.05) (1.18) (0.82) (1.05) --
In excess of net
realized gains -- (0.04) -- -- --
-------------------------------------------------------------------------------
Total Distributions (0.05) (1.22) (0.82) (1.05) --
-------------------------------------------------------------------------------
Net Asset Value, End of
Period $13.38 $11.53 $14.74 $13.24 $13.37
-------------------------------------------------------------------------------
Total Return (excludes
redemption charge) 16.57% (14.79)% 18.62% 7.63% 20.83%(b)
Ratios/Supplementary
Data:
Net assets at end of
period (000) $1,094 $1,286 $1,503 $1,272 $ 603
Ratio of expenses to
average net assets 1.96% 1.95% 1.95% 1.96% 1.96%(c)
Ratio of net investment
loss to average net
assets (1.27)% (1.15)% (0.99)% (0.83)% (0.78)%(c)
Ratio of expenses to
average net assets* 2.06% 2.05% 2.05% 2.06% 2.06%(c)
Portfolio turnover** 72.08% 69.72% 80.23% 65.85% 83.13%
</TABLE>
- --------------------------------------------------------------------------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Represents the total return for Investor A Shares from December 1, 1994
to February 28, 1995 plus the total return for Investor B Shares from
March 1, 1995 through November 30, 1995.
(c) Annualized.
(d) Per share net investment loss has been calculated using the daily
average share method.
68
<PAGE>
Financial Highlights Small Cap Equity Index Portfolio
<TABLE>
<CAPTION>
Investor A Shares
(For a Share
outstanding
throughout the period)
December 30, 1998
to
November 30, 1999(a)
<S> <C>
Net Asset Value, Beginning of Period $10.00
----------------------------------------------------------------------------
Investment Activities
Net investment loss -- (d)
Net realized and unrealized gains from investments 0.19
----------------------------------------------------------------------------
Total from Investment Activities 0.19
----------------------------------------------------------------------------
Distributions
Net investment income (0.01)
----------------------------------------------------------------------------
Total Distributions (0.01)
----------------------------------------------------------------------------
Net Asset Value, End of Period $10.18
----------------------------------------------------------------------------
Total Return (excludes sales charge) 1.86%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000) $ 134
Ratio of expenses to average net assets 1.00%(c)
Ratio of net investment loss to average net assets (0.15)%(c)
Ratio of expenses to average net assets* 1.14%(c)
Portfolio turnover** 35.27%
</TABLE>
- --------------------------------------------------------------------------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Period from initial public investment.
(b) Not annualized.
(c) Annualized.
(d) Net investment income per share was less than $0.005.
69
<PAGE>
Financial Highlights International Equity Portfolio
<TABLE>
<CAPTION>
Investor A Shares
(For a Share outstanding
throughout each period)
Year Ended November 30,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $13.27 $11.99 $12.05 $10.76 $ 9.90
------------------------------------------------------------------------------
Investment Activities
Net investment income (loss) -- 0.01 (0.02) 0.02 0.02
Net realized and unrealized gains
from
investments and foreign currency 4.55 1.77 0.32 1.27 0.86
------------------------------------------------------------------------------
Total from Investment Activities 4.55 1.78 0.30 1.29 0.88
------------------------------------------------------------------------------
Distributions
Net investment income (loss) (0.03) -- -- -- --
In excess of net investment
income (0.01) (0.07) (0.05) -- --
Net realized gains (0.75) (0.43) (0.31) -- (0.01)
Tax return of capital -- -- -- -- (0.01)
------------------------------------------------------------------------------
Total Distributions (0.79) (0.50) (0.36) -- (0.02)
------------------------------------------------------------------------------
Net Asset Value, End of Period $17.03 $13.27 $11.99 $12.05 $10.76
------------------------------------------------------------------------------
Total Return (excludes sales
charge) 36.62% 15.33% 2.58% 11.99% 8.89%
Ratios/Supplementary Data:
Net Assets at end of period (000) $3,939 $3,154 $2,854 $2,573 $1,568
Ratio of expenses to average net
assets 1.56% 1.58% 1.59% 1.44% 1.45%
Ratio of net investment income
(loss) to average net assets (0.01)% 0.02% (0.20)% 0.19% 0.07%
Ratio of expenses to average net
assets* 1.75% 1.75% 1.75% 1.75% 1.76%
Portfolio turnover** 93.73% 88.95% 75.18% 77.63% 62.78%
</TABLE>
- --------------------------------------------------------------------------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
70
<PAGE>
Financial Highlights International Equity Portfolio
<TABLE>
<CAPTION>
Investor B Shares
(For a Share outstanding throughout each period)
Year Ended November 30, March 1, 1995 to
1999 1998 1997 1996 November 30, 1995(a)
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $12.97 $11.77 $11.90 $10.71 $ 9.26
-----------------------------------------------------------------------------------
Investment Activities
Net investment loss (0.10) (0.09) (0.09) (0.04) (0.03)
Net realized and
unrealized gains from
investments and
foreign currency 4.43 1.74 0.30 1.23 1.48
-----------------------------------------------------------------------------------
Total from Investment
Activities 4.33 1.65 0.21 1.19 1.45
-----------------------------------------------------------------------------------
Distributions
Net investment income (0.01) -- -- -- --
In excess of net
investment income -- (0.02) (0.03) -- --
Net realized gains (0.75) (0.43) (0.31) -- --
-----------------------------------------------------------------------------------
Total Distributions (0.76) (0.45) (0.34) -- --
-----------------------------------------------------------------------------------
Net Asset Value, End of
Period $16.54 $12.97 $11.77 $11.90 $10.71
-----------------------------------------------------------------------------------
Total Return (excludes
redemption charge) 35.65% 14.48% 1.82% 11.11% 8.38%(b)
Ratios/Supplementary
Data:
Net Assets at end of
period (000) $ 781 $ 624 $ 562 $ 437 $ 102
Ratio of expenses to
average net assets 2.26% 2.28% 2.29% 2.14% 2.02%(c)
Ratio of net investment
loss to average net
assets (0.71)% (0.70)% (0.91)% (0.50)% (0.96)%(c)
Ratio of expenses to
average net assets* 2.45% 2.45% 2.45% 2.46% 2.44%(c)
Portfolio turnover** 93.73% 88.95% 75.18% 77.63% 62.78%
</TABLE>
- --------------------------------------------------------------------------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratio would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Represents the total return for Investor A Shares from December 1, 1994
to February 28, 1995 plus the total return for Investor B Shares from
March 1, 1995 through November 30, 1995.
(c) Annualized.
71
<PAGE>
Where to find more information
You'll find more information about the Portfolios in the following documents:
Annual and semi-annual reports
The Fund's annual and semi-annual reports contain information about each
Portfolio and a discussion about the market conditions and investment strategies
that had a significant effect on each Portfolio's performance during the last
fiscal year.
Statement of Additional Information (SAI)
The SAI contains detailed information about the Portfolios and their policies.
By law, it's incorporated by reference into (considered to be part of) this
prospectus.
You can get a free copy of these documents, request other information about the
Portfolios and make shareholder inquiries by calling the Fund at 1-800-452-2724
or by writing to:
Mercantile Mutual Funds, Inc.
c/o Firstar Mutual Fund Services, LLC
615 E. Michigan Street
P.O. Box 3011
Milwaukee, WI 53201-3011
If you buy your shares through a broker-dealer or other financial institution,
you may contact your institution for more information.
You can write to the Securities and Exchange Commission (SEC) Public Reference
Section and ask them to mail you information about the Portfolios, including the
SAI. They'll charge you a fee for this service. You can also visit the SEC
Public Reference Room and copy the documents while you're there. For more
information about the operation of the Public Reference Room, call the SEC.
Public Reference Section of the SEC
Washington, D.C. 20549-0102
1-202-942-8090
Reports and other information about the Portfolios are also available on the
EDGAR database on the SEC's website at http://www.sec.gov. Copies of this
-------------------
information may also be obtained, after paying a duplicating fee, by electronic
request to the SEC's e-mail address at [email protected].
-------------------
The Fund's Investment Company Act File No. is 811-3567
Form #MFINVSFP-00
<PAGE>
CONNING MONEY MARKET PORTFOLIO
[LOGO OF CONNING]
PROSPECTUS
March 31, 2000
As with all mutual funds, the Securities and Exchange Commission
has not approved or disapproved these securities or passed upon
the adequacy of this prospectus. Any representation to the
contrary is a criminal offense.
<PAGE>
Conning Money Market Portfolio Contents
<TABLE>
<CAPTION>
Risk/Return Summary
- ---------------------------------------
[GRAPHIC]
<S> <C> <C>
1 Risk/Return Summary
4 Additional Information on Risk
Your Account
- ---------------------------------------
[GRAPHIC]
5 Explanation of Sales Price
5 How to Buy Shares
5 How to Sell Shares
6 Shareholder Services Fees
6 General Transaction Policies
Distributions and Taxes
- ---------------------------------------
[GRAPHIC]
7 Dividends and Distributions
7 Taxation
Management of the Fund
- ---------------------------------------
[GRAPHIC]
8 The Adviser
8 The Sub-Adviser
Financial Highlights
- ---------------------------------------
[GRAPHIC]
9 Introduction
</TABLE>
<PAGE>
Risk/Return Summary [GRAPHIC]
- --------------------------------------------------------------------------------
Money market instruments are short-term obligations issued by banks,
corporations, the U.S. Government and state and local governments. Money market
instruments purchased by the Portfolio must meet strict requirements as to
investment quality, maturity and diversification. The Portfolio generally does
not invest in securities with maturities of more than 397 days and the average
maturity of all securities held by the Portfolio must be 90 days or less. Prior
to purchasing a money market instrument for the Portfolio, the Portfolio's sub-
adviser must determine that the instrument carries very little credit risk.
- --------------------------------------------------------------------------------
Investment Objective
The investment objective of the Conning Money Market Portfolio
(the "Portfolio") is to seek current income with liquidity and
stability of principal.
The investment objective of the Portfolio, which is an
investment portfolio of Mercantile Mutual Funds, Inc. (the
"Fund"), can be changed by the Fund's Board of Directors
without shareholder approval. Shareholders will be given at
least 30 days' written notice before any such change occurs.
Principal Investment Strategies
The Portfolio invests in a broad range of U.S. dollar-
denominated money market instruments, including commercial
paper, notes and bonds issued by U.S. and foreign
corporations, obligations issued by the U.S. Government and
its agencies and instrumentalities, and obligations issued by
U.S. and foreign banks, such as certificates of deposit,
letters of credit, bankers' acceptances and time deposits.
The Portfolio usually invests a substantial portion of its
assets in unregistered commercial paper issued by corporations
pursuant to Section 4(2) of the Securities Act of 1933.
Because this type of commercial paper (which is commonly
referred to as Section 4(2) paper) is unregistered, there are
restrictions on its resale. The Portfolio's sub-adviser will
determine that a liquid trading market exists for any Section
4(2) paper purchased by the Portfolio and will continue to
monitor the paper's liquidity as long as it is held by the
Portfolio.
The Portfolio will only buy a money market instrument if it
has the highest short-term rating from at least two nationally
recognized statistical rating organizations, such as Standard
& Poor's Ratings Group or Moody's Investors Service, Inc., or
only one such rating if only one organization has rated the
instrument. If the money market instrument is not rated, the
Portfolio's sub-adviser must determine that it is of
comparable quality to eligible rated instruments.
Principal Risk Considerations
The yield paid by the Portfolio will vary with short-term
interest rates. During periods of rising interest rates, the
Portfolio's yield will tend to be lower than prevailing
interest rates, while during periods of falling interest rates
the Portfolio's yield will tend to be higher.
Although credit risk is very low because the Portfolio only
invests in high quality obligations, if an issuer fails to pay
interest or repay principal, the value of your investment
could decline.
Investments by the Portfolio in Section 4(2) paper could
adversely affect the liquidity of the Portfolio during any
period in which eligible investors were no longer interested
in purchasing these securities.
1
<PAGE>
Risk/Return Summary [GRAPHIC]
The Portfolio's sub-adviser evaluates the rewards and risks
presented by all securities purchased by the Portfolio and how
they may advance the Portfolio's investment objective. It is
possible, however, that these evaluations will prove to be
inaccurate.
There's no guarantee the Portfolio will be able to preserve
the value of your investment at $1.00 per share.
An investment in the Portfolio is not a deposit of Firstar
Bank, N.A. and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency.
Although the Portfolio seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by
investing in the Portfolio.
Return History
The Portfolio does not have a long-term performance record
because it has been in operation for less than one calendar
year.
2
<PAGE>
Risk/Return Summary [GRAPHIC]
- --------------------------------------------------------------------------------
The table on the right shows the fees and expenses that you pay if you buy and
hold shares of the Portfolio.
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown, reinvest all of your dividends and
distributions, and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
Fees and Expenses
Annual Portfolio
Operating Expenses
(expenses that are
deducted from the
Portfolio's assets)
<TABLE>
<S> <C>
Management Fees .40%/1/
------------------------------------------------
Distribution (12b-1) Fees None
------------------------------------------------
Other Expenses 1.07%/1/
------------------------------------------------
Total Annual Portfolio Operating Expenses 1.47%/1/
-------------------------------------------------
</TABLE>
/1/Management Fees, Other Expenses and Total Annual Portfolio
Operating Expenses for the current fiscal year are expected
to be less than the amounts shown above because certain of
the Portfolio's service providers are voluntarily waiving a
portion of their fees and/or reimbursing the Portfolio for
certain other expenses. These fee waivers and/or
reimbursements are being made in order to keep the annual
fees and expenses for the Portfolio at a certain level.
Management Fees, Other Expenses and Total Annual Portfolio
Operating Expenses, after taking these fee waivers and
expense reimbursements into account, are expected to be
.17%, .82% and .99%, respectively. These fee waivers and
expense reimbursements may be revised or cancelled at any
time.
Example
Conning Money
Market
Portfolio
<TABLE>
<CAPTION>
1 3 5 10
year years years years
<S> <C> <C> <C>
$150 $465 $803 $1,757
</TABLE>
---------------------------------------------------------------
3
<PAGE>
Additional Information on Risk [GRAPHIC]
The principal risks of investing in the Conning Money Market Portfolio are
described above. The following supplements that discussion.
Securities Lending
To obtain interest income, the Portfolio may lend its securities to broker-
dealers, banks or institutional borrowers pursuant to agreements requiring that
the loans be continuously secured by collateral equal at all times in value to
at least the market value of the securities loaned. There is the risk that when
lending portfolio securities, the securities may not be available to the
Portfolio on a timely basis. Therefore, the Portfolio may lose the opportunity
to sell the securities at a desirable price. Additionally, in the event that a
borrower of securities would file for bankruptcy or become insolvent,
disposition of the securities may be delayed pending court action.
Temporary Defensive Positions
During unfavorable market conditions, the Portfolio may temporarily hold up to
100% of its total assets in cash (which will not earn any income) and short-
term obligations issued or guaranteed by the U.S. Government and its agencies
and instrumentalities. This strategy, which is not one of the Portfolio's
principal investment strategies, could prevent the Portfolio from achieving its
investment objective.
Other Types of Investments
This prospectus describes the Portfolio's principal investment strategies and
the particular types of securities in which the Portfolio principally invests.
The Portfolio may, from time to time, make other types of investments and
pursue other investment strategies in support of its overall investment goal.
These supplemental investment strategies and the risks involved are described
in detail in the Statement of Additional Information ("SAI"), which is referred
to on the back cover of this prospectus.
Year 2000 Risks
Over the past several years, the Portfolio's adviser and other major service
providers expended considerable time and money in addressing the computer and
technology problems associated with the transition to the Year 2000. As a
result of those efforts, the Portfolio did not experience any material
disruptions in its operations as a result of the transition to the 21st
century. The Portfolio's adviser and other major service providers are
continuing to monitor the Year 2000 or Y2K problem, however, and there can be
no assurances that there will be no adverse impact to the Portfolio as a result
of future computer-related Y2K difficulties.
4
<PAGE>
Your Account [GRAPHIC]
- --------------------------------------------------------------------------------
Business days defined
A business day is any day that both the New York Stock Exchange (NYSE) and the
Federal Reserve Banks' Fedline System are open for business. Currently, the
Fund observes the following holidays: New Year's Day, Martin Luther King Jr.
Day, Presidents' Day, Good Friday, Memorial Day (observed), Independence Day
(observed), Labor Day, Columbus Day, Veterans' Day, Thanksgiving and Christmas.
- --------------------------------------------------------------------------------
Explanation of Sales Price
Shares of the Portfolio are sold at their net asset value
(NAV). The NAV for shares of the Portfolio is determined as of
11:00 a.m. (Central time) and as of the close of regular
trading on the New York Stock Exchange (currently 3:00 p.m.
Central time) on every business day. The NAV is determined by
adding the value of the Portfolio's investments, cash and
other assets, subtracting the Portfolio's liabilities and then
dividing the result by the total number of shares of the
Portfolio that are outstanding.
. The Portfolio's investments are valued at amortized cost,
which is approximately equal to market value.
. A properly placed purchase order (see "How to Buy Shares"
below) that is delivered to the Fund by 1:00 p.m. (Central
time) on any business day receives the share price next
determined if the Fund receives payment in federal funds or
other immediately available funds by 3:00 p.m. (Central
time) that day. If payment is not received by that time, the
order will be cancelled. A properly placed purchase order
that is delivered to the Fund after 1:00 p.m. (Central time)
will be placed the following business day.
How to Buy Shares
Shares of the Portfolio are sold without any sales charge
through broker-dealers or other financial advisers acting on
behalf of their customers. It is the responsibility of your
broker-dealer or financial adviser to transmit your purchase
order to the Fund on a timely basis.
The Fund does not have any minimum investment requirements for
shares of the Portfolio but your broker-dealer or financial
adviser may. They may also charge transaction fees and require
you to maintain a minimum account balance.
How to Sell Shares
Orders to sell or "redeem" shares of the Portfolio should be
placed with the same broker-dealer or financial adviser that
placed the original purchase order in accordance with the
procedures established by that broker-dealer or financial
adviser. Your broker-dealer or financial adviser is
responsible for sending your redemption order to the Fund on a
timely basis and for crediting your account with the
redemption proceeds. The Fund does not currently charge for
wiring redemption proceeds, but your broker-dealer or
financial adviser may.
The Fund's transfer agent may require a signature guarantee
unless the redemption proceeds are payable to the shareholder
of record and the proceeds are either mailed to the
shareholder's address of record or electronically transferred
to the account designated on the original account application.
A signature guarantee helps prevent fraud, and you may obtain
one from most banks and broker/dealers. Contact your broker-
dealer or financial adviser for more information on signature
guarantees.
5
<PAGE>
Your Account [GRAPHIC]
- --------------------------------------------------------------------------------
Selling recently purchased shares
If you attempt to sell shares you recently purchased with a personal check, the
Fund may delay processing your request until it collects payment for those
shares. This process may take up to 15 days, so if you plan to sell shares
shortly after purchasing them, you may want to consider purchasing them via
electronic transfer to avoid delay.
- --------------------------------------------------------------------------------
Shares of the Portfolio will be sold at the NAV next
determined after the Fund accepts an order (see above). If the
order to sell is received and accepted by the Fund before 1:00
p.m. (Central time) on a business day, the proceeds are sent
electronically the same day to the broker-dealer or financial
adviser that placed the order. If the order to sell is
received and accepted by the Fund after 1:00 p.m. (Central
time) on a business day or on a non-business day, the proceeds
normally are sent electronically to the broker-dealer or
financial adviser on the next business day.
Shareholder Services Fees
The Portfolio can pay for shareholder liaison and/or
administrative support services at the annual rates of up to
.25% and .50%, respectively, of the Portfolio's average daily
net assets. These fees are paid to broker-dealers and
financial advisers that provide such services to their
customers who own shares of the Portfolio. The Portfolio does
not intend to pay more than .66% of average daily net assets
in the aggregate for shareholder liaison and/or administrative
support services during the current fiscal year.
General Transaction Policies
The Fund reserves the right to:
. Refuse any order to buy shares.
. Send redemption proceeds within seven days after receiving a
request, if an earlier payment could adversely affect the
Portfolio.
. Make a "redemption in kind." Under abnormal conditions that
may make payment in cash unwise, the Fund may offer partial
or complete payment in portfolio securities rather than cash
at such securities' then-market-value equal to the
redemption price. In such cases, a shareholder may incur
brokerage costs in converting these securities to cash.
6
<PAGE>
Distributions and Taxes [GRAPHIC]
- --------------------------------------------------------------------------------
You will be advised at least annually regarding the federal income tax
treatment of dividends and distributions made to you. You should save your
account statements because they contain information you will need to calculate
your capital gains or losses, if any, upon your ultimate sale of shares of the
Portfolio.
- --------------------------------------------------------------------------------
Dividends and Distributions
The Portfolio declares dividends from net investment income
daily and pays them monthly. Shares of the Portfolio begin
earning dividends on the day the purchase order is received by
the Fund's transfer agent through the day before the
redemption order for such shares is received. Although the
Portfolio does not expect to realize net long-term capital
gains, any capital gains realized would be distributed at
least annually.
All of your dividends and capital gains distributions will be
reinvested in additional shares of the Portfolio unless you
instruct otherwise on your account application or have
redeemed all shares you held in the Portfolio. In such cases,
dividends and distributions will be paid in cash.
Taxation
As with any investment, you should consider the tax
implications of an investment in the Portfolio. The following
is only a brief summary of some of the important tax
considerations generally affecting the Portfolio and its
shareholders under current law, which may be subject to change
in the future. Consult your tax adviser with specific
reference to your own tax situation.
. Federal Taxes
Distributions from the Portfolio will generally be taxable to
shareholders. It is expected that all, or substantially all,
of these distributions will consist of ordinary income. You
will be subject to income tax on these distributions
regardless of whether they are paid in cash or reinvested in
additional shares. The one major exception to these tax
principles is that distributions on shares held in an IRA (or
other tax-qualified plan) will not be currently taxable.
. State and Local Taxes
Shareholders may also be subject to state and local taxes on
distributions and redemptions. State income taxes may not
apply however, to the portions of the Portfolio's
distributions, if any, that are attributable to interest on
U.S. Government securities.
The foregoing is only a summary of certain tax considerations
under current law, which may be subject to change in the
future. Shareholders who are nonresident aliens, foreign
trusts or estates, or foreign corporations or partnerships,
may be subject to different U.S. federal income tax treatment.
For more information regarding the taxation of the Portfolio,
consult the SAI under the heading "Additional Information
Concerning Taxes." You should also consult your tax adviser
for further information regarding federal, state, local and/or
foreign tax consequences relevant to your specific situation.
7
<PAGE>
Management of the Fund [GRAPHIC]
The Adviser
Firstar Investment Research & Management Company, LLC ("FIRMCO" or the
"Adviser") serves as the investment adviser to the Portfolio as a result of
FIRMCO's acquisition of all of the assets and liabilities of the Portfolio's
former adviser, Mississippi Valley Advisors Inc., on March 1, 2000. FIRMCO is a
subsidiary of Firstar Corporation, a banking and financial services
organization, and has its main office at Firstar Center, 777 East Wisconsin
Avenue, Suite 800, Milwaukee, Wisconsin 53202. FIRMCO has been providing
advisory services since 1986 and as of December 31, 1999, FIRMCO had
approximately $35.3 billion in assets under management.
FIRMCO, subject to the general supervision of the Fund's Board of Directors, is
responsible for the day-to-day management of the Portfolio in accordance with
the Portfolio's investment objective and policies. This includes making
investment decisions, buying and selling securities and overseeing the
administration and recordkeeping for the Portfolio.
In exchange for these services, FIRMCO is entitled to receive investment
advisory fees, which are calculated daily and paid monthly, at the annual rate
of .40% of the first $1.5 billion of the Portfolio's average daily net assets,
.35% of the next $1 billion of average daily net assets and .25% of average
daily net assets in excess of $2.5 billion. FIRMCO currently receives advisory
fees (after waivers) at the annual rate of .17% of the Portfolio's average
daily net assets.
The Sub-Adviser
Conning Asset Management Company ("Conning") serves as sub-adviser to the
Portfolio and is responsible for the management of the Portfolio's assets.
Conning manages the Portfolio under the direction and guidance of FIRMCO and
according to its sub-advisory agreement with FIRMCO. For its services, Conning
receives a monthly fee from FIRMCO based on a percentage of the Portfolio's
average daily net assets.
Conning, with principal offices located at 700 Market Street, St. Louis,
Missouri 63101, is an indirect subsidiary of GenAmerica Corporation, a
financial services holding company, which in turn is a wholly-owned subsidiary
of Metropolitan Life Insurance Company. Founded in 1912, Conning has extensive
investment management experience and as of December 31, 1999 had approximately
$33.3 billion in assets under management.
8
<PAGE>
Financial Highlights [GRAPHIC]
Introduction
The financial highlights table presented below is intended to help you
understand the financial performance of the Portfolio for the period from its
commencement of operations on February 16, 1999 through November 30, 1999.
Certain information reflects the financial results for a single share in the
Portfolio. The total return in the table represents the rate that an investor
would have earned on an investment in the Portfolio assuming reinvestment of
all dividends and distributions. This information has been audited by KPMG LLP,
independent auditors, whose report, along with the Portfolio's financial
statements, are included in the Portfolio's Annual Report to Shareholders, and
are incorporated by reference into the SAI.
Conning Money Market Portfolio
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 16, 1999
to
November 30, 1999(a)
--------------------
<S> <C>
Net Asset Value, Beginning of Period....................... $ 1.00
--------
Investment Activities
Net investment income.................................... 0.034
--------
Total from Investment Activities......................... 0.034
--------
Distributions
Net investment income.................................... (0.034)
--------
Total Distributions...................................... (0.034)
--------
Net Asset Value, End of Period............................. $ 1.00
========
Total Return............................................. 3.41 %(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)........................ $230,580
Ratio of expenses to average net assets.................. 0.99 %(c)
Ratio of net investment income to average net assets..... 4.47 %(c)
Ratio of expenses to average net assets*................. 1.47 %(c)
</TABLE>
- ------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
(a) Period from initial public investment.
(b) Not annualized.
(c) Annualized.
9
<PAGE>
Where to find more information
You'll find more information about the Conning Money Market Portfolio in the
following documents:
Annual and semi-annual reports
The Portfolio's annual and semi-annual reports contain more information about
the Portfolio and its performance.
Statement of Additional Information (SAI)
The SAI contains detailed information about the Portfolio and its policies. By
law, it's incorporated by reference into (considered to be part of) this
prospectus.
You can get a free copy of these documents, request other information about the
Portfolio and make shareholder inquiries by calling the Fund at 1-800-452-2724
or by writing to:
Mercantile Mutual Funds, Inc.
c/o Fustar Mutual Fund Services, LLC
615 East Michigan Street
P.O. Box 3011
Milwaukee, Wisconsin 53201-3011
If you buy your shares through a broker-dealer or financial adviser, you may
contact your broker-dealer or financial adviser for more information.
You can write to the Securities and Exchange Commission (SEC) Public Reference
Section and ask them to mail you information about the Portfolio, including the
SAI. They'll charge you a fee for this service. You can also visit the SEC
Public Reference Room and copy the documents while you're there. For
information about the operation of the Public Reference Room, call the SEC.
Public Reference Section of the SEC
Washington, DC 20549-0102
1-202-942-8090
Reports and other information about the Conning Money Market Portfolio are also
available on the EDGAR Database on the SEC's website at http://www.sec.gov.
Copies of this information may also be obtained, after paying a duplicating
fee, by electronic request to the SEC's e-mail address at [email protected].
The Fund's Investment Company Act File No. is 811-3567.
