COMMON SENSE TRUST, 497, 1995-03-31

COMMON SENSE TRUST
497, 1995-03-31

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<PAGE> 1

SUPPLEMENT DATED APRIL 3, 1995
TO PROSPECTUS OF
COMMON SENSE(R) TRUST

The following replaces the last paragraph under the section entitled "The
Trust and Its Management":

Stephen Boyd is primarily responsible for the day-to-day management of
Growth Fund's investment portfolio since 1989. Mr. Boyd is Vice President
of the Trust and Senior Vice President -- Portfolio Manager of the Adviser.
Mr. Boyd was formerly Investment Vice President of the Adviser from May,
1989 to July, 1990; Senior Vice President of the Adviser from July, 1990 to
July, 1991; and Senior Vice President and Chief Investment Officer of
Wertheim Asset Management Services, Inc. from 1986 to 1989. James Gilligan
is primarily responsible for the day-to-day management of Growth and Income
Fund's investment portfolio since July 11, 1994. Mr. Gilligan is Vice
President of the Trust and Vice President -- Portfolio Manager of the
Adviser since March, 1990. Prior to that time he was a securities analyst
with the Adviser. John Reynoldson is primarily responsible for the
day-to-day management of Government Fund's investment portfolio since 1988.
Mr. Reynoldson is Vice President of the Trust and Senior Vice
President -- Portfolio Manager of the Adviser. Mr. Reynoldson was formerly
Investment Vice President of the Adviser from January, 1988 to July, 1991.
David Troth is primarily responsible for the day-to-day management of Money
Market Fund's investment portfolio since its inception. Mr. Troth is Vice
President of the Trust and Senior Investment Vice President of the Adviser.
Mr. Troth was formerly Investment Vice President of the Adviser from March,
1978 to July, 1991. Robert S. Waas is primarily responsible for the
day-to-day management of Municipal Bond Fund's investment portfolio since
April 3, 1995. Mr. Waas is Vice President of the Trust and an agent of the
Adviser. Mr. Waas has been employed by Van Kampen American Capital
Investment Advisory Corp., an affiliate of the Adviser, since July, 1992.
Prior to that time he sold municipal bonds with Germano Municipals. Mr.
Waas was a Portfolio Manager for tax-exempt assets with the Colonial Penn
Group from September, 1988 to July, 1991.
<PAGE> 2

{COMMON SENSE TRUST LOGO}

FEBRUARY 21, 1995

Common Sense(R) Trust (the "Trust") is a diversified open-end management
investment company which offers shares in eleven separate Portfolios, five of
which are described in this Prospectus. The goals of such Portfolios are as
follows:

Common Sense(R) Growth Fund (the "Growth Fund") seeks capital
appreciation by investing in a portfolio of securities consisting
principally of common stocks and options on common stocks. Any income
realized on its investments will be purely incidental to its goal of
capital appreciation.

Common Sense(R) Growth and Income Fund (the "Growth and Income Fund")
seeks reasonable growth and income by investing principally in a portfolio
of equity securities that provide dividend or interest income, including
common and preferred stocks and securities convertible into common or
preferred stocks.

Common Sense(R) Government Fund (the "Government Fund") seeks high
current return consistent with preservation of capital by investing in debt
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.

Common Sense(R) Municipal Bond Fund (the "Municipal Bond Fund") seeks
as high a level of current interest income exempt from federal income tax
as is consistent with the preservation of capital.

Common Sense(R) Money Market Fund (the "Money Market Fund") seeks
protection of capital and a high level of current income through
investments in short-term money market securities.

INVESTMENTS IN THE MONEY MARKET FUND ARE NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT. ALTHOUGH THE MONEY MARKET FUND SEEKS TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE THERE IS NO ASSURANCE
THAT IT WILL BE ABLE TO DO SO.

In seeking their respective goals, each Fund, except the Money Market
Fund, may engage in portfolio management strategies and techniques
involving options, futures contracts and options on futures. See "Goals and
Investment Policies."

There is no assurance that each Fund will be successful in achieving
its goals.

THE FUNDS WILL NOT PURCHASE ANY SECURITIES ISSUED BY COMPANIES
PRIMARILY ENGAGED IN THE MANUFACTURE OF ALCOHOL OR TOBACCO.

This Prospectus tells investors briefly the information they should know
before investing in a Fund. Investors should read and retain this Prospectus for
future reference.

A Statement of Additional Information dated the same date as this
Prospectus has been filed with the Securities and Exchange Commission ("SEC")
and contains further information about the Funds. A copy of the Statement of
Additional Information may be obtained without charge by writing Common Sense(R)
Distributors, 3100 Breckinridge Blvd., Bldg. 200, Duluth, Georgia 30199-0001.
The Statement of Additional Information is hereby incorporated by reference into
this Prospectus. Please call Customer Service at (800) 544-5445 for information
on the Funds.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR STATE REGULATORS NOR HAS THE COMMISSION OR STATE
REGULATORS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

CST-1
<PAGE> 3

--------------------------------------------------------------------------------
COMMON SENSE(R) TRUST
--------------------------------------------------------------------------------

<TABLE>
<S> <C>
CUSTODIAN: INVESTMENT ADVISER:
State Street Bank and Trust Company Van Kampen American Capital
225 Franklin Street Asset Management, Inc.
Boston, Massachusetts 02110 2800 Post Oak Blvd.
Houston, Texas 77056
TRANSFER AGENT:
Common Sense(R) Shareholder Services DISTRIBUTOR:
3100 Breckinridge Blvd., Bldg. 200 Common Sense(R)
Duluth, Georgia 30199-0062 Distributors
(800) 544-5445 3100 Breckinridge Blvd., Bldg. 200
(800) 544-7278 Spanish-speaking Representatives Duluth, Georgia 30199-0001
(800) 824-1721 TDD Service for Hearing Impaired
</TABLE>

--------------------------------------------------------------------------------
TABLE OF CONTENTS
--------------------------------------------------------------------------------

<TABLE>
<S> <C>
Prospectus Summary.................... 2
Expense Synopsis...................... 5
Financial Highlights.................. 6
Introduction.......................... 9
Goals and Investment Policies......... 9
Growth Fund......................... 9
Growth and Income Fund.............. 9
Government Fund..................... 10
Municipal Bond Fund................. 12
Money Market Fund................... 13
Investment Practices and Risks........ 14
The Trust and Its Management.......... 18
Purchase of Shares.................... 19
Shareholder Services.................. 22
Redemption of Shares.................. 23
Dividends, Distributions and Taxes.... 24
Prior Performance Information......... 26
Additional Information................ 27
</TABLE>

--------------------------------------------------------------------------------

No dealer, salesperson, or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus or in the Statement of Additional Information, and, if given or made,
such other information or representations must not be relied upon as having been
authorized by the Trust or by the Distributor. This Prospectus does not
constitute an offering by the Distributor in any jurisdiction in which such
offering may not lawfully be made.

--------------------------------------------------------------------------------

PROSPECTUS SUMMARY

Shares Offered.............. Shares of beneficial interest in five Portfolios:
the Growth Fund, the Growth and Income Fund, the
Government Fund, the Money Market Fund and the
Municipal Bond Fund.

Type of Company............. Diversified, open-end management investment
company.

Goals....................... The Growth Fund seeks capital appreciation; the
Growth and Income Fund seeks reasonable growth and
income; the Government Fund seeks high current
return consistent with preservation of capital; the
Money Market Fund seeks protection of capital and a
high level of current income; and the Municipal
Bond Fund seeks current interest income exempt from
federal income tax. There is, however, no assurance
that each Fund will be successful in achieving its
goals.

Investment Policies and
Risks....................... The Growth Fund invests principally in common
stocks that the investment adviser believes provide
unusually attractive growth opportunities and
options on such common stocks. Any income from
these investments will be incidental to the capital
appreciation goal. The Fund may use portfolio
management techniques and strategies involving
options, futures contracts and options on futures.
The utilization of options, futures contracts and
options on futures contracts may involve greater
than ordinary investment risks and the likelihood
of more volatile price fluctuation. See "Goals and
Investment Policies -- Growth Fund," "Investment
Practices and Risks -- Using Options, Futures
Contracts and Related Options," and the Statement
of Additional Information, for a discussion of risk
factors relating to options and futures strategies.

The Growth and Income Fund invests principally in
common and preferred stocks, and in securities
convertible into common and preferred stocks, that
have provided dividend or interest income to their
security holders during the past twelve months. The
Fund may use portfolio management techniques and
strategies involving options, futures contracts and
options on futures. The utilization of options,
futures contracts and options on futures contracts
may involve greater than ordinary investment risks
and the likelihood of more volatile price
fluctuation. See "Goals and Investment
Policies -- Growth and Income Fund," "Investment
Practices and

--------------------------------------------------------------------------------

2
<PAGE> 4

Risks -- Using Options, Futures Contracts and
Related Options," and the Statement of Additional
Information, for a discussion of risk factors
relating to options and futures strategies.

The Government Fund invests in debt securities
issued or guaranteed by the U.S. Government, its
agencies or instrumentalities. The Fund may sell
and purchase options on U.S. Government securities;
and purchase and sell interest rate futures
contracts and options on such contracts since such
transactions are entered into for bona fide hedging
purposes. The market prices of debt securities,
including U.S. Government securities, generally
fluctuate with changes in interest rates so that
the Fund's net asset value can be expected to
decrease as interest rates rise. See "Goals and
Investment Policies -- Government Fund." The Fund
may also purchase or sell U.S. Government
securities on a forward commitment basis. See
"Investment Practices and Risks -- Options, Futures
Contracts and Related Options" and "Forward
Commitments" and the Statement of Additional
Information, for a discussion on forward
commitments and risk factors relating to options
and futures strategies.

The Municipal Bond Fund invests in a diversified
portfolio of obligations issued by states,
territories or possessions of the United States and
the District of Columbia and their political
subdivisions, agencies and instrumentalities, the
interest from which is exempt from federal income
tax ("Municipal Bonds"). The Fund will not purchase
any "private activity bonds" subject to the
alternative minimum tax. See "Goals and Investment
Policies -- Municipal Bond Fund." The Fund invests
primarily in long-term Municipal Bonds which tend
to produce higher yields and are subject to greater
market fluctuations as a result of changes in
interest rates ("market risk") than Municipal Bonds
with shorter maturities and lower yields. At least
75% of the Fund's total assets will be invested in
Municipal Bonds rated "A" or higher. Lower rated
securities are subject to greater market risks and
are also subject to the ability of the issuer to
meet its principal and interest obligations
("credit risk"). The Fund may acquire stand-by
commitments. Stand-by commitments involve an
element of risk. See "Investment Practices and
Risks -- Stand-by Commitments." The Fund may seek
to hedge interest rate risk through transactions in
listed futures contracts related to U.S. Government
securities, Municipal Bonds or to an index of
Municipal Bonds, and options on such contracts. Any
net gains from futures and options transactions are
subject to federal income tax and such transactions
may involve certain risks. See "Investment
Practices and Risks -- Options, Futures Contracts
and Related Options" and the Statement of
Additional Information for further discussion. The
market prices of debt securities, including
Municipal Bonds, generally fluctuate with changes
in interest rates so that the Fund's net asset
value can be expected to decrease as long-term
interest rates rise and to increase as long-term
interest rates fall.

The Money Market Fund invests in a diversified
portfolio of money market instruments. This Fund
seeks to maintain a constant net asset value of
$1.00 per share. There can be no guarantee that the
Fund will maintain its net asset value per share at
$1.00.

Under certain market conditions, all Funds except
the Money Market Fund may experience a high rate of
portfolio turnover. Higher portfolio turnover
involves correspondingly greater brokerage
commissions and other transaction costs. See
"Investment Practices and Risks -- Portfolio
Turnover."

Investment Adviser.......... Van Kampen American Capital Asset Management, Inc.
(the "Adviser"), serves as investment adviser to
the Trust. The Adviser provides investment advice
to 47 investment company portfolios. See "The Trust
and Its Management."

Distributor................. Common Sense(R) Distributors (the "Distributor").

Sales Charge................ Shares of the Growth and Income Fund and the Growth
Fund are offered at a sales charge of 8.50% of
offering price (9.29% of net amount invested);
shares of the Government Fund are offered at a
sales charge of 6.75% of offering price (7.24% of
net amount invested); shares of the Municipal Bond
Fund are offered at a sales charge of 4.75% of
offering price (4.99% of net amount invested); the
sales charge is reduced on investments of $10,000
or more for the Growth Fund and the Growth and
Income Fund, $25,000 or more for the Government
Fund, and $100,000 or more for the Municipal Bond
Fund. Shares of the Money Market Fund are sold
without a sales charge. The Money Market Fund does,
however, require payment

3
<PAGE> 5

of an initial administrative set-up fee of $15 for
the establishment of each investment account. See
"Purchase of Shares," "Sales Charge Tables,"
"Volume Discounts," "Cumulative Purchase Discount"
and "Letter of Intent."

Dividends and Capital
Gains....................... The Growth Fund may declare and pay dividends and
capital gain distributions annually. The Growth and
Income Fund may declare and pay dividends quarterly
and capital gain distributions annually. Income
dividends are declared each business day and paid
monthly for the Government Fund, the Municipal Bond
Fund and the Money Market Fund; any net short-term
or long-term capital gains are distributed at least
annually. All dividends and distributions are
automatically reinvested in shares of a Fund at net
asset value per share (without a sales charge)
unless payment in cash is requested. See
"Dividends, Distributions and Taxes."

Redemption.................. At the next determined net asset value. The Trust
may redeem any account with a net asset value of
less than $200 upon three months notice. See
"Redemption of Shares."

4
<PAGE> 6

--------------------------------------------------------------------------------
EXPENSE SYNOPSIS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
GROWTH
& MUNICIPAL MONEY
GROWTH INCOME GOVERNMENT BOND MARKET
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>

SHAREHOLDER TRANSACTION EXPENSES:
Maximum sales load imposed on purchases
(as a percentage of offering price)........ 8.50% 8.50% 6.75% 4.75% None
Maximum sales charge on reinvestment of
dividends.................................. None None None None None
Administrative set-up fee.................... None None None None $15
Redemption fee............................... None None None None None
12b-1 fee.................................... None None None None None
**Exchange fee.................................. $5 $5 $5 $5 $0

ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets):
Management fees.............................. .62% .65% .60% .60% .00%*
Other expenses (including accounting
services).................................. .47% .37% .29% .39% 1.00%*
Total fund operating expenses................ 1.09% 1.02% .89% .99% 1.00%*

* After expense reimbursements. In the absence of expense reimbursements, management
fees, other expenses, and total fund operating expenses would be .50%, 1.34%, and
1.84%, respectively.

** An investor may have to pay the excess, if any, of the sales load rate applicable to
the Fund being acquired over the sales load rate, if any, previously paid.
--------------------------------------------------------------------------------------------------
EXAMPLE
--------------------------------------------------------------------------------------------------
You would pay the following expenses on a
$1,000 investment assuming (1) five percent
annual return and (2) redemption at the end
of each time period:

1 year.................................. $ 95 $ 95 $ 76 $ 57 $ 10
3 years................................. $117 $115 $ 94 $ 78 $ 32
5 years................................. $140 $137 $113 $100 $ 55
10 years................................ $207 $199 $170 $163 $122
</TABLE>

--------------------------------------------------------------------------------

The purpose of the foregoing table is to assist the investor in
understanding the various costs and expenses that an investor in any Fund will
bear directly or indirectly. See "Purchase of Shares" and "The Trust and Its
Management." The example is included to provide a means for the investor to
compare expense levels of funds with different fee structures over varying
investment periods. To facilitate such comparison, all funds are required to
utilize a five percent annual return assumption. This assumption is unrelated to
a Fund's prior performance and is not a projection of future performance. The
example should not be considered a representation of past or future expenses.
Actual expenses may be greater or less than those shown.

5
<PAGE> 7

--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------

(For a share of beneficial interest outstanding throughout the period)

The following information has been audited by the Trust's independent
auditors, Ernst & Young LLP, whose report thereon was unqualified. This
information should be read in conjunction with the related financial statements
and notes thereto included in the Statement of Additional Information.

GROWTH FUND

<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31
-------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987(1)
---------- ---------- ---------- ---------- ---------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value, beginning of
period..................... $16.26 $16.02 $15.47 $11.26 $13.15 $10.81 $9.37 $11.44(2)
---------- ---------- ---------- ---------- ---------- --------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS
Investment income............ .29 .281 .30 .36 .38 .36 .24 .16
Expenses..................... (.16) (.165) (.17) (.17) (.175) (.17) (.14) (.16)
---------- ---------- ---------- ---------- ---------- --------- -------- --------
Net investment income........ .13 .116 .13 .19 .205 .19 .10 --
Net realized and unrealized
gain or loss on
securities................. .2075 2.0065 1.3925 4.2425 (1.25) 2.26 1.435 (2.07)
---------- ---------- ---------- ---------- ---------- --------- -------- --------
Total from investment
operations................. .3375 2.1225 1.5225 4.4325 (1.045) 2.45 1.535 (2.07)
---------- ---------- ---------- ---------- ---------- --------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment
income..................... (.1125) (.115) (.17) (.2225) (.2025) (.11) -- --
Distributions from net
realized gain on
securities................. (1.175) (1.3996) (.8025) -- (.6425) -- (.095) --
Distributions in excess of
net realized gain on
securities(3).............. -- (.3679) -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- --------- -------- --------
Total distributions.......... (1.2875) (1.8825) (.9725) (.2225) (.845) (.11) (.095) --
---------- ---------- ---------- ---------- ---------- --------- -------- --------
Net asset value, end of
period..................... $15.31 $16.26 $16.02 $15.47 $11.26 $13.15 $10.81 $9.37
========= ========= ========= ========= ========= ======== ======== ========
TOTAL RETURN*................ 2.04% 14.27% 9.83% 39.90% (8.73%) 22.90% 16.51% (18.09%)
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period
(in millions)............. $2,169.9 $2,065.7 $1,648.0 $1,311.5 $866.1 $767.8 $492.2 $196.3
Ratios to average net assets
Expenses................... 1.09% 1.14% 1.18% 1.26% 1.53% 1.63% 1.93% 2.82%**
Net investment income
(loss)................... .89% .80% .91% 1.44% 1.79% 1.75% 1.30% (.09%)**
Portfolio turnover rate...... 164% 166% 134% 100% 99% 101% 63% 17%
</TABLE>

--------------------------------------------------------------------------------

<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GROWTH AND INCOME FUND
PER SHARE OPERATING
PERFORMANCE
Net asset value, beginning of
period...................... $17.13 $15.54 $14.70 $11.49 $12.51 $10.49 $9.84 $11.44(2)
---------- ---------- ---------- ---------- ---------- --------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS
Investment income............. .45 .46 .435 .46 .47 .46 .40 .29
Expenses...................... (.16) (.17) (.16) (.155) (.165) (.15) (.13) (.14)
---------- ---------- ---------- ---------- ---------- --------- -------- --------
Net investment income......... .29 .29 .275 .305 .305 .31 .27 .15
Net realized or unrealized
gain or loss on
securities.................. (.2125) 1.8775 1.2875 3.2225 (.9975) 2.00 .655 (1.685)
---------- ---------- ---------- ---------- ---------- --------- -------- --------
Total from investment
operations.................. .0775 2.1675 1.5625 3.5275 (.6925) 2.31 .925 (1.535)
---------- ---------- ---------- ---------- ---------- --------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment
income...................... (.275) (.2775) (.295) (.3175) (.325) (.29) (.24) (.065)
Distributions from net
realized gain on
securities.................. (1.1625) (.30) (.4275) -- (.0025) -- (.035) --
---------- ---------- ---------- ---------- ---------- --------- -------- --------
Total distributions........... (1.4375) (.5775) (.7225) (.3175) (.3275) (.29) (.275) (.065)
---------- ---------- ---------- ---------- ---------- --------- -------- --------
Net asset value, end of
period...................... $15.77 $17.13 $15.54 $14.70 $11.49 $12.51 $10.49 $9.84
========= ========= ========= ========= ========= ======== ======== =======
TOTAL RETURN*................. .51% 14.13% 10.85% 31.68% (5.84%) 22.38% 9.55% (13.48%)
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period
(in millions)............... $712.9 $712.4 $591.0 $499.6 $366.6 $278.4 $168.0 $72.8
Ratios to average net assets
Expenses.................... 1.02% 1.05% 1.09% 1.14% 1.37% 1.39% 1.57% 2.38%**
Net investment income....... 1.84% 1.76% 1.84% 2.29% 2.55% 2.81% 3.04% 2.64%**
Portfolio turnover rate....... 88% 51% 32% 42% 48% 26% 64% 4%
</TABLE>

--------------------------------------------------------------------------------

(1) Based on average month-end shares outstanding.

(2) The net asset value on April 14, 1987, the date the Fund commenced
operations.

(3) Effective November 1, 1992, the Trust adopted Statement of Position 93-2,
Determination, Disclosure and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies.
Prior year financial information has not been restated.

* Total returns for periods of less than one full year are not annualized.
Total return does not consider the effect of sales charges.

** Annualized.

6
<PAGE> 8

GOVERNMENT FUND

<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31
--------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987(1)
---------- ---------- ---------- ---------- ---------- ---------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value,
beginning of
period.............. $11.80 $11.56 $11.47 $10.79 $11.46 $11.13 $11.08 $11.66(2)
---------- ---------- ---------- ---------- ---------- ---------- --------- -------
INCOME FROM INVESTMENT
OPERATIONS
Investment income..... .78 .8536 .97 1.012 1.073 1.16 1.09 .52
Expenses.............. (.09) (.092) (.11) (.107) (.118) (.13) (.15) (.12)
---------- ---------- ---------- ---------- ---------- ---------- --------- -------
Net investment
income.............. .69 .7616 .86 .905 .955 1.03 .94 .40
Net realized and
unrealized gain or
loss on
securities.......... (1.358) .4249 .1639 .6788 (.4421) .3274 .0436 (.58)
---------- ---------- ---------- ---------- ---------- ---------- --------- -------
Total from investment
operations.......... (.668) 1.1865 1.0239 1.5838 .5129 1.3574 .9836 (.18)
---------- ---------- ---------- ---------- ---------- ---------- --------- -------
LESS DISTRIBUTIONS
Dividends from net
investment income... (.6878) (.7615) (.8639) (.9038) (.9579) (1.0274) (.9336) (.40)
Distributions from net
realized gain on
securities.......... -- (.185) (.07) -- (.225) -- -- --
---------- ---------- ---------- ---------- ---------- ---------- --------- -------
Distributions in
excess of book-basis
net realized gains
on securities(3).... (.4542) -- -- -- -- -- -- --
Total distributions... (1.142) (.9465) (.9339) (.9038) (1.1829) (1.0274) (.9336) (.40)
---------- ---------- ---------- ---------- ---------- ---------- --------- -------
Net asset value, end
of period........... $9.99 $11.80 $11.56 $11.47 $10.79 $11.46 $11.13 $11.08
=========== =========== =========== =========== =========== =========== ========= =======
TOTAL RETURN*......... (5.45%) 10.55% 9.32% 15.16% 4.94% 12.87% 9.20% (1.56%)
RATIOS/SUPPLEMENTAL
DATA
Net assets, end of
period (in
millions)........... $335.0 $370.2 $282.0 $189.0 $140.9 $101.0 $70.6 $21.6
Ratios to average net
assets
Expenses............ .89% .89% .95% .96% 1.09% 1.20% 1.44% 2.12%**
Net investment
income............ 7.06% 7.35% 7.46% 8.15% 8.78% 9.29% 8.55% 7.13%**
Portfolio turnover
rate................ 256% 218% 112% 39% 28% 29% 51% 52%
</TABLE>

--------------------------------------------------------------------------------

(1) Based on average month-end shares outstanding.

(2) The net asset value on April 14, 1987, the date the Fund commenced
operations.

* Total returns for periods of less than one full year are not annualized.
Total return does not consider the effect of sales charges.

** Annualized.

7
<PAGE> 9

MUNICIPAL BOND FUND

<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31
----------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988
--------- --------- --------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value, beginning of
period...................... $14.07 $13.03 $12.84 $12.18 $12.37 $12.26 $11.91(1)
--------- --------- --------- -------- -------- --------- --------
INCOME FROM INVESTMENT
OPERATIONS
Investment income............. .84 .859 .875 .905 .91 .92 .25
Expenses...................... (.13) (.141) (.15) (.145) (.16) (.23) (.07)
Voluntary expense subsidy..... -- .01 -- -- .01 .08 .01
--------- --------- --------- -------- -------- --------- --------
Net investment income......... .71 .728 .725 .76 .76 .77 .19
Net realized and unrealized
gain or loss on
securities.................. (1.182) 1.038 .2175 .648 (.185) .10 .315
--------- --------- --------- -------- -------- --------- --------
Total from investment
operations.................. (.472) 1.766 .9425 1.408 .575 .87 .505
--------- --------- --------- -------- -------- --------- --------
DIVIDENDS FROM NET INVESTMENT
INCOME...................... (.708) (.726) (.7525) (.748) (.765) (.76) (.155)
--------- --------- --------- -------- -------- --------- --------
Net asset value, end of
period...................... $12.89 $14.07 $13.03 $12.84 $12.18 $12.37 $12.26
========== ========== ========== ========= ========= ========= ========
TOTAL RETURN*................. (3.38%) 13.84% 7.57% 11.79% 4.77% 7.31% 4.26%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in
millions)................... $112.1 $95.9 $60.3 $42.5 $37.1 $24.7 $6.4
Ratios to average net assets
Expenses.................... .99% .96% 1.14% 1.15% 1.25% 1.25% 1.91% **
Expenses, without voluntary
expense subsidy........... -- 1.04% -- -- 1.28% 1.93% 2.22% **
Net investment income....... 5.27% 5.29% 5.56% 6.08% 6.21% 6.28% 5.55% **
Net investment income,
without voluntary expense
subsidy................... -- 5.21% -- -- 6.18% 5.60% 5.24%
Portfolio turnover rate....... 4% 4% 6% 1% 4% 0% 5%
</TABLE>

-------------------------------------------------------------------------------

MONEY MARKET FUND

<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of
period....................... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00(2)
--------- --------- --------- -------- -------- --------- ---------
INCOME FROM INVESTMENT
OPERATIONS
Investment income............ .0388 .033 .0424 .0647 .0839 .0946 .068
Expenses..................... (.0184) (.0174) (.016) (.014) (.014) .012) (.015)
Voluntary expense subsidy.... .0084 .0074 .006 .0041 .004 .002 .007
--------- --------- --------- -------- -------- --------- ---------
Net investment income........ .0288 .023 .0324 .0548 .0739 .0846 .06
Net realized and unrealized
gain or loss on
securities................. -- -- -- -- -- -- (.0037)
--------- --------- --------- -------- -------- --------- ---------
Total from investment
operations................. .0288 .023 .0324 .0548 .0739 .0846 .0563
--------- --------- --------- -------- -------- --------- ---------
DIVIDENDS FROM NET INVESTMENT
INCOME....................... (.0288) (.023) (.0324) (.0548) (.0739) (.0846) (.0563)
--------- --------- --------- -------- -------- --------- ---------
Net asset value, end of
period....................... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
========== ========== ========== ========= ========= ========= =========
TOTAL RETURN*.................. 2.91% 2.31% 3.29% 5.65% 7.61% 8.80% 5.82%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in
millions).................... $56.4 $59.2 $72.5 $84.8 $95.7 $66.2 $21.1
Ratios to average net assets
Expenses..................... 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% .94%**
Expenses, without voluntary
expense subsidy............ 1.84% 1.74% 1.60% 1.41% 1.36% 1.18% 1.76%**
Net investment income........ 2.87% 2.30% 3.27% 5.53% 7.37% 8.51% 7.10%**
Net investment income,
without voluntary expense
subsidy.................... 2.03% 1.56% 2.67% 5.12% 7.01% 8.33% 6.28%
</TABLE>

--------------------------------------------------------------------------------

(1) The net asset value on July 13, 1988, the date the Fund commenced
operations.

(2) The net asset value on December 15, 1987, the date the Fund commenced
operations.

* Total returns for periods of less than one full year are not annualized.
Total return does not consider the effect of sales charges.

** Annualized.

8
<PAGE> 10

--------------------------------------------------------------------------------
INTRODUCTION
--------------------------------------------------------------------------------

The Trust is a duly organized Massachusetts business trust with eleven
separate Portfolios, five of which are described in this Prospectus -- the
Growth Fund, the Growth and Income Fund, the Government Fund, the Municipal Bond
Fund and the Money Market Fund. Each Fund has separate assets and liabilities
and a separate net asset value per share. Shares of a Fund represent an interest
only in the assets of that Fund. Since market risks are inherent in all
securities to varying degrees, assurance cannot be given that the goal of any of
the Funds will be met.

In addition to the five Portfolios described in this Prospectus, the Trust
offers shares in six Portfolios through other Prospectuses. Three of the
Portfolios have goals and investment policies like certain of the Funds
described in this Prospectus -- Common Sense II Growth Fund, Common Sense II
Growth and Income Fund and Common Sense II Government Fund ("Common Sense II
Funds"). The Common Sense II Funds offer Class A and Class B shares. Class A
shares are offered at net asset value per share plus a maximum initial sales
charge of 5.50% for the Growth II Fund and the Growth and Income II Fund and
4.75% for the Government II Fund and are subject to an annual service fee at the
rate of 0.25% of their average daily net assets attributable to such class of
shares. Class B shares are offered at the next determined net asset value, and
are subject to a contingent deferred sales charge if redeemed within five years
and pay a combined annual distribution fee and service fee at the rate of 1% of
its average daily net assets attributable to such class of shares. The
investment performance of the Common Sense II Funds may be expected to differ
from the investment performance of the Funds described in this Prospectus. A
prospectus of the Common Sense II Funds may be obtained from the Distributor or
PFS Investments.

--------------------------------------------------------------------------------
GOALS AND INVESTMENT POLICIES
--------------------------------------------------------------------------------

Although each Fund of the Trust has a different goal which it pursues
through separate investment policies described below, the Trust will not
purchase any securities issued by any company primarily engaged in the
manufacture of alcohol or tobacco. The differences in goals and investment
policies among the Funds can be expected to affect the return of each Fund and
the degree of market and financial risk to which each Fund is subject. The goal
and investment policies, the percentage limitations, and the kinds of securities
in which each Fund may invest are generally not fundamental policies and may be
changed by the Trustees, unless expressly governed by those limitations as
described under "Investment Practices and Risks" which can be changed only by
action of the shareholders. If there is a change in the goal of any Fund,
shareholders should consider whether the Fund remains an appropriate investment
in light of their then current financial position and needs.

GROWTH FUND

The Growth Fund seeks capital appreciation through investments in common
stocks and options on common stocks.

Portfolio securities are selected by the Adviser using an investment
research process blending traditional security analysis and quantitative
security selection techniques. Such process includes focusing on securities of
companies that the Adviser believes either: (1) experienced above-average and
consistent long-term growth of earnings and have excellent prospects for
outstanding future growth in earnings; (2) are presently experiencing or
expected to have a material increase in profits and sales; (3) are undervalued
either in that such securities are selling at prices that do not reflect the
current market value of its securities and there is reason to expect realization
of this potential in the form of increased equity values or that the potential
improving prospects of the security is not reflected in the price of the
security; (4) will experience a fundamental change in structure that potentially
may result in higher earnings; or (5) will produce new products, new services or
new processes. The Fund may invest in options and other securities that have
above average volatility of price movement. Because prices of common stocks,
options and other investments fluctuate, the value of an investment in the Fund
will vary based upon the Fund's investment performance. The Fund attempts to
reduce overall exposure to risk from declines in securities prices by spreading
its investments over many different companies in a variety of industries and by
using stock index options and stock index futures and options thereon, as
discussed in the Statement of Additional Information. There is no assurance that
the Fund will be successful in achieving its goal.

Certain policies of the Fund, such as purchasing and selling options on
stocks, purchasing options on stock indices and purchasing stock index futures
contracts and options thereon inherently involve greater than ordinary
investment risk and the likelihood of more volatile price fluctuations. Options,
futures contracts and related options are described in "Investment Practices and
Risks -- Options, Futures Contracts and Related Options" and the Statement of
Additional Information. The Fund may also invest up to 20% of its total assets
in securities of foreign issuers and in investment companies. See "Investment
Practices and Risks -- Securities of Foreign Issuers" and "Investment in
Investment Companies." Since the Fund may take substantial risks in seeking its
goal of capital appreciation, it is not suitable for investors unable or
unwilling to assume such risks.

GROWTH AND INCOME FUND

The Growth and Income Fund seeks reasonable growth and income through
investments in equity securities including common and preferred stocks and
securities convertible into common and preferred stocks.

9
<PAGE> 11

Portfolio securities are selected by the Adviser using an investment
research process blending traditional security analysis and quantitative
security selection techniques. Such process includes focusing on securities of
companies that the Adviser believes either: (1) experienced above-average and
consistent long-term growth of earnings and have excellent prospects for
outstanding future growth in earnings; (2) are presently experiencing or
expected to have a material increase in profits and sales; (3) are undervalued
either in that such securities are selling at prices that do not reflect the
current market value of its securities and there is reason to expect realization
of this potential in the form of increased equity values or that the potential
improving prospects of the security is not reflected in the price of the
security; (4) will experience a fundamental change in structure that potentially
may result in higher earnings; or (5) will produce new products, new services or
new processes. In general, the Fund intends to invest primarily in securities
that have yielded a dividend or interest income to security holders within the
past twelve months; however, it may invest in non-income producing investments
held for anticipated increase in value. There is no assurance that the Fund will
be successful in achieving its goal.

Convertible securities rank senior to common stocks in a corporation's
capital structure. They are consequently of higher quality and entail less risk
than the corporation's common stock, although the extent to which such risk is
reduced depends in large measure upon the degree to which the convertible
security sells above its value as fixed income security. The Fund may purchase
convertible securities rated Ba or lower by Moody's Investors Services, Inc.
("Moody's") or BB or lower by Standard & Poor's Corporation ("S&P") or in
non-rated securities considered by the Adviser to be of comparable quality.
Although the Fund selects these securities primarily on the basis of their
equity characteristics, investors should be aware that debt securities rated in
these categories are considered high risk securities; the rating agencies
consider them speculative, and payment of interest and principal is not
considered well assured. To the extent that such convertible securities are
acquired by the Fund there is a greater risk as to the timely payment of the
principal of, and timely payment of interest or dividends on, such securities
than in the case of higher rated convertible securities.

Although the portfolio turnover rate will not be considered a limiting
factor, the Fund does not intend to engage in trading directed at realizing
short-term profits. Nevertheless, changes in the portfolio will be made promptly
when determined to be advisable by reason of developments not foreseen at the
time of the investment decision, and usually without reference to the length of
time the security has been held.

The Fund may hold a portion of its assets in high grade short-term debt
securities and high grade corporate or government bonds in order to provide
liquidity. The amount of assets the Fund may hold for liquidity purposes is
based on market conditions and the need to meet redemption requests. Such
investments may be increased by the Fund, up to 100% of its assets, when deemed
appropriate by the Adviser for temporary defensive purposes. Short-term
investments may include repurchase agreements with banks or broker-dealers. See
"Investment Practices and Risks -- Repurchase Agreements." The Fund may also
invest up to 20% of its total assets in securities of foreign issuers and in
investment companies. See "Investment Practices and Risks -- Securities of
Foreign Issuers" and "Investment in Investment Companies." The Fund may engage
in portfolio management strategies and techniques involving options, futures
contracts and options on futures. Options, futures contracts and related options
are described in "Investment Practices and Risks -- Options, Futures Contracts
and Related Options" and the Statement of Additional Information.

GOVERNMENT FUND

The goal of the Government Fund is to seek to provide investors with a high
current return consistent with preservation of capital. The Fund invests
primarily in debt securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities. In order to hedge against changes in interest
rates, the Fund may purchase or sell options on U.S. Government securities and
engage in transactions involving interest rate futures contracts and options on
such contracts. See "Investment Practices and Risks -- Options, Futures
Contracts and Related Options" and the Statement of Additional Information for
further discussion. The Fund may invest in repurchase agreements fully
collateralized by U.S. Government securities. The Fund may also purchase or sell
U.S. Government securities on a forward commitment basis. See "Investment
Practices and Risks -- Repurchase Agreements" and "Forward Commitments." The
Fund is not designed for investors seeking long-term capital appreciation.
Shares of the Fund are not insured or guaranteed by the U.S. Government, its
agencies or instrumentalities or by any other person or entity. There is no
assurance that the Fund will be successful in achieving its goal.

The Fund may also engage in transactions involving obligations issued or
guaranteed by U.S. Government agencies and instrumentalities which are supported
by any of the following: (a) the full faith and credit of the U.S. Government
(such as Government National Mortgage Association ("GNMA" Certificates), (b) the
right of the issuer to borrow an amount limited to a specific line of credit
from the U.S. Government, (c) discretionary authority of the U.S. Government
agency or instrumentality, or (d) the credit of the instrumentality. Agencies
and instrumentalities include, but are not limited to: Federal Land Banks,
Farmers Home Administration, Central Bank for Cooperatives, Federal Intermediate
Credit Banks, Federal Home Loan Banks and Federal National Mortgage Association.
The Fund expects in any event that at all times at least 80% of its assets will
be invested in U.S. Government securities.

Securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities include: (1) U.S. Treasury obligations, which differ in their
interest rates, maturities and times of issuance: U.S. Treasury bills (maturity
of one year or less), U.S. Treasury notes (maturity of one to ten years), and
U.S. Treasury bonds (generally maturities of greater than ten years), including
the principal components or the interest components issued by the U.S.
Government under the Separate Trading of Registered Interest and Principal of
Securities program (i.e., "STRIPS"), all of which are backed by the full faith
and credit of the United States; and (2) obligations issued or guaranteed by
U.S. Government agencies or instrumentalities, including government guaranteed
mortgage-related securities, some of which are backed by the full faith and
credit of the U.S. Treasury, some of which are supported by the right of the
issue to borrow from the U.S. Government and some of which are backed only by
the credit of the issuer itself.

Mortgage loans made by banks, savings and loan institutions, and other
lenders are often assembled into pools, which are issued or guaranteed by an
agency or instrumentality of the U.S. Government, though not necessarily by the
U.S. Government itself. Interests in such pools are what this Prospectus calls
"mortgage-related securities."

Mortgage-related securities include, but are not limited to, obligations
issued or guaranteed by the Government National Mortgage Association ("GNMA"),
the Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC"). GNMA is a wholly owned corporate instrumentality
of the United States whose securities and guarantees are backed by the full
faith and credit of the United States. FNMA, a federally chartered and
privately-owned corporation, and FHLMC, a federal corporation, are
instrumentalities of the United States. The securities and

10
<PAGE> 12

guarantees of FNMA and FHLMC are not backed, directly or indirectly, by the full
faith and credit of the United States. Although the Secretary of the Treasury of
the United States has discretionary authority to lend FNMA up to $2.25 billion
outstanding at any time, neither the United States nor any agency thereof is
obligated to finance FNMA's or FHLMC's operations or to assist FNMA or FHLMC in
any other manner. Securities of FNMA and FHLMC include those issued in principal
only or interest only components.

Mortgage-related securities are characterized by monthly payments to the
holder, reflecting the monthly payments made by the borrowers who received the
underlying mortgage loans. The payments to the securityholders (such as the
Fund), like the payments on the underlying loans, represent both principal and
interest. Although the underlying mortgage loans are for specified periods of
time, such as 20 or 30 years, the borrowers can, and typically do, pay them off
sooner. Thus, the securityholders frequently receive prepayments of principal,
in addition to the principal which is part of the regular monthly payment. A
borrower is more likely to prepay a mortgage which bears a relatively high rate
of interest. This means that in times of declining interest rates, some of the
Fund's higher yielding securities might be converted to cash, and the Fund will
be forced to accept lower interest rates when that cash is used to purchase
additional securities. The increased likelihood of prepayment when interest
rates decline also limits market price appreciation of mortgage-related
securities. If the Fund buys mortgage-related securities at a premium, mortgage
foreclosures or mortgage prepayments may result in a loss to the Fund of up to
the amount of the premium paid since only timely payment of principal and
interest is guaranteed.

In general, the prices of debt securities vary inversely with interest
rates. If interest rates rise, debt security prices generally fall; if interest
rates fall, debt security prices generally rise. In addition, for a given change
in interest rates, longer-maturity debt securities fluctuate more in price
(gaining or losing more in value) than shorter-maturity debt securities, and
generally offer higher yields than shorter-maturity debt securities, all other
factors, including credit quality, being equal. This potential for a decline in
prices of debt securities due to rising interest rates is referred to herein as
"market risk." While the Fund has no policy limiting the maturities of the debt
securities in which it may invest, the Adviser seeks to moderate market risk by
generally maintaining a portfolio duration within a range of approximately four
to six years. Duration is a measure of the expected life of a debt security that
was developed as a more precise alternative to the concept of "term to
maturity." Duration incorporates a debt security's yield, coupon interest
payments, final maturity and call features into one measure.

Duration is an objective computation which allows an investment manager to
make certain predictions regarding how the value of a portfolio will respond to
changes in interest rate levels. Generally, larger measures of duration
correspond to larger expected price changes in securities and portfolios. For
example, a portfolio consisting entirely of treasury notes with a remaining
maturity of five years would have a duration of about 4.5 years. A one percent
change in interest rate levels should impact the securities prices and portfolio
net asset value inversely to the change in direction in interest rates, by about
4.5%. A portfolio consisting entirely of treasury notes with a remaining
maturity of ten years would have a duration of about 7.5 years. Here, a one
percent change in interest rate levels should impact the securities prices and
portfolio net asset value inversely to the change in direction in interest
rates, by about seven to eight percent. This example, is intended for
demonstration purposes only; however, and is not intended to approximate how the
Fund's portfolio will respond to changes in interest rates. The Fund's
investment portfolio may include securities with differing maturities and
quality levels and the interest rates on those instruments may not all change by
the same amount at the same time as rates rise or fall generally in the
marketplace. Also, the treasury securities described in the example cannot be
retired prior to maturity, while some of the securities in the Fund's portfolio
can. These factors among others can cause the Fund's investment portfolio to
respond somewhat differently to changes in interest rates than shown in the
example.

Traditionally a debt security's "term to maturity" has been used as a proxy
for the sensitivity of the security's price to changes in interest rates (which
is the "interest rate risk" or "price volatility" of the security). However,
"term to maturity" measures only the time until a debt security provides its
final payment taking no account of the pattern of the security's payments of
interest or principal prior to maturity. Duration is a measure of the expected
life of a debt security on a present value basis expressed in years. It measures
the length of the time interval between the present and the time when the
interest and principal payments are scheduled (or in the case of a callable
bond, expected to be received), weighing them by the present value of the cash
to be received at each future point in time. For any debt security with interest
payments occurring prior to the payment of principal, duration is always less
than maturity, and for zero coupon issues, duration and term to maturity are
equal. In general, the lower the coupon rate of interest or the longer the
maturity, or the lower the yield-to-maturity of a debt security, the longer its
duration; conversely, the higher the coupon rate of interest, the shorter the
maturity or the higher the yield-to-maturity of a debt security, the shorter its
duration.

There are some situations where even the standard duration calculation does
not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or more
years; however, their interest rate exposure corresponds to the frequency of the
coupon reset. Another example where the interest rate exposure is not properly
captured by duration is the case of mortgage pass-through securities. The stated
final maturity of such securities is generally 30 years, but current prepayment
rates are more critical in determining the securities' interest rate exposure.
In these and other similar situations, the Adviser will use more sophisticated
analytical techniques that incorporate the economic life of a security into the
determination of its interest rate exposure. At October 31, 1994, the average
maturity of the debt securities owned by the Fund, as adjusted for investments
in options, futures contracts and related options, was approximately 6.20 years
and the duration of the portfolio was approximately 4.71 years. The duration is
likely to vary from time to time as the Adviser pursues its strategy of striving
to maintain an active balance between seeking to maximize income and endeavoring
to maintain the value of the Fund's capital. Thus, the objective of providing
high current return consistent with preservation of capital to shareholders is
tempered by seeking to avoid undue market risk and thus provide reasonable total
return as well as high distributed return. There is, of course, no assurance
that the Adviser will be successful in achieving such results for the Fund.

The Fund generally purchases debt securities at a premium over the
principal or face value in order to obtain higher current income. The amount of
any premium declines during the term of the security to zero at maturity. Such
decline generally is reflected in the market price of the security and thus in
the Fund's net asset value. Any such decline is realized for accounting purposes
as a capital loss at maturity or upon resale. Prior to maturity or resale, such
decline in value could be offset, in whole or part, or increased by changes in
the value of the security due to changes in interest rate levels.

The principal reason for selling call or put options is to obtain, through
the receipt of premiums, a greater return than would be realized on the
underlying securities alone. By selling options, the Fund reduces its potential
for capital appreciation on debt securities if interest rates decline. Thus if
market prices of debt securities increase, the Fund receives less total return
from its optioned positions than it would have received if the options had

11
<PAGE> 13

not been sold. The purpose of selling options is intended to improve the Fund's
total return and not to "enhance" monthly distributions. During periods when the
Fund has capital loss carry forwards any capital gains generated from such
transactions will be retained in the Fund. See "Investment Practices and
Risks -- Options, Futures Contracts and Related Options," "Dividends,
Distributions and Taxes" and the Statement of Additional Information for further
discussion.

The purchase and sale of options may result in a high portfolio turnover
rate. The Fund's turnover rate is shown in the table of Financial Highlights.
See "Investment Practices and Risks -- Portfolio Turnover."

MUNICIPAL BOND FUND

The goal of the Municipal Bond Fund is to provide as high a level of
current interest income exempt from federal income tax as is consistent with the
preservation of capital. Because the value of and yield on Municipal Bonds
fluctuate, there can be no assurance that the Fund's goal will be achieved.

The Fund seeks to achieve its objective by investing in a diversified
portfolio of obligations issued by or on behalf of states, territories or
possessions of the United States and the District of Columbia and their
political subdivisions, agencies and instrumentalities, the interest from which,
in the opinion of bond counsel for the issuer, is exempt from federal income
tax. See "Municipal Bonds." It is a fundamental policy of the Fund under normal
conditions to invest at least 80% of its assets in Municipal Bonds which are
considered tax-exempt. The Fund does not independently evaluate the tax-exempt
status of the Municipal Bonds in which it invests. The Fund invests principally
in Municipal Bonds rated at the time of purchase within the three highest grades
assigned by Moody's or S & P. Ratings at the time of purchase determine which
securities may be acquired, and a subsequent reduction in rating does not
require the Fund to dispose of a security. At least 75% of the Fund's total
assets will be invested in Municipal Bonds rated "A" or higher. The Fund may
invest up to 25% of its total assets in Municipal Bonds rated "Baa" by Moody's
or "BBB" by S & P or any non-rated Municipal Bonds having characteristics
similar to Municipal Bonds rated "Baa" or "BBB." Municipal Bonds rated BBB or
Baa may have speculative characteristics so that changes in economic conditions
or other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than in the case of higher grade Municipal
Bonds. The market prices of Municipal Bonds generally fluctuate with changes in
interest rates so that the value of investments in such securities can be
expected to decrease as interest rates rise and increase as interest rates fall.
Because investment in lower rated securities involves greater investment risks,
achievement of the Fund's goal may be more dependent on the Adviser's credit
analysis than would be the case if the Fund invested only in higher rated
securities. Non-rated Municipal Bonds are not necessarily of lower quality than
rated Municipal Bonds, but the market for rated Municipal Bonds is often
broader. The Fund may seek to hedge against changes in interest rates through
transactions in listed futures contracts related to U.S. Government securities,
Municipal Bonds or to an index of Municipal Bonds, and options on such
contracts. See the Statement of Additional Information for discussion of futures
contracts and options.

On a temporary basis, due to market conditions or pending investment in
Municipal Bonds, the Fund may invest up to 100% of its assets in "Temporary
Investments" consisting of short-term municipal notes rated MIG 1 through MIG 4
by Moody's or SP-1 or SP-2 by S & P; tax-exempt commercial paper rated P-1 or
P-2 in the case of Moody's or A-1 or A-2 by S & P; securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities; corporate
bonds and debentures; certificates of deposit and bankers' acceptances of
domestic banks with assets of $500 million or more and having deposits insured
by the Federal Deposit Insurance Corporation; commercial paper and repurchase
agreements. The income on corporate bonds and debentures, certificates of
deposit and bankers' acceptances, commercial paper and repurchase agreements is
taxable. See the Appendix in the Statement of Additional Information for
discussion of ratings of commercial paper and bonds.

The Fund may invest up to 10% of its net assets in illiquid securities
which include Municipal Bonds issued in limited placements under which the Fund
represents that it is purchasing for investment purposes only, repurchase
agreements maturing in more than seven days and other securities subject to
legal or contractual restrictions on resale. Municipal Bonds acquired in limited
placements generally may be resold only in a privately negotiated transaction to
one or more other institutional investors. Restricted securities are generally
purchased at a discount from the market price of unrestricted securities of the
same issuer. Investments in restricted securities are not readily marketable
without some time delay. A Fund position in restricted securities might
adversely affect the liquidity and marketability of such securities. Such
limitation could result in the Fund's inability to realize a favorable price
upon disposition, and in some cases might make disposition of such securities at
the time desired by the Fund impossible. The 10% limitation applies at the time
the purchase commitment is made. See "Investment Practices and
Risks -- Repurchase Agreements."

Variations in the quality and maturity of the Fund's portfolio investments
can be expected to affect the Fund's yield and the degree of market and
financial risk to which the Fund is subject. Generally, Municipal Bonds with
longer maturities tend to produce higher yields and are subject to greater
market fluctuations as a result of changes in interest rates than Municipal
Bonds with shorter maturities and lower yields. The market value of Municipal
Bonds generally rises when interest rates decline and falls when interest rates
rise. Generally lower rated Municipal Bonds provide a higher yield than higher
rated Municipal Bonds of similar maturity but are subject to greater market and
financial risk. The Fund is not limited as to the maturities of the Municipal
Bonds in which it invests. Such securities may have remaining maturities of up
to 30 years or more.

MUNICIPAL BONDS. Municipal Bonds include debt obligations of a state,
territory or a possession of the United States and the District of Columbia and
their political subdivisions, agencies and instrumentalities issued to obtain
funds for various public purposes, including the construction of a wide range of
public facilities such as airports, highways, bridges, schools, hospitals,
housing, mass transportation, streets and water and sewer works. Other public
purposes for which Municipal Bonds may be issued include refunding outstanding
obligations, obtaining funds for general operating expenses and obtaining funds
to lend to other public institutions and facilities. Certain types of Municipal
Bonds are issued to obtain funding for privately operated facilities.

Many new issues of Municipal Bonds are sold on a "when issued" basis. While
the Fund has ownership rights to the bonds, the Fund does not have to pay for
them until they are delivered, normally 15 to 45 days later. To meet that
payment obligation, the Fund sets aside with the custodian sufficient cash or
high grade securities equal to the amount that will be due. When the Fund
engages in when-issued and delayed delivery transactions, the Fund relies on the
buyer or seller, as the case may be, to consummate the trade. Failure of the
buyer or seller to do so may result in the Fund missing the opportunity of
obtaining a price considered to be advantageous. See "Investment Practices and
Risks -- Delayed Delivery and When-Issued Securities."

12
<PAGE> 14

The yields of Municipal Bonds depend on, among other things, general money
market conditions, general conditions of the Municipal Bond market, size of a
particular offering, the maturity of the obligation and rating of the issue. The
ratings of Moody's and S & P represent their opinions of the quality of the
Municipal Bonds they undertake to rate. It should be emphasized, however, that
ratings are general and are not absolute standards of quality. Consequently,
Municipal Bonds with the same maturity, coupon and rating may have different
yields while Municipal Bonds of the same maturity and coupon with different
ratings may have the same yield. A description of the ratings is included in the
Statement of Additional Information.

Among the various types of Municipal Bonds are general obligation bonds,
revenue or special obligation bonds, industrial development bonds, pollution
control bonds, variable rate demand notes, and short-term tax-exempt municipal
obligations such as tax anticipation notes.

General obligation bonds are backed by the taxing power of the issuing
municipality. Revenue bonds are backed by the revenues of a project or
facility -- tolls from a toll-bridge, for example. Industrial development
revenue bonds are a specific type of revenue bond backed by the credit and
security of a private user. The Fund's ability to achieve its goal depends to a
great extent on the ability of these various issuers to meet their scheduled
payments of principal and interest.

The Fund considers investments in Municipal Bonds not to be subject to
concentration policies and may invest a relatively high percentage of its assets
in Municipal Bonds issued by entities having similar characteristics. The
issuers may be located in the same geographic area or may pay their interest
obligations from revenue of similar projects such as hospitals, utility systems
and housing finance agencies. This may make the Fund's investments more
susceptible to similar economic, political or regulatory occurrences. As the
similarity in issuers increases, the potential for fluctuation in the Fund's per
share net asset value also increases. The Fund may invest more than 25% of its
total assets in industrial development revenue bonds, but it does not intend to
invest more than 25% of its assets in industrial development revenue bonds
issued for companies in the same industry or state. Sizeable investments in such
obligations could involve an increased risk to the Fund should any of such
issuers of any such related projects or facilities experience financial
difficulties.

From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Bonds. It may be expected that similar proposals may be
introduced in the future. If any such proposals were to be enacted, the ability
of the Fund to pay "exempt-interest" dividends may be adversely affected and the
Fund would re-evaluate its investment objective and policies and consider
changes in its structure.

TAX LEGISLATION. Interest on certain "private-activity bonds" issued after
August 7, 1986, is an item of tax preference subject to the alternative minimum
tax on individuals and corporations. THE TRUST WILL NOT PURCHASE ANY PRIVATE
ACTIVITY BONDS SUBJECT TO THE ALTERNATIVE MINIMUM TAX.

The Omnibus Budget Reconciliation Act of 1993, which was signed into law on
August 10, 1993, included certain provisions intended to prevent the conversion
of ordinary income into capital gain. One such provision affects tax-exempt
securities by requiring that gains on certain debt instruments purchased at a
market discount be treated as ordinary income to the extent of the accrued
market discount. The new law extends this treatment to market discount bonds
issued before July 18, 1984 and to tax-exempt bonds, if the bonds are acquired
after April 30, 1993. Such bonds were exempt from the market discount rules
under prior law.

MONEY MARKET FUND

The Money Market Fund seeks protection of capital and a high level of
current income through investments in money market securities. Such securities
may include obligations of the U.S. Government, its agencies and
instrumentalities, bank obligations, commercial paper and repurchase agreements
secured by obligations of the U.S. Government, its agencies and
instrumentalities. Such securities are described below and repurchase agreements
are described under the caption "Investment Practices and Risks -- Repurchase
Agreements."

The Fund seeks to maintain a constant net asset value of $1.00 per share by
investing in a diversified portfolio of money market instruments maturing within
13 months with a dollar-weighted average maturity of 90 days or less. It seeks
high current income from these short-term investments to the extent consistent
with protection of capital. Of course, there can be no guarantee that the Fund
will achieve its objective or be able at all times to maintain its net asset
value per share at $1.00. In addition, the daily dividend rate paid by the Fund
may be expected to fluctuate. The Fund uses the amortized cost method for
valuing portfolio securities. See "Purchase of Shares."

OBLIGATIONS OF THE U.S. GOVERNMENT AND ITS AGENCIES. The Fund may invest in
obligations issued or guaranteed as to principal and interest by the U.S.
Government, its agencies, and instrumentalities which are supported by any of
the following: (a) the full faith and credit of the U.S. Government, (b) the
right of the issuer to borrow an amount limited to a specific line of credit
from the U.S. Government, (c) discretionary authority of the U.S. Government
agency or instrumentality, or (d) the credit of the instrumentality. Such
agencies or instrumentalities include, but are not limited to, FNMA, GNMA,
Federal Land Banks, and the Farmer's Home Administration.

BANK OBLIGATIONS. The Fund may invest in negotiable time deposits,
certificates of deposit and bankers' acceptances which are obligations of
domestic banks having total assets in excess of $1 billion as of the date of
their most recently published financial statements. The Fund is also authorized
to invest up to 5% of its total assets in certificates of deposit issued by
domestic banks having total assets of less than $1 billion, provided that the
principal amount of the certificate of deposit acquired by the Fund is insured
in full by the Federal Deposit Insurance Corporation.

COMMERCIAL PAPER. The Fund may invest in short-term obligations of
companies which at the time of investment are (a) rated in the two highest
categories by S & P (A-1 and A-2) or by Moody's (Prime-1 and Prime-2), or (b) if
not rated, are in the opinion of the Adviser, of comparable quality. Commercial
paper consists of short-term (usually from 1 to 270 days) unsecured promissory
notes issued by corporations in order to finance their current operations. (See
the Statement of Additional Information for an explanation of these ratings.)
The Fund's current policy is to limit investments in commercial paper to
obligations rated A-1 or Prime-1.

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INVESTMENT PRACTICES AND RISKS
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REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements with
broker-dealers or domestic banks. A repurchase agreement is a short-term
investment in which the purchaser (e.g., the Fund) acquires ownership of a debt
security and the seller agrees to repurchase the obligation at a future time and
set price, thereby determining the yield during the purchaser's holding period.
Repurchase agreements involve certain risks in the event of a default by the
other party. No Fund will invest in repurchase agreements maturing in more than
seven days if any such investment, together with any other illiquid securities
held by such Fund, exceeds 10% of the value of the Fund's net assets. See the
Statement of Additional Information.

For the purpose of investing in repurchase agreements, the Adviser may
aggregate the cash that substantially all of the funds advised or subadvised by
the Adviser would otherwise invest separately into a joint account. The cash in
the joint account is then invested and the funds that contributed to the joint
account share pro rata in the net revenue generated. The Adviser believes that
the joint account produces greater efficiencies and economies of scale that may
contribute to reduced transaction costs, higher returns, higher quality
investments and greater diversity of investments for a Fund than would be
available to a Fund investing separately. The manner in which the joint account
is managed is subject to conditions set forth in the SEC order authorizing this
practice, which conditions are designed to ensure the fair administration of the
joint account and to protect the amounts in that account.

OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS (ALL FUNDS EXCEPT MONEY
MARKET FUND). The Funds expect to utilize options, futures contracts and options
thereon in several different ways, depending upon the status of a Fund's
portfolio and the Adviser's expectations concerning the securities markets.

For example, in times of stable or rising security prices, a Fund generally
seeks to obtain maximum exposure to the securities markets, i.e., to be "fully
invested." Nevertheless, even when a Fund is fully invested, prudent management
requires that at least a small portion of assets be available as cash to honor
redemption requests and for other short-term needs. A Fund may also have cash on
hand that has not yet been invested. The portion of a Fund's assets that is
invested in cash equivalents does not fluctuate with security market prices, so
that, in times of rising market prices, a Fund may underperform the market in
proportion to the amount of cash equivalents in its portfolio. By purchasing
futures contracts, however, a Fund can compensate for the cash portion of its
assets and obtain equivalent performance to investing 100% of its assets in
equity securities.

If the Adviser forecasts a market decline, a Fund may take a defensive
position, reducing its exposure to the securities markets by increasing its cash
position. By selling futures contracts instead of portfolio securities, a
similar result can be achieved to the extent that the performance of the futures
contracts correlates to the performance of a Fund's portfolio securities. Sale
of futures contracts could frequently be accomplished more rapidly and at less
cost than the actual sale of securities. Once the desired hedged position has
been effected, a Fund could then liquidate securities in a more deliberate
manner, reducing its futures position simultaneously to maintain the desired
balance, or it could maintain the hedged position.

As an alternative to selling futures contracts, a Fund can purchase puts
(or futures puts) to hedge the portfolio's risk in a declining market. Since the
value of a put increases as the index declines below a specified level, the
portfolio's value is protected against a market decline to the degree the
performance of the index correlates with the performance of a Fund's investment
portfolio. If the market remains stable or advances, a Fund can refrain from
exercising the put and its portfolio will participate in the advance, having
incurred only the premium cost for the put.

In many cases, a Fund could achieve results similar to those available from
options and futures contracts without investing in the options and futures
markets. For example, instead of hedging portfolio securities it owned with
options and futures contracts, the Fund could sell the securities and invest the
proceeds in money market instruments. In other cases, however, the options and
futures markets provide investment or risk management opportunities that are not
available from direct investments in securities. In addition, some strategies
can be implemented with greater ease and at lower cost by utilizing the options
and futures markets.

POTENTIAL RISKS OF OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS. The
purchase and sale of options and futures contracts involve risks different from
those involved with direct investments in securities. While utilization of
options, futures contracts and similar instruments may be advantageous to a
Fund, if the Adviser is not successful in employing such instruments in managing
a Fund's investments, a Fund's performance will be worse than if a Fund did not
make such investments. In addition, a Fund would pay commissions and other costs
in connection with such investments, which may increase a Fund's expenses and
reduce its return.

The Government Fund, the Growth and Income Fund and the Growth Fund may
write or purchase options in privately negotiated transactions ("OTC Options")
as well as listed options. OTC Options can be closed out only by agreement with
the other party to the transaction. Any OTC Option purchased by a Fund will be
considered an illiquid security. Any OTC Option written by a Fund will be with a
qualified dealer pursuant to an agreement under which the Fund may repurchase
the option at a formula price. Such options will be considered illiquid to the
extent that the formula price exceeds the intrinsic value of the option. Each
Fund may not purchase or sell futures contracts or related options for which the
aggregate initial margin and premiums exceed five percent of the fair market
value of the Fund's assets. In order to prevent leverage in connection with the
purchase of futures contracts thereon by the Fund, an amount of cash, cash
equivalents or liquid high grade debt securities equal to the market value of
the obligation under the futures contracts (less any related margin deposits)
will be maintained in a segregated account with the Custodian. A Fund may not
invest more than 10% of its net assets in illiquid securities and repurchase
agreements which have a maturity of longer than seven days. A more complete
discussion of the potential risks involved in transactions involving options or
futures contracts and related options, is contained in the Statement of
Additional Information.

SECURITIES OF FOREIGN ISSUERS. The Growth Fund and the Growth and Income
Fund may invest up to 20% of the value of their total assets in securities of
foreign governments and companies of developed and emerging market countries.

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<PAGE> 16

Investments in securities of foreign entities and securities denominated in
foreign currencies involve risks not typically involved in domestic investment,
including fluctuations in foreign exchange rates, future foreign political and
economic developments, and the possible imposition of exchange controls or other
foreign or United States governmental laws or restrictions applicable to such
investments. Since each Fund may invest in securities denominated or quoted in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates may affect the value of investments in the portfolio and the accrued
income and unrealized appreciation or depreciation of investments. Changes in
foreign currency rates relative to the U.S. dollar will affect the U.S. dollar
value of the Fund's assets denominated in that currency and the Fund's yield on
such assets.

Each Fund may also purchase foreign securities in the form of American
Depositary Receipts ("ADRs") and European Depositary Receipts ("EDRs") or other
securities representing underlying shares of foreign companies. ADRs are
publicly traded on exchanges or over-the-counter in the United States and are
issued through "sponsored" or "unsponsored" arrangements. In a sponsored ADR
arrangement, the foreign issuer assumes the obligation to pay some or all of the
depositary's transaction fees, whereas under an unsponsored arrangement, the
foreign issuer assumes no obligation and the depositary's transaction fees are
paid by the ADR holders. In addition, less information is available in the
United States about an unsponsored ADR than about a sponsored ADR, and the
financial information about a company may not be as reliable for an unsponsored
ADR as it is for a sponsored ADR. Each Fund may invest in ADRs through both
sponsored and unsponsored arrangements. For further information on ADRs and
EDRs, investors should refer to the Statement of Additional Information.

With respect to certain foreign countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social instability
or diplomatic developments which could affect investment in those countries.
There may be less publicly available information about a foreign security than
about a United States security, and foreign entities may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to those of United States entities. In addition, certain foreign
investments made by the Fund may be subject to foreign withholding taxes, which
would reduce the Fund's total return on such investments and the amounts
available for distributions by the Fund to its shareholders. See "Dividends,
Distributions and Taxes." Foreign financial markets, while growing in volume,
have, for the most part, substantially less volume than United States markets,
and securities of many foreign companies are less liquid and their prices more
volatile than securities of comparable domestic companies. The foreign markets
also have different clearance and settlement procedures, and in certain markets
there have been times when settlements have been unable to keep pace with the
volume of securities transactions making it difficult to conduct such
transactions. Delays in settlement could result in temporary periods when assets
of the Fund are not invested and no return is earned thereon. The inability of
each Fund to make intended security purchases due to settlement problems could
cause the Fund to miss attractive investment opportunities. Inability to dispose
of portfolio securities due to settlement problems could result either in losses
to the Fund due to subsequent declines in value of the portfolio security or, if
the Fund has entered into a contract to sell the security, could result in
possible liability to the purchaser. Costs associated with transactions in
foreign securities, including custodial costs and foreign brokerage commissions,
are generally higher than with transactions in United States securities. In
addition, each Fund will incur cost in connection with conversions between
various currencies. There is generally less government supervision and
regulation of exchanges, financial institutions and issuers in foreign countries
than there are in the United States. These risks may be intensified in the case
of investments in developing or emerging markets. In many developing markets,
there is less government supervision and regulation of business and industry
practices, stock exchanges, brokers and listed companies than in the United
States. The foreign securities markets of many of the countries in which the
Fund may invest may also be smaller, less liquid, and subject to greater price
volatility than those in the United States.

The Growth Fund and the Growth and Income Fund may invest in the securities
of developing countries. A developing country generally is considered to be a
country that is in the initial stages of its industrialization cycle. Investing
in the equity and fixed-income markets of developing countries involves exposure
to economic structures that are generally less diverse and mature, and to
political systems that can be expected to have less stability, than those of
developed countries. Historical experience indicates that the markets of
developing countries have been more volatile than the markets of the more mature
economies of developed countries; however, such markets often have provided
higher rates of return to investors.

One or more of the risks discussed above could affect adversely the economy
of a developing market or a Fund's investments in such a market. In Eastern
Europe, for example, upon the accession to power of Communist regimes in the
past, the governments of a number of Eastern European countries expropriated a
large amount of property. The claims of many property owners against those
governments were never finally settled. There can be no assurance that any
investments that the Fund might make in such emerging markets would not be
expropriated, nationalized or otherwise confiscated at some time in the future.
In such an event, the Fund could lose its entire investment in the market
involved. Moreover, changes in the leadership or policies of such markets could
halt the expansion or reverse the liberalization of foreign investment policies
now occurring in certain of these markets and adversely affect existing
investment opportunities.

FORWARD COMMITMENTS (GOVERNMENT FUND). The Fund may purchase or sell U.S.
Government securities on a "when-issued" or "delayed delivery" basis ("Forward
Commitments"). These transactions occur when securities are purchased or sold by
the Fund with payment and delivery taking place in the future, frequently a
month or more after such transactions. The price is fixed on the date of the
commitment, and the seller continues to accrue interest on the securities
covered by the Forward Commitment until delivery and payment take place. At the
time of settlement, the market value of the securities may be more or less than
the purchase or sale price.

The Fund may either settle a Forward Commitment by taking delivery of the
securities or may either resell or repurchase a Forward Commitment on or before
the settlement date in which event the Fund may reinvest the proceeds in another
Forward Commitment. The Fund's use of Forward Commitments may increase its
overall investment exposure and thus its potential for gain or loss. When
engaging in Forward Commitments, the Fund relies on the other party to complete
the transaction; should the other party fail to do so, the Fund might lose a
purchase or sale opportunity that could be more advantageous than alternative
opportunities at the time of the failure.

The Fund maintains a segregated account (which is marked to market daily)
of cash, U.S. Government securities or the security covered by the Forward
Commitment with the Fund's custodian in an aggregate amount equal to the amount
of its commitment as long as the obligation to purchase or sell continues.

LOANS OF PORTFOLIO SECURITIES. Each Fund may lend portfolio securities to
unaffiliated brokers, dealers and financial institutions provided that (a)
immediately after any such loan, the value of the securities loaned does not
exceed 10% of the total value of that Fund's assets, and (b) any

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<PAGE> 17

securities loan is collateralized in accordance with applicable regulatory
requirements. The Adviser believes the risk of loss on such transactions is
slight, because, if a borrower was to default for any reason, the collateral
should satisfy the obligation. See the Statement of Additional Information.

VARIABLE RATE DEMAND NOTES (MUNICIPAL BOND FUND). The Fund may invest in
variable rate demand notes ("VRDNs") which are tax-exempt obligations which
contain a floating or variable interest rate adjustment formula and which are
subject to an unconditional right of demand to receive payment of the principal
balance plus accrued interest either at any time or at specified intervals not
exceeding one year and in either case upon no more than seven days' notice. The
interest rates are adjustable at intervals ranging from daily ("floating rate")
to up to one year to some prevailing market rate for similar investments, such
adjustment formula being calculated to maintain the market value of the VRDN at
approximately the par value of the VRDN upon the adjustment date. The
adjustments are typically based upon the prime rate of a bank or some other
appropriate interest rate adjustment index.

The Fund may also invest in VRDNs in the form of participation interests
("Participating VRDNs") in variable rate tax-exempt obligations held by a
financial institution, typically a commercial bank ("institution").
Participating VRDNs provide the Fund with a specified undivided interest (up to
100%) in the underlying obligation and the right to demand payment of the unpaid
principal balance plus accrued interest on the Participating VRDNs from the
institution upon a specified number of days' notice, not to exceed seven days.
The Fund has an undivided interest in the underlying obligation and thus
participates on the same basis as the institution in such obligation except that
the institution typically retains fees out of the interest paid on the
obligation for servicing the obligation and issuing the repurchase commitment.

STAND-BY COMMITMENTS (MUNICIPAL BOND FUND). The Fund may acquire stand-by
commitments with respect to Municipal Bonds held by it. Under a stand-by
commitment, a bank or dealer from which Municipal Bonds are acquired agrees to
purchase from the Fund, at the Fund's option, the Municipal Bonds at a specified
price. Such commitments are sometimes called "liquidity puts."

The amount payable to the Fund upon its exercise of a stand-by commitment
is normally (i) the Fund's acquisition cost of the Municipal Bonds (excluding
any accrued interest which the Fund paid on their acquisition), less any
amortized market premium or plus any amortized market or original issue discount
during the period the Fund owned the securities, plus (ii) all interest accrued
on the securities since the last interest payment date during that period.
Stand-by commitments generally can be acquired when the remaining maturity of
the underlying Municipal Bonds is not greater than one year, and are exercisable
by the Fund at any time before the maturity of such obligations.

The Fund's right to exercise stand-by commitments is unconditional and
unqualified. A stand-by commitment generally is not transferable by the Fund,
although the Fund can sell the underlying Municipal Bonds to a third party at
any time.

The Fund expects that stand-by commitments will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, the Fund may pay for a stand-by commitment either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitment (thus reducing the yield to maturity
otherwise available for the same securities). The total amount paid in either
manner for outstanding stand-by commitments held in the Fund will not exceed
one-half of one percent of the value of the Fund's total assets calculated
immediately after each stand-by commitment is acquired. The Fund intends to
enter into stand-by commitments only with banks and dealers which, in the
Adviser's opinion, present minimal credit risks.

The Fund would acquire stand-by commitments solely to facilitate portfolio
liquidity and does not intend to exercise its rights thereunder for trading
purposes. The acquisition of a stand-by commitment would not affect the
valuation of the underlying Municipal Bonds which would continue to be valued in
accordance with the method of valuation employed by the Fund. Stand-by
commitments acquired by the Fund would be valued at zero in determining net
asset value. Where the Fund paid any consideration directly or indirectly for a
stand-by commitment, the cost would be reflected as unrealized depreciation for
the period during which the commitment was held by the Fund.

DELAYED DELIVERY AND WHEN-ISSUED SECURITIES (MUNICIPAL BOND
FUND). Municipal Bonds may at times be purchased or sold on a "delayed
delivery" or a "when-issued" basis. These transactions arise when securities are
purchased or sold by the Fund with payment and delivery taking place in the
future, often a month or more after the purchase. The payment obligation and the
interest rate are each fixed at the time the Fund enters into the commitment.
The Fund will only make commitments to purchase such securities with the
intention of actually acquiring the securities, but the Fund may sell these
securities prior to settlement date if it is deemed advisable. Purchasing
Municipal Bonds on a when-issued basis involves the risk that the yields
available in the market when the delivery takes place may actually be higher
than those obtained in the transaction itself; if yields so increase, the value
of the when-issued obligation will generally decrease. The Fund maintains a
separate account at its custodian bank consisting of cash or liquid high grade
debt obligations (valued on a daily basis) equal at all times to the amount of
any when-issued commitment.

RESTRICTED SECURITIES. The Growth Fund, the Growth and Income Fund and the
Municipal Bond Fund may each invest up to 10% of their net assets in restricted
securities and other illiquid assets. As used herein, restricted securities are
those that have been sold in the United States without registration under the
Securities Act of 1933 and are thus subject to restrictions on resale. Excluded
from the limitation, however, are any restricted securities which are eligible
for resale pursuant to Rule 144A under the Securities Act of 1933 and which have
been determined to be liquid by the Trustees or by the Adviser pursuant to
board-approved guidelines. The determination of liquidity is based on the volume
of reported trading in the institutional secondary market for each security.
Since it is not possible to predict with assurance how the markets for
restricted securities sold and offered under Rule 144A will develop, the
Trustees will carefully monitor each Fund's investment in these securities
focusing on such factors, among others, as valuation, liquidity and availability
of information. This investment practice could have the effect of increasing the
level of illiquidity in each Fund to the extent that qualified institutional
buyers become for a time uninterested in purchasing these restricted securities.
These difficulties and delays could result in a Fund's inability to realize a
favorable price upon disposition of restricted securities, and in some cases
might make disposition of such securities at the time desired by the Fund
impossible. Since market quotations are not readily available for restricted
securities, such securities will be valued by a method that the Trustees believe
accurately reflects fair value.

PORTFOLIO TURNOVER. Each Fund may purchase or sell securities without
regard to the length of time the security has been held and thus may experience
a high rate of portfolio turnover. A 100% turnover rate would occur, for
example, if all the securities in a portfolio were replaced in a period of one
year. Under certain market conditions, the Growth Fund and the Government Fund
may experience a high rate of portfolio turnover. This may

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<PAGE> 18

occur, for example, if the Fund writes a substantial number of covered call
options and the market prices of the underlying securities appreciate. The rate
of portfolio turnover is not a limiting factor when the Adviser deems it
desirable to purchase or sell securities or to engage in options transactions.
The annual turnover rates of the Growth Fund, the Government Fund and the
Municipal Bond Fund are not expected to exceed 400%; and the annual turnover
rate of the Growth and Income Fund is not expected to exceed 100%. High
portfolio turnover involves correspondingly greater transaction costs, including
any brokerage commissions, which are borne directly by the respective Fund and
may increase the recognition of short-term, rather than long-term, capital
gains. See "Dividends, Distributions and Taxes."

PORTFOLIO TRANSACTIONS AND BROKERAGE PRACTICES. The Adviser is responsible
for the placement of orders for the purchase and sale of portfolio securities
for the Trust and the negotiation of brokerage commissions on such transactions.
Brokerage firms are selected on the basis of their professional capability for
the type of transaction and the value and quality of execution services rendered
on a continuous basis. Brokerage firms are selected on the basis of their
professional capability for the type of transaction and the value and quality of
execution services rendered on a continuing basis. Orders may be directed to any
broker including, to the extent and in the manner permitted by applicable law,
Smith Barney, Inc. ("Smith Barney") and Robinson Humphrey, Inc. ("Robinson
Humphrey"). Smith Barney and Robinson Humphrey may be considered affiliated
persons of the Distributor's parent, The Travelers Inc. ("Travelers"). In order
for Smith Barney and Robinson Humphrey to effect any such transaction, the
commissions, fees or other remuneration received by Smith Barney and Robinson
Humphrey must be reasonable and fair compared to the commissions, fees or other
remuneration paid to other brokers in connection with comparable transactions
involving similar securities, futures or options on futures being purchased or
sold on an exchange during a comparable period of time. This standard would
allow Smith Barney and Robinson Humphrey to receive no more than the
remuneration that would be expected to be received by an unaffiliated broker in
a commensurate arms-length transaction. Furthermore, the Board of Trustees of
the Trust, including a majority of the Trustees who are not "interested"
Trustees, has adopted procedures that are reasonably designed to provide that
any commissions, fees or other remuneration paid to Smith Barney and Robinson
Humphrey are consistent with the foregoing standard. Brokerage transactions with
Smith Barney and Robinson Humphrey are also subject to such fiduciary standards
as may be imposed upon Smith Barney and Robinson Humphrey by applicable law.
U.S. Government securities in which the Trust invests are traded in the over-
the-counter market. Such securities are generally traded on a net basis with a
dealer acting as principal for its own account without a stated commission,
although the prices of the securities usually include a profit to the dealer.
Most transactions made by the Money Market Fund are principal transactions at
net prices which incur little or no brokerage costs. It is the policy of the
Trust to seek to obtain the best net results taking into account such factors as
price (including the applicable dealer spread), the size, type and difficulty of
the transaction involved, the firm's general execution and operational
facilities, the firm's risk in positioning the securities involved, and the
provision of supplemental investment research by the firm. While the Trust seeks
reasonably competitive spreads, the Trust will not necessarily be paying the
lowest spread available. Brokerage commissions are paid on transactions in
listed options, futures contracts and options thereon. The Adviser is authorized
to place portfolio transactions with broker-dealers participating in the
distribution of shares of the Trust if it reasonably believes that the quality
of the execution and any commission are comparable to that available from other
qualified firms. The Adviser is authorized to pay higher commissions to
brokerage firms that provide it with investment and research information than to
firms which do not provide such service if they determine that such commissions
are reasonable in relation to the overall services provided. The information
received may be used by the Adviser in managing the assets of other advisory
accounts managed by the Adviser as well as in the management of the assets of
the Trust.

INVESTMENT IN INVESTMENT COMPANIES (GROWTH FUND AND GROWTH AND INCOME
FUND). The Growth Fund and the Growth and Income Fund, may invest in a separate
investment company, American Capital Small Capitalization Fund, Inc. ("Small Cap
Fund"), that invests in a broad selection of small capitalization securities.
The shares of the Small Cap Fund are available only to investment companies
advised by the Adviser. The Adviser believes that the use of the Small Cap Fund
provides the Funds with the most effective exposure to the performance of the
small capitalization sector of the stock market while at the same time
minimizing costs. The Adviser charges no advisory fee for managing the Small Cap
Fund, nor are there any sales load or other charges associated with distribution
of its shares. Other expenses incurred by the Small Cap Fund are borne by it,
and thus indirectly by the Funds and the American Capital funds that invest in
it. With respect to such other expenses, the Adviser anticipates that the
efficiencies resulting from use of the Small Cap Fund will result in cost
savings for the Funds and the American Capital funds that invest in the Small
Cap Fund. In large part, these savings will be attributable to the fact that
administrative actions that would have to be performed multiple times if each
Fund held its own portfolio of small capitalization stocks will need to be
performed only once. The Adviser expects that the Small Cap Fund will experience
trading costs that will be substantially less than the trading costs that would
be incurred if small capitalization stocks were purchased separately for the
Funds and the American Capital funds.

The securities of small and medium sized companies that the Small Cap Fund
may invest in may be subject to more abrupt or erratic market movements than
securities of larger, more established companies or the market averages in
general. In addition, small capitalization companies typically are subject to a
greater degree of change in earnings and business prospects than are larger,
more established companies. In light of these characteristics of small
capitalization companies and their securities, the Small Cap Fund may be subject
to greater investment risk than that assumed through investment in the equity
securities of larger capitalization companies.

Each Fund will be deemed to own a pro rata portion of each investment of
the Small Cap Fund. For example, if a Fund's investment in the Small Cap Fund
were $10 million, and the Small Cap Fund had five percent of its assets invested
in the electronics industry, the Fund would be considered to have an investment
of $500,000 in the electronics industry.

INVESTMENT RESTRICTIONS

RESTRICTIONS APPLICABLE TO ALL OF THE FUNDS. Each Fund has adopted a number
of investment restrictions which may not be changed without the approval of the
holders of a majority (as defined by the 1940 Act) of the shares of such Fund.
The percentage limitations need only be met at the time the investment is made
or other relevant action taken. These restrictions provide, among other things,
that a Fund may not:

1. With respect to 75% of its assets, invest more than 5% of its assets in
the securities of any one issuer (except obligations of the U.S. Government, its
agencies or instrumentalities and repurchase agreements secured thereby), or
purchase more than 10% of the outstanding voting securities of any one issuer.
Neither limitation shall apply to the acquisition of shares of other open-end
investment companies by the Growth Fund or the Growth

17
<PAGE> 19

and Income Fund to the extent permitted by rule or order of the SEC exempting
them from the limitations imposed by Section 12(d)(1) of the 1940 Act;

2. Purchase a restricted security or a security for which market quotations
are not readily available if as a result of such purchase more than 5% of the
Fund's assets would be invested in such securities, provided, however, that with
respect to the Growth Fund and the Growth and Income Fund, this limitation shall
exclude shares of other open-end investment companies owned by the Fund but
include the Fund's pro rata portion of the securities and other assets owned by
any such company;

3. Invest more than 25% of the value of its total assets in securities of
issuers in any particular industry; provided, however, that with respect to the
Growth Fund and the Growth and Income Fund, this limitation shall exclude shares
of other open-end investment companies owned by the Fund but include the Fund's
pro rata portion of the securities and other assets owned by any such company
(This does not restrict any of the Funds from investing in obligations of the
U.S. Government and repurchase agreements secured thereby, and, in the case of
the Money Market Fund, does not restrict investments in money market instruments
of banks.);

4. Borrow in excess of 10% of the market or other fair value of its total
assets, or pledge its assets to an extent greater than 5% of the market or other
fair value of its total assets, provided that so long as any borrowing exceeds
5% of the value of the Fund's total assets, the Fund shall not purchase
portfolio securities. Any such borrowings shall be from banks and shall be
undertaken only as a temporary measure for extraordinary or emergency purposes.
Deposits in escrow in connection with the writing of covered call or secured put
options, or in connection with the purchase or sale of futures contracts and
related options, are not deemed to be a pledge or other encumbrance;

5. Invest more than 5% of its assets in companies having a record together
with predecessors, of less than three years' continuous operation, except that
the Growth Fund and the Growth and Income Fund, may acquire shares of other
open-end investment companies to the extent permitted by rule or order of the
SEC exempting them from the limitations imposed by Section 12(d)(1) of the 1940
Act.

6. Engage in option writing for speculative purposes or purchase call or
put options on securities if, as a result, more than 5% of its net assets of the
Fund would be invested in premiums on such options; or

7. Purchase any security issued by any company deriving more than 25% of
its gross revenues from the manufacture of alcohol or tobacco.

Each state and each political subdivision, agency or instrumentality of
such state, and each multi-state agency of which a state is a member is a
separate "issuer" as that term is used in this Prospectus. The non-government
user of facilities financed by industrial development or pollution control bonds
is also considered as a separate issuer. In certain circumstances, the guarantor
of a guaranteed security may also be considered to be an issuer in connection
with such guarantee.

In addition to the foregoing, the Trust has adopted additional investment
restrictions, which may be changed by the Trustees without a vote of
shareholders, as follows:

FOREIGN INVESTMENTS. The Growth Fund and the Growth and Income Fund may not
invest in the securities of a foreign issuer if, at the time of acquisition,
more than 20% of the value of the Fund's total assets would be invested in such
securities.

FUTURES CONTRACTS AND OPTIONS. In addition, the Growth and Income Fund and
the Growth Fund may not write, purchase or sell puts, calls or combinations
thereof, except that each Fund may (a) write covered call options with respect
to any part or all of its portfolio securities, write secured put options, or
enter into closing purchase transactions with respect to such options, (b)
purchase and sell put and call options to the extent that the premiums paid for
all such options do not exceed 10% of its total assets and only if the Fund owns
the securities covered by the put option at the time of purchase, and (c) engage
in futures contracts and related options transactions as described in the
Statement of Additional Information.

The Government Fund may not write, purchase or sell puts, calls or
combinations thereof, except that the Fund may (a) write covered or fully
collateralized call options, write secured put options, and enter into closing
or offsetting purchase transactions with respect to such options, (b) purchase
and sell options to the extent that the premiums paid for all such options owned
at any time do not exceed 10% of its total assets, and (c) engage in futures
contracts and related options transactions as described in the Statement of
Additional Information.

The Municipal Bond Fund may engage in futures contracts and related options
as described in the Statement of Additional Information.

--------------------------------------------------------------------------------
THE TRUST AND ITS MANAGEMENT
--------------------------------------------------------------------------------

The Trust is a diversified, open-end management investment company,
generally known as a mutual fund, organized as a Massachusetts business trust on
January 29, 1987. A mutual fund provides, for those who have similar investment
goals, a practical and convenient way to invest in a diversified portfolio of
securities by combining their resources in an effort to achieve such goals.

The Trustees have the responsibility for overseeing the affairs of the
Trust. The Adviser, 2800 Post Oak Boulevard, Houston, Texas 77056, determines
the investment of the Trust's assets, provides administrative services and
manages the Trust's business and affairs. The Adviser is a subsidiary of Van
Kampen American Capital, Inc. ("VKAC"), which in turn, is a wholly-owned
subsidiary of VK/AC Holding, Inc. VK/AC Holding, Inc. is controlled through the
ownership of a substantial majority of its common stock, by The Clayton &
Dubilier Private Equity Fund IV Limited Partnership (the "C&D L.P."), a
Connecticut limited partnership. C&D L.P. is managed by Clayton, Dubilier &
Rice, Inc., a New York private investment firm. The general partner of C&D L.P.
is Clayton & Dubilier Associates IV Limited Partnership ("C&D Associates L.P.").
The general partners of C&D Associates L.P. are Joseph L. Rice, III, B. Charles
Ames, Alberto Cribiore, Donald J. Gogel and Hubbard C. Howe, each of whom is a
principal of Clayton, Dubilier & Rice, Inc. In addition certain officers,
directors and employees of VKAC own, in the aggregate, not more than 6% of the
common stock of VK/AC Holding, Inc. and have the right to acquire, upon the
exercise of options, approximately an additional 10% of the common stock of
VK/AC Holding, Inc. The Adviser, 2800 Post Oak Boulevard, Houston, Texas 77056,
together with its predecessors, has been in the investment advisory business
since 1926.

18
<PAGE> 20

The Adviser presently manages the assets of 47 investment company portfolios
with total net assets of over $16.2 billion at January 31, 1995. Mr. Don G.
Powell is Chairman, Trustee and President of the Trust, and Chief Executive
Officer of the Adviser. Most other officers of the Trust are also officers of
the Adviser and a number are officers of the Distributor.

The Trust retains the Adviser to manage the investment of its assets and to
place orders for the purchase and sale of its portfolio securities. Under
separate investment advisory agreements with each Fund, dated December 20, 1994,
the Trust pays the Adviser an annual fee for the Growth Fund and the Growth and
Income Fund, calculated separately for each Fund at the following rates: 0.65%
of the first $1 billion of the Fund's average daily net assets; 0.60% of the
next $1 billion of the Fund's average daily net assets; 0.55% of the next $1
billion of the Fund's average daily net assets; 0.50% of the next $1 billion of
the Fund's average daily net assets; and 0.45% of the Fund's average daily net
assets in excess of $4 billion. The Trust pays the Adviser an annual fee for the
Government Fund of 0.60% of the first $1 billion of the Fund's average daily net
assets; 0.55% of the next $1 billion of the Fund's average daily net assets;
0.50% of the next $1 billion of the Fund's average daily net assets; 0.45% of
the next $1 billion of the Fund's average daily net assets; 0.40% of the next $1
billion of the Fund's average daily net assets; and 0.35% of the Fund's average
daily net assets in excess of $5 billion. For the Municipal Bond Fund, the Trust
pays the Adviser an annual fee of 0.60% of the first $1 billion of the Fund's
average daily net assets; 0.55% of the next $1 billion of the Fund's average
daily net assets; 0.50% of the next $1 billion of the Fund's average daily net
assets; and 0.45% of the Fund's average daily net assets over $3 billion. For
the Money Market Fund, the Trust pays the Adviser an annual fee of 0.50% of the
first $2 billion of the Fund's average daily net assets; 0.475% of the next $2
billion of the Fund's average daily net assets; and 0.45% of the Fund's average
daily net assets over $4 billion. The fee is computed daily and payable monthly
with respect to each Fund.

Under each of the foregoing Advisory Agreements, the Trust also reimburses
the Adviser for the actual cost of the Trust's accounting services, which
include maintaining its financial books and records and calculating the daily
net asset value of each Fund. Operating expenses paid by the Trust include
transfer agency fees, custodian fees, legal and auditing fees, trustees' fees,
the cost of registration of its shares under federal laws and state blue sky
laws, the cost of reports and proxies to shareholders, and all other ordinary
business expenses not specifically assumed by the Adviser or any other party.
For the last fiscal year, advisory fees plus the cost of accounting services
paid by the Growth Fund, Growth and Income Fund, Government Fund, Municipal Bond
Fund and Money Market Fund equaled .63%, .67%, .63%, .69% and .10%,
respectively, of each Fund's average net assets. For the same period, the total
operating expenses of the Growth Fund, Growth and Income Fund, Government Fund,
Municipal Bond Fund and Money Market Fund were .46%, .35%, .26%, .30% and .90%,
respectively, of average net assets.

The Adviser may, from time to time, agree to waive their respective
investment advisory fees or any portion thereof or elect to reimburse a Fund for
ordinary business expenses in excess of an agreed upon amount.

Stephen Boyd has been primarily responsible for the day-to-day management
of Growth Fund's investment portfolio since 1989. Mr. Boyd is Vice President of
the Trust and Senior Vice President -- Portfolio Manager of the Adviser. Mr.
Boyd was formerly Investment Vice President of the Adviser from May, 1989 to
July, 1990; Senior Vice President of the Adviser from July, 1990 to July, 1991;
and Senior Vice President and Chief Investment Officer of Wertheim Asset
Management Services, Inc. from 1986 to 1989. James Gilligan has been primarily
responsible for the day-to-day management of Growth and Income Fund's investment
portfolio since July 11, 1994. Mr. Gilligan is Vice President of the Trust and
Vice President -- Portfolio Manager of the Adviser since March 1990. Prior to
that time he was a securities analyst with the Adviser. John Reynoldson has been
primarily responsible for the day-to-day management of Government Fund's
investment portfolio since 1988. Mr. Reynoldson is Vice President of the Trust
and Senior Vice President -- Portfolio Manager of the Adviser. Mr. Reynoldson
was formerly Investment Vice President of the Adviser from January, 1988 to
July, 1991. David Troth has been primarily responsible for the day-to-day
management of Money Market Fund's investment portfolio since its inception. Mr.
Troth is Vice President of the Trust and Senior Investment Vice President of the
Adviser. Mr. Troth was formerly Investment Vice President of the Adviser from
March, 1978 to July, 1991. Robert Evans has been primarily responsible for the
day-to-day management of Municipal Bond Fund's investment portfolio since its
inception. Mr. Evans is Vice President of the Trust. Mr. Evans has been
associated with the Adviser since 1991.

--------------------------------------------------------------------------------
PURCHASE OF SHARES
--------------------------------------------------------------------------------

Shares of beneficial interest in each Fund are offered continuously for
sale by the Distributor, an indirect subsidiary of The Travelers Inc. (the
"Travelers"), 65 East 55th Street, New York, New York 10022. Travelers is a
financial services holding company engaged through its subsidiaries, principally
in three business segments -- investment services, consumer finance services and
insurance services. Shares of beneficial interest in each Fund are available
through PFS Investments, Inc. ("PFS Investments"), an affiliate of Travelers.
Initial investments in a Fund must be at least $250 and subsequent investments
must be at least $25. The Distributor may waive the minimum amount for initial
investment for shares involving periodic investments. The Trust reserves the
right to suspend the sale of any Fund's shares to the public in response to
conditions in the securities markets or for other reasons and to refuse any
order for the purchase of shares.

Shares may be purchased on any business day by completing the application
included in this Prospectus and forwarding the application through PFS
Investments to Common Sense(R) Shareholder Services (the "Transfer Agent"), 3100
Breckinridge Blvd., Bldg. 200, Duluth, Georgia 30199-0062. Checks drawn on
foreign banks must be payable in U.S. dollars and have the routing number of the
U.S. bank encoded on the check.

Additionally, investments of $25,000 or more may be made by having your
bank wire federal funds (funds of the Federal Reserve System) to the Transfer
Agent's bank. Wire transfers will only be accepted on days your bank, the
Transfer Agent, the Trust, and Bank South of Atlanta ("Bank South") are open for
business. Your wired funds must be received by 4:00 p.m. Eastern time by Bank
South to be credited to your account that day. Otherwise, your wire purchase
will be processed the next business day. The wire purchase will not be
considered made until the wired amount is received and the purchase is accepted
by the Trust. If the wire purchase does not contain the information stated
below, the Trust may reject it. Any delays that may occur in wiring funds,
including delays in processing by the banks, are not the responsibility of the
Trust or Transfer Agent.

You must pay any charge assessed by your bank for the wire service. If a
wire transfer is rejected, all money received by the Trust, less any costs
incurred by the Trust or Transfer Agent in rejecting it, will be returned
promptly.

19
<PAGE> 21

To insure the proper handling of your investment, the following procedures
should be observed:

New Account Procedures -- If the wire transfer is for a new account,
you and your PFS Investments representative should call the Transfer
Agent's Customer Service Department at (800) 544-5445 and ask for the Wire
Purchase Desk. They will assist you in establishing your account and
processing your wire purchase.

Existing Account Procedures -- If the wire transfer is for an existing
account, the wire must be sent to Bank South, Routing Number 061000078,
Atlanta, Georgia. It should state the following:

"Credit CSSS Account #6380344
For Further Credit to CST Account # _________________ (your
account number)
For ___________________________________ (your name)"

Upon executing your wire transfer, you or your PFS Investments
representative should contact the Transfer Agent's Wire Purchase Desk to notify
them of your name, your Trust account number and the name of the bank
transmitting the federal funds.

Shares are offered at the next determined net asset value per share, plus a
sales charge as described below with respect to the Growth Fund, the Growth and
Income Fund, the Government Fund, and the Municipal Bond Fund. Shares of the
Trust may be purchased at net asset value by the PFS Primerica Corporation
Savings and Retirement Plan (the "Plan") for its participants, subject to the
provisions of the Employee Retirement Income Security Act of 1974, as amended.
Shares so purchased are purchased for investment purposes and may not be resold
except by redemption or repurchase by or on behalf of the Plan. Shares are also
offered at net asset value to accounts opened for shareholders by PFS
Investments representatives where the amounts invested represent the redemption
proceeds from investment companies distributed by an entity other than the
Distributor if such redemption has occurred no more than 60 days prior to the
purchase of shares of the Trust and the shareholder paid an initial sales charge
and was not subject to a deferred sales charge on the redeemed account. Shares
are offered at net asset value to such persons because of anticipated economies
in sales efforts and sales related expenses. The Trust may terminate, or amend
the terms of, offering shares of the Trust at net asset value to such persons at
any time. The Distributor may pay PFS Investments representatives through whom
purchases are made at net asset value an amount equal to 0.40% of the amount
invested if the purchase represents redemption proceeds from an investment
company distributed by an entity other than the Distributor. Contact the
Transfer Agent at (800) 544-5445 for further information and appropriate forms.

Net asset value per share of each Fund is computed as of the close of
trading on the New York Stock Exchange ("Exchange") (currently 4:00 p.m. Eastern
time) on each day the Exchange is open for trading, except in the case of the
Money Market Fund, for which net asset value is computed as of 12:00 noon New
York time on each such day. Net asset value of each Fund is determined by
dividing the value of all the portfolio securities held by such Fund, cash, and
other assets (including accrued interest) less all liabilities (including
accrued expenses) by the total number of shares outstanding of the Fund. The
Money Market Fund's assets are valued on the basis of amortized cost, which
involves valuing a portfolio security at its cost and, thereafter, assuming a
constant amortization to maturity of any discount or premium, regardless of the
impact of fluctuating interest rates on the market value of the security. While
this method provides for certainty in valuation it may result in periods in
which value as determined by amortized cost is higher or lower than the price
the Fund would receive if it sold the security.

Shares of the Money Market Fund are offered at the next determined net
asset value after a purchase order becomes effective, which is when the check
payment is converted into federal funds. A check payment is normally converted
into federal funds on the second business day following receipt of payment by
the Transfer Agent. With respect to the other Funds, the price paid for shares
purchased is based on the net asset value next computed after an order is
received by the Transfer Agent. For a discussion of the methods used to value
the portfolio securities of each Fund, see the Statement of Additional
Information.

The tables included herein show the sales charge at various investment
levels with respect to the Growth Fund, the Growth and Income Fund, the
Government Fund and the Municipal Bond Fund. No sales charge is payable on
purchases of shares of the Money Market Fund. The Money Market Fund does,
however, require payment of an initial administrative set-up fee of $15 for the
establishment of each investment account. See "Shareholder
Services -- Investment Account."

SALES CHARGE TABLES

GROWTH FUND AND GROWTH AND INCOME FUND

REALLOWED
TO PFS
INVESTMENTS
AS % OF AS % OF (AS A % OF
SIZE OF NET AMOUNT OFFERING OFFERING
INVESTMENT INVESTED PRICE PRICE)*
<S> <C> <C> <C>
---------------------------------------------------------------------------------------------------------------------------------
Less than $10,000.................................................................... 9.29% 8.50% 7.00%
$10,000 but less than $25,000........................................................ 8.40% 7.75% 6.25%
$25,000 but less than $50,000........................................................ 6.38% 6.00% 5.00%
$50,000 but less than $100,000....................................................... 4.71% 4.50% 3.75%
$100,000 but less than $250,000...................................................... 3.63% 3.50% 3.00%
$250,000 but less than $400,000...................................................... 2.56% 2.50% 2.00%
$400,000 but less than $600,000...................................................... 2.04% 2.00% 1.60%
$600,000 but less than $5,000,000.................................................... 1.01% 1.00% 0.75%
$5,000,000 or more................................................................... 0.25% 0.25% 0.20%
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

20
<PAGE> 22

GOVERNMENT FUND

<TABLE>
<CAPTION>
REALLOWED
TO PFS
INVESTMENTS
AS % OF AS % OF (AS A % OF
SIZE OF NET AMOUNT OFFERING OFFERING
INVESTMENT INVESTED PRICE PRICE)*
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>

Less than $25,000.................................................................... 7.24% 6.75% 6.00%
$25,000 but less than $50,000........................................................ 6.10% 5.75% 5.00%
$50,000 but less than $100,000....................................................... 4.44% 4.25% 3.50%
$100,000 but less than $250,000...................................................... 3.63% 3.50% 2.75%
$250,000 but less than $500,000...................................................... 2.56% 2.50% 2.00%
$500,000 but less than $1,000,000.................................................... 2.04% 2.00% 1.60%
$1,000,000 but less than $2,500,000.................................................. 1.01% 1.00% 0.75%
$2,500,000 but less than $5,000,000.................................................. 0.50% 0.50% 0.40%
$5,000,000 or more................................................................... 0.25% 0.25% 0.20%
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

* Additionally, the Distributor will pay to PFS Investments a promotional fee
calculated as a percentage of the sales charge reallowed to PFS Investments.
The percentage used in the calculation is 3%.

MUNICIPAL BOND FUND

Less than $100,000................................................................... 4.99% 4.75% 4.25%
$100,000 but less than $250,000...................................................... 3.90% 3.75% 3.25%
$250,000 but less than $500,000...................................................... 3.09% 3.00% 2.50%
$500,000 but less than $1,000,000.................................................... 2.04% 2.00% 1.60%
$1,000,000 but less than $2,500,000.................................................. 1.01% 1.00% .75%
$2,500,000 but less than $5,000,000.................................................. .50% .50% .40%
$5,000,000 or more................................................................... .25% .25% .20%
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

PFS Investments may be deemed to be an underwriter for purposes of the
Securities Act of 1933. From time to time, the Distributor or its affiliates may
also pay for certain non-cash sales incentives provided to PFS Investments
representatives. Such incentives do not have any effect on the net amount
invested. In addition to the reallowances from the applicable public offering
price described above, the Distributor may, from time to time, pay or allow
additional reallowances or promotional incentives, in the form of cash or other
compensation to PFS Investments representatives that sell shares of the Trust.

VOLUME DISCOUNTS. The size of the investment shown in the preceding tables
applies to the total amount being invested by any person in shares of the
indicated Fund alone, or in any combination of shares of the Fund and shares of
the Common Sense Funds (except the Money Market Fund). A person eligible for a
volume discount includes an individual; members of a family unit comprising
husband, wife and minor children; a trustee or other fiduciary purchasing for a
single fiduciary account including pension, profit-sharing and other employee
benefit trusts qualified under Section 401(a) of the Internal Revenue Code
("Code"), or multiple custodial accounts where more than one beneficiary is
involved if purchases are made by salary reduction and/or payroll deduction for
qualified and nonqualified accounts and transmitted by a common employer entity.
Employer entity for payroll deduction accounts may include trade and craft
associations and any other similar organizations.

CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the preceding
tables may also be determined by combining the amount being invested in shares
of the indicated Fund plus the current offering price of all shares of such
Funds described in this Prospectus and other Common Sense Funds (except the
Money Market Fund) which have been previously purchased and are still owned.
Shares previously purchased are only taken into account, however, if the
Transfer Agent is notified by the shareholder at the time an order is placed for
a purchase which would qualify for a reduced sales load on the basis of the
current value of previous purchases and if sufficient information is furnished
to permit confirmation of such purchases.

LETTER OF INTENT. A Letter of Intent provides an opportunity for an
investor to obtain a reduced sales charge by aggregating all investments over a
13-month period to determine the sales load as outlined in the preceding tables.
Each investment made during the period will receive the reduced sales charge
applicable to the amount represented by the goal as if it were a single
investment. The size of investment shown in the preceding tables also includes
purchases of shares of any Fund and other Common Sense Funds (except the Money
Market Fund) over a 13-month period, based on the total amount of intended
purchases plus the value of all shares at the offering price of such Funds
previously purchased and still owned. An investor may elect to compute the
13-month period starting up to 90 days before the date of execution of a Letter
of Intent. Each investment made during the period receives the reduced sales
charge applicable to the total amount of the investment goal. If the goal is not
achieved within the period, the investor must pay the difference between the
charge applicable to the aggregate purchases made and the sales charge
previously paid. The initial purchase must be for an amount equal to at least
five percent of the minimum total purchase amount of the level selected. If
trades not initially made under a Letter of Intent subsequently qualify for a
lower sales charge through the 90-day back-dating provisions, an adjustment will
be made at the expiration of the Letter of Intent to give effect to the lower
charge. Such adjustment in sales charge will be used to purchase additional
shares for the shareholder at the applicable discount category. Additional
information is contained in the application form included in this Prospectus.

21
<PAGE> 23

--------------------------------------------------------------------------------
SHAREHOLDER SERVICES
--------------------------------------------------------------------------------

The Trust offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. Below is a
description of such services. A CST Shareholder Service Form should be completed
to effect a change or cancel any Common Sense Trust account option. The CST
Shareholder Service Form is provided in the CST New Account Welcome Package.
Additional CST Shareholder Service Forms may be obtained from the Transfer
Agent. Customer Service representatives are available from 8:00 a.m. to 9:00
p.m. Monday through Friday, and 10:00 a.m. to 4:00 p.m. on Saturday (Eastern
time) to assist you. If you prefer a Spanish-speaking representative, please
call (800) 544-7278 (Monday through Friday). TDD service is available for the
hearing impaired at (800) 824-1721.

INVESTMENT ACCOUNT. Each shareholder of record has an investment account
under which shares are held by the Transfer Agent. The Trust recommends that
shares be left on deposit with the Transfer Agent. If a share certificate is
desired, it is issued only for full shares (preferably 100 shares or more) and
must be requested in writing from the Transfer Agent for each transaction.
Except as described below, after each share transaction in an account, the
shareholder will receive a report showing the activity in the account. A
quarterly report will be sent to shareholders utilizing the pre-authorized check
plan. Additions to an investment account may be made at any time by mailing a
check directly to the Transfer Agent. There is no charge for establishing an
investment account in the Growth, Growth and Income, Government or Municipal
Bond Funds. An investor in the Money Market Fund pays the Transfer Agent an
initial administrative set-up fee of $15 for establishing each investment
account on the books of the Fund.

REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of a
Fund. Such shares are acquired at net asset value (without a sales charge). This
reinvestment is automatic unless the shareholder instructs otherwise. The
investor may, on the CST Additional New Account Options Form found in the
Prospectus, instruct that dividends and/or capital gains distributions be paid
in cash or be credited to another account of a Fund described in this
Prospectus. If you are changing this option after your account has been
established, you should complete a CST Shareholder Service Form and mail it to
the Transfer Agent.

PRE-AUTHORIZED CHECK PLAN. A pre-authorized check plan is available under
which a shareholder can authorize the Transfer Agent to draw on a bank account
on a regular basis to invest pre-determined amounts in shares of a Fund. To
establish or change an existing pre-authorized check plan, a shareholder should
give the Transfer Agent ten days prior notice before drawing on such bank
account. You may choose to have your draft on any day of the month and the
Transfer Agent will submit the draft to your bank on that day. Additionally, the
Transfer Agent will purchase shares in your Common Sense Trust account on the
day indicated for the amount of the draft. If the draft is returned to the
Transfer Agent from the depository bank, it may attempt to redeposit the draft
in an effort to collect the proceeds before cancelling the shares bought with
the draft. A shareholder may designate in the application to increase the amount
of the pre-authorized check on an automatic basis. Additional information is
contained in the application included in this Prospectus. There is no charge for
establishing a pre-authorized check plan. Standard Pre-Authorized Check Plan
minimum draft amount is $25.

RETIREMENT PLAN. Eligible investors may establish individual retirement
accounts ("IRAs"). Van Kampen American Capital Trust Company, c/o Common
Sense(R) Custodial Services L.P., 3100 Breckinridge Blvd., Bldg. 200, Duluth,
Georgia 30199-0062 serves as custodian under IRA, SEP and 403(b)(7) plans.
Common Sense(R) Custodial Services, L.P. is a limited partnership which is an
indirect wholly owned subsidiary of Travelers. There is an annual $20
maintenance fee. This fee is deducted from a shareholder's account balance each
December, unless prepaid. If a redemption is requested during the year, the
maintenance fee will be deducted from the redemption proceeds. There will be no
additional fees for the redemption of an account or the establishment of new
accounts. Details regarding fees, as well as plan administration, and other
details regarding this Retirement Plan is available from PFS Investments'
registered representatives.

EXCHANGE PRIVILEGE. Shares of any Fund may be exchanged for shares of any
of the other Funds described in this Prospectus upon payment of the excess, if
any, of the sales charge applicable to the Fund being acquired over the sales
charge paid on the purchase. Shares of the Money Market Fund may be exchanged
for shares of the other Funds upon payment of the sales charge applicable to
shares of the Fund being acquired unless a sales charge previously has been
paid. An investor exchanging shares from any Fund into the Money Market Fund
will incur an initial administrative set-up fee of $15 for the establishment of
an account.

Shares of the fund to be acquired must be registered for sale in the
investor's state and an exchange fee, currently $5 per transaction, is charged
by the Transfer Agent except as described herein under "Systematic Exchange" for
all exchanges other than exchanges from the Money Market Fund. Exchanges of
shares are sales and may result in a gain or loss for federal income tax
purposes, although if the shares exchanged have been held for less than 91 days,
the sales charge paid on such shares is not included in the tax basis of the
exchanged shares, but is carried over and included in the tax basis of the
shares acquired. A Fund reserves the right to reject any order to acquire its
shares through exchange, or otherwise modify, restrict or terminate the exchange
privilege at any time on 60 days' notice to its shareholders of any termination
or material amendment. See the Statement of Additional Information.

A shareholder wishing to make an exchange may do so by completing a CST
Exchange Form and sending it to the Transfer Agent. A signature guarantee and
other documentary evidence may be required for certain registrations other than
individual accounts (e.g., corporation, trust, etc.). Exchanges are effected at
the net asset value next calculated after the request is received in good order.
See "Purchase of Shares" and "Redemption of Shares." If the exchanging
shareholder does not have an account in the Fund whose shares are being
acquired, a new account will be established with the same registration, dividend
and capital gain options as the account from which shares are exchanged, unless
otherwise specified by the shareholder. In order to establish a systematic
withdrawal plan or a pre-authorized bank draft for the new account, however, an
exchanging shareholder must file a specific written request.

A shareholder may utilize the Transfer Agent's Facsimile Transaction Line
("FAX") to effect an exchange as long as a signature guarantee or other
documentary evidence is not required. Exchange requests should be properly
signed by all owners of the account and faxed to the Transfer Agent at (800)
554-2374. Facsimile exchanges may not be available if the shareholder cannot
reach the Transfer Agent by FAX, whether because all tele-

22
<PAGE> 24

phone lines are busy or for any other reason; in such case, a shareholder would
have to use the Fund's regular exchange procedure described above. Facsimile
exchanges received by the Transfer Agent prior to 4:00 p.m. Eastern time on a
regular business day will be processed at the net asset value per share
determined that day.

SYSTEMATIC EXCHANGE. A shareholder has the option to systematically
exchange a dollar or share amount on a monthly basis. You may automatically
exchange shares from one CST account for shares in another CST account on a
regular schedule (e.g., monthly or quarterly). The accounts must have identical
registrations and the originating account must have a minimum balance of $5,000.
The $5 transaction fee will be waived for all systematic exchanges. The minimum
exchange amount is $50. You may add this service to your account by completing
the CST Additional New Account Options Form found in the Prospectus, and
submitting it with your initial application. If you are selecting this option
after your account has been established, you should complete a CST Shareholder
Service Form and mail it to the Transfer Agent.

SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $5,000 or more at the offering price next computed after receipt of
instructions may establish a withdrawal plan. This plan provides for the orderly
use of the entire account, not only the income but also the capital, if
necessary. Each withdrawal constitutes a redemption of shares on which any
capital gain or loss will be recognized. The planholder may arrange for monthly,
quarterly, semiannual or annual checks in any amount not less than $50, in
multiples of $5, unless specifically authorized by the Distributor.

Under the plan, sufficient shares of a Fund are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gain
distributions on shares held under the plan are reinvested in additional shares
at the next determined net asset value. If periodic withdrawals continuously
exceed reinvested dividends and capital gains distributions, the shareholder's
original investment will be correspondingly reduced and ultimately exhausted.
Withdrawals made concurrently with purchase of additional shares ordinarily will
be disadvantageous to the shareholder because of the duplication of sales
charges. There is no charge for establishing a systematic withdrawal plan. You
may add this service to your account by completing the CST Additional New
Account Options Form found in the Prospectus and submitting it with your initial
application. If you are selecting this option after your account has been
established, you should complete a CST Shareholder Service Form and mail it to
the Transfer Agent.

CHECK WRITING PRIVILEGE. A shareholder holding shares of the Government
Fund, Money Market Fund and Municipal Bond Fund for which certificates have not
been issued may appoint the Fund's Transfer Agent as agent and request, on the
application form, special forms of drafts payable through Fidelity National Bank
("Fidelity"). The Transfer Agent issues these drafts on behalf of the Fund in
books of ten drafts, for which there is a charge by the Fund of $7.50 per book.
These drafts may be made payable by the shareholder to the order of any person
in any amount of $250 or more. When a draft is presented to Fidelity for
payment, full and fractional shares required to cover the amount of the draft
will be redeemed from the shareholder's account by the Transfer Agent at the
next determined net asset value. Any gain or loss realized on the sale of shares
is a taxable event. See "Redemption of Shares." Drafts will not be honored for
redemption of shares held less than fifteen (15) days, or until the Transfer
Agent is presented with satisfactory evidence that the purchase check has
cleared. Any shares for which there are outstanding certificates may not be
redeemed by draft. If the amount of the draft is greater than the proceeds of
all uncertificated shares held in the shareholder's account, the draft will be
returned and the shareholder may be subject to additional charges imposed by
banks. A shareholder may not liquidate the entire account by means of a draft.
The check writing privilege may be terminated or suspended at any time by the
Fund or Fidelity. Retirement plans and accounts that are subject to backup
withholding are not eligible for the privilege. A "stop payment" system is not
available on Government Fund, Money Market Fund and Municipal Bond Fund checks.
Fidelity will only honor those drafts authorized by the Trust.

DOLLAR COST AVERAGING. Special services are available that enable investors
to take advantage of dollar cost averaging through automatic monthly
investments. Dollar cost averaging involves the investment of a fixed dollar
amount in investment vehicles such as the Funds at pre-set intervals. This
practice will result in more shares being purchased when a Fund's net asset
value is relatively low, and fewer shares being purchased when a Fund's net
asset value is relatively high. Therefore, the investor's overall cost of shares
purchased is lower than it would be if the investor purchased a fixed number of
shares at pre-set intervals.

Investors may purchase shares of any of the Funds by using pre-authorized
checks drawn on the investor's bank account. See "Pre-Authorized Check Plan."
Further information on automatic investing and the advantages of dollar cost
averaging is set forth in the Statement of Additional Information.

--------------------------------------------------------------------------------
REDEMPTION OF SHARES
--------------------------------------------------------------------------------

Shareholders may redeem for cash some or all of their shares of any Fund at
any time by sending a written request in proper form directly to the Transfer
Agent at 3100 Breckinridge Blvd., Bldg. 200, Duluth, Georgia 30199-0062. There
is no charge for a redemption. If you should have any questions concerning how
to redeem your account after reviewing the information below, please contact the
Transfer Agent at (800) 544-5445, Spanish-speaking representatives (800)
544-7278 or TDD Line for the Hearing Impaired (800) 824-1721.

The request for redemption must be signed by all persons in whose names the
shares are registered. Signatures must conform exactly to the account
registration. If the proceeds of the redemption exceed $50,000, or if the
proceeds are not to be paid to the record owner(s) at the record address, if the
shareholder(s) has had an address change in the past 45 days, or if the
shareholder(s) is a corporation, sole proprietor, partnership, trust or
fiduciary, signature(s) must be guaranteed by one of the following: a bank or
trust company; a broker-dealer; a credit union; a national securities exchange,
registered securities association or clearing agency; a savings and loan
association; or a federal savings bank.

Generally, a properly completed CST Redemption Form with any required
signature guarantee is all that is required for a redemption. In some cases,
however, other documents may be necessary. For example, in the case of
shareholders holding certificates, the certificates for the shares being
redeemed must accompany the redemption request. Additional documentary evidence
of authority is also required by the Transfer Agent in the event redemption is
requested by a corporation, partnership, trust, fiduciary, executor or
administrator. Additionally, if a shareholder requests a redemption

23
<PAGE> 25

from a Retirement Plan account (IRA, SEP or 403(b)(7)), such request must state
whether or not federal income tax is to be withheld from the proceeds of the
redemption check.

A shareholder may utilize the Transfer Agent's FAX to redeem their account
as long as a signature guarantee or other documentary evidence is not required.
Redemption requests should be properly signed by all owners of the account and
faxed to the Transfer Agent at (800) 554-2374. Facsimile redemptions may not be
available if the shareholder cannot reach the Transfer Agent by FAX, whether
because all telephone lines are busy or for any other reason; in such case, a
shareholder would have to use the Fund's regular redemption procedure described
above. Facsimile redemptions received by the Transfer Agent prior to 4:00 p.m.
Eastern time on a regular business day will be processed at the net asset value
per share determined that day.

In all cases, the redemption price is the net asset value per share of the
Fund next determined after the request for redemption is received in proper form
by the Transfer Agent. Payment for shares redeemed will be made by check mailed
within seven days after acceptance by the Transfer Agent of the request and any
other necessary documents in proper order. Such payment may be postponed or the
right of redemption suspended as provided by the rules of the SEC. If the shares
to be redeemed have been recently purchased by check or draft, the Transfer
Agent may hold the payment of the proceeds until the purchase check or draft has
cleared, usually a period of up to 15 days. Any taxable gain or loss will be
recognized by the shareholder upon redemption of shares.

After following the above-stated redemption guidelines, a shareholder(s)
may elect to have the redemption proceeds wire-transferred directly to the
shareholder's bank account of record (defined as a currently established
pre-authorized draft on the shareholder's account with no changes within the
previous 45 days), as long as the bank account is registered in the same name(s)
as the account with the Fund. If the proceeds are not to be wired to the bank
account of record, or to the registered owner(s), a signature guarantee will be
required from all shareholder(s). A $25 service fee will be charged by the
Transfer Agent to help defray the administrative expense of executing a wire
redemption. Redemption proceeds will normally be wired to the designated bank
account on the next business day following the redemption, and should ordinarily
be credited to your bank account by your bank within 48 to 72 hours.

The Trust may redeem any shareholder account with a net asset value of less
than $200. Three months advance notice of any such involuntary redemption is
required and the shareholder may purchase prior to such redemption the required
value of additional shares in order to avoid such involuntary redemption. Any
involuntary redemption may only occur if the shareholder's account is less than
the required minimum due to shareholder redemptions or did not reach the
required minimum because the shareholder failed to meet the shareholder's
obligations under a periodic investment arrangement. Any taxable gain or loss
will be recognized by the shareholder upon redemption of shares.

REINSTATEMENT PRIVILEGE. A shareholder who has redeemed shares of the Trust
may reinvest any portion or all of the proceeds of such redemption in shares of
any Fund described in this Prospectus. Such reinvestment is made at the net
asset value (without sales load) next determined after the order is received,
which must be within 60 days after the date of the redemption. This privilege
can be exercised only once.

--------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
--------------------------------------------------------------------------------

Unless the shareholder instructs otherwise, all dividends and capital gain
distributions of each Fund are automatically reinvested in additional shares of
such Fund. See "Shareholder Services -- Reinvestment Plan." Dividends and
distributions paid by a Fund have the effect of reducing the net asset value per
share on the record date by the amount of the dividend or distribution.
Therefore, a dividend or distribution paid shortly after a purchase of shares by
an investor would represent, in substance, a return of capital to the
shareholder (to the extent it is paid on the shares so purchased), even though
it would be subject to income taxes, as discussed below.

DIVIDENDS AND DISTRIBUTIONS OF THE GROWTH FUND AND GROWTH INCOME
FUND. Dividends from stocks and interest earned from other investments are the
main source of income for the Growth Fund and the Growth and Income Fund. When a
Fund sells portfolio securities, it may realize capital gains or losses,
depending on whether the prices of the securities sold are higher or lower than
the prices the Fund paid to purchase them. Net realized capital gains represent
the total profit from sales of securities minus total losses from sales of
securities including any losses carried forward from prior years.

The Growth Fund distributes substantially all its net investment income,
less expenses, and any net realized capital gains annually, normally in
December. The Growth and Income Fund distributes substantially all its net
investment income, less expenses quarterly, normally in March, June, September
and December, and it distributes any net realized capital gains annually,
normally in December. Net long-term gains realized from both Funds' transactions
in options, futures and related options transactions may be paid out more
frequently (with short-term gains) as may be determined from time to time by the
Trustees, but only after appropriate regulatory approval is first obtained.
There is no assurance that such regulatory approval will be obtained.

DIVIDENDS AND DISTRIBUTIONS OF THE GOVERNMENT FUND. Income dividends are
declared each business day, and paid monthly. Any taxable net realized
short-term capital gains may be distributed quarterly and any net realized
short-term gains are distributed to shareholders annually, normally in December.
Net long-term gains realized from the Fund's transactions in options, futures
and related options transactions may be paid out more frequently (with
short-term gains) as may be determined from time to time by the Trustees, but
only after appropriate regulatory approval is first obtained. There is no
assurance that such regulatory approval will be obtained.

In computing interest income, the Fund does not amortize debt discount or
premiums resulting from the purchase of debt securities. Thus in the case of
U.S. Government securities purchased at a premium, interest income is greater
than it would be if the premium was amortized.

DIVIDENDS AND DISTRIBUTIONS OF THE MUNICIPAL BOND FUND. Income dividends
are declared each business day, and paid monthly. The daily dividend is a fixed
amount determined at least monthly which is not expected to exceed the net
income of the Fund for the month divided by the

24
<PAGE> 26

number of business days during the month. The Fund intends to distribute after
the end of a fiscal year the net capital gains, if any, realized during the
fiscal year, except to the extent that such gains are offset by capital loss
carryovers of the Fund.

Net long-term gains realized from transactions in futures and related
options transactions may be paid out more frequently (with short-term gains) as
may be determined from time to time by the Trustees, but only after appropriate
regulatory approval is first obtained. There is no assurance that such
regulatory approval will be obtained.

DIVIDENDS OF THE MONEY MARKET FUND. Income dividends are declared each
business day, and paid monthly. Dividends are paid to shareholders of record
immediately prior to the determination of net asset value for that day. Since
shares are issued and redeemed at the time net asset value is determined,
dividends commence on the day following the date shares are issued and are
received for the day shares are redeemed. Shareholders may elect to receive
monthly payments of dividends in cash by written instruction to the Transfer
Agent. Shares purchased as a result of the accrual of daily dividends are
liquidated at the net asset value on the last business day of the month and the
proceeds of such redemption mailed to the shareholder electing cash payment. A
redeeming shareholder receives all dividends accrued through the date of
redemption.

The Fund's net income for dividend purposes is calculated daily and
consists of interest accrued or discount earned, plus or minus any net realized
gains or losses on portfolio securities, less any amortization of premium and
the expenses of the Fund.

TAXES. Each Fund intends to qualify as a "regulated investment company"
under the Code. By so qualifying and by distributing all of its net investment
income and net realized capital gains within the time periods specified in the
Code, each Fund would not be required to pay any federal income tax. Dividends
from net investment income and distributions from any net realized short-term
capital gains are taxable to shareholders as ordinary income. All such dividends
are taxable to the shareholder whether or not reinvested in shares. However,
shareholders not subject to tax on their income will not be required to pay tax
on amounts distributed to them.

In addition, the Municipal Bond Fund intends to invest in sufficient
Municipal Bonds to permit payment of "exempt-interest dividends" (as defined in
the Code). Dividends paid by the Fund from the net tax-exempt interest earned
from Municipal Securities qualify as exempt-interest dividends if, at the close
of each quarter of the fiscal year, at least 50% of the value of the total
assets of the Fund consists of Municipal Bonds. See "Federal Tax Information" in
the Statement of Additional Information.

Exempt-interest dividends paid to shareholders are not includable in the
shareholder's gross income for federal income tax purposes. The percentage of
the total dividends paid by the Fund during any taxable year that qualify as
exempt-interest dividends will be the same for all shareholders of the Fund
receiving dividends during such year.

Dividends and interest received by the Growth Fund and the Growth and
Income Fund may give rise to withholding and other taxes imposed by foreign
countries. Tax conventions between certain countries and the United States may
reduce or eliminate such taxes. Investors may be entitled to claim United States
foreign tax credits with respect to such taxes, subject to certain provisions
and limitations contained in the Code.

The foregoing is a brief summary of some of the federal income tax
considerations affecting the Trust and its investors who are U.S. residents or
U.S. corporations. Investors should consult their tax advisors for more detailed
tax advice including state and local tax considerations. Foreign investors
should consult their own counsel for further information as to the U.S. and
their country of residence or citizenship tax consequences of receipt of
dividends and distributions from the Trust.

Shareholders are notified annually of the federal tax status of dividends
and capital gains distributions, including information as to the portion
(including short-term capital gains) taxable as ordinary income, and the portion
taxable as long-term capital gains. TO AVOID BEING SUBJECT TO A 31% FEDERAL
BACKUP WITHHOLDING ON DIVIDENDS, DISTRIBUTIONS AND REDEMPTION PAYMENTS,
SHAREHOLDERS MUST FURNISH THE FUND WITH THEIR CORRECT TAXPAYER IDENTIFICATION
NUMBER. Shareholders are urged to consult their tax advisers with specific
reference to their own tax situation.

STATE AND LOCAL TAXES. The exemption of interest income for federal income
tax purposes may not result in similar exemptions under the laws of a particular
state or local taxing authority. Income distributions may be taxable to
shareholders under state or local law as dividend income even though a portion
of such distributions may be derived from interest on tax-exempt obligations
which, if realized directly, would be exempt from such income taxes. It is
recommended that shareholders consult their tax advisers for information in this
regard. The Municipal Bond Fund will report annually to its shareholders the
percentage and source, on a state-by-state basis, of interest income earned on
Municipal Bonds held by the Fund during the preceding year. Distributions paid
by the Fund from sources other than tax-exempt interest are generally subject to
taxation at the state and local levels.

TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS. Gains or losses on the
Growth Fund's, the Growth and Income Fund's, the Government Fund's and the
Municipal Bond Fund's transactions in certain listed options (except certain
equity options) on securities or indices, futures or options on futures
generally are treated as 60% long-term and 40% short-term, and positions held by
a Fund at the end of its fiscal year generally are required to be marked to
market, with the result that unrealized gains and losses are treated as though
they were realized. Gains and losses realized by a Fund on transactions in
over-the-counter options generally are short-term capital gains or losses unless
the option is exercised in which case the character of the gain or loss is
determined by the holding period of the underlying security. The Code contains
certain "straddle" rules which require deferral of losses incurred in certain
transactions involving hedged positions to the extent a Fund has unrealized
gains in offsetting positions and generally terminates the holding period of the
subject position. Additional information is set forth in the Statement of
Additional Information.

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<PAGE> 27

--------------------------------------------------------------------------------
PRIOR PERFORMANCE INFORMATION
--------------------------------------------------------------------------------

From time to time, each of the Funds, except for the Money Market Fund, may
advertise its total return for prior periods. Any such advertisement would
include at least average annual total return quotations for one year, five years
and for the life of each Fund. Other total return quotations, aggregate or
average, over other time periods may also be included.

The total return of a Fund for a particular period represents the increase
(or decrease) in the value of a hypothetical investment in the Fund from the
beginning to the end of the period. Total return is calculated by subtracting
the value of the initial investment from the ending value and showing the
difference as a percentage of the initial investment; the calculation assumes
the initial investment is made at the maximum public offering price and that all
income dividends or capital gains distributions during the period are reinvested
in Fund shares at net asset value. Total return is based on historical earnings
and asset value fluctuations and is not intended to indicate future performance.
No adjustments are made to reflect any income taxes payable by shareholders on
dividends and distributions paid by the Fund.

Average annual total return quotations for periods of two or more years are
computed by finding the average annual compounded rate of return over the period
that would equate the initial amount invested to the ending redeemable value.

In addition to total return information, the Government Fund and the
Municipal Bond Fund may also advertise their current "yield." Yield figures are
based on historical earnings and are not intended to indicate future
performance. Yield is determined by analyzing the Fund's net income per share
for a 30-day (or one-month) period (which period will be stated in the
advertisement), and dividing by the maximum offering price per share on the last
day of the period. A "bond equivalent" annualization method is used to reflect a
semiannual compounding. The Municipal Bond Fund's "tax-equivalent yield" is
calculated by determining the rate of return that would have to be achieved on a
fully taxable investment to produce the after-tax equivalent of the Municipal
Bond Fund's yield, assuming certain tax brackets for a Fund shareholder.

For purposes of calculating yield quotations, net income is determined by a
standard formula prescribed by the SEC to facilitate comparison with yields
quoted by other investment companies. Net income computed for this formula
differs from net income reported by a Fund in accordance with generally accepted
accounting principles and from net income computed for federal income tax
reporting purposes. Thus the yield computed for a period may be greater or
lesser than a Fund's then current dividend rate.

A Fund's yield is not fixed and will fluctuate in response to prevailing
interest rates and the market value of portfolio securities, and as a function
of the type of securities owned by a Fund, portfolio maturity and a Fund's
expenses.

Yield quotations should be considered relative to changes in the net asset
value of a Fund's shares, a Fund's investment policies, and the risks of
investing in shares of a Fund. The investment return and principal value of an
investment in a Fund will fluctuate so that an investor's shares, when redeemed,
may be worth more or less than their original cost.

From time to time the Money Market Fund advertises its "yield" and
"effective yield." Both yield figures are based on historical earnings and are
not intended to indicate future performance. The "yield" of the Fund refers to
the income generated by an investment in the Fund over a seven-day period (which
will be stated in the advertisement). This income is then "annualized." That is,
the amount of income generated by the investment during that week is assumed to
be generated each week over a 52-week period and is shown as a percentage of the
investment. The "effective yield" is calculated similarly but, when annualized,
the income earned by an investment in the Fund is assumed to be reinvested. The
"effective yield" will be slightly higher than the "yield" because of the
compounding effect of this assumed reinvestment. The current and effective
yields for the seven-day period ending October 31, 1994 and a description of the
method by which the yield was calculated is contained in the Statement of
Additional Information.

To increase the yield of the Money Market Fund, the Adviser, for an
indefinite period has agreed to absorb a certain amount of the ordinary business
expenses. A yield quotation which reflects an expense reimbursement or
subsidization by the Adviser will be higher than a yield quotation without such
expense reimbursement or subsidization. The Adviser may stop absorbing these
expenses at any time without prior notice.

Since yield fluctuates, yield data cannot necessarily be used to compare an
investment in the Fund's shares with bank deposits, savings accounts and similar
investment alternatives which often provide an agreed or guaranteed fixed yield
for a stated period of time. Shareholders should remember that yield is
generally a function of the kind and quality of the instruments held in a
portfolio, portfolio maturity, operating expenses and market conditions.

In reports or other communications to shareholders or in advertising
material, a Fund may compare its performance with that of other mutual funds as
listed in the ratings or rankings prepared by Lipper Analytical Services, Inc.,
Donaghue's Money Market Report, CDA, Ibbotson Associates or similar independent
services which monitor the performance of mutual funds or with the Consumer
Price Index, Dow Jones Industrial Average, Salomon Brothers' various indices,
Standard & Poor's or NASDAQ or other appropriate indices of investment
securities or with investment or savings vehicles. The performance information
may also include evaluations of a Fund published by nationally recognized
ranking services and by financial publications that are nationally recognized,
such as Business Week, Forbes, Fortune, Financial World, Institutional Investor,
Investor's Business Daily, Kiplinger's Personal Finance Magazine, Money, Mutual
Fund Forecaster, New York Times, Pension World, Stanger's Investment Advisor,
U.S. News & World Report, USA Today and The Wall Street Journal. Such
comparative performance information will be stated in the same terms in which
the comparative data or indices are stated. Any such advertisement would also
include the standard performance information required by the SEC as described
above. For these purposes, the performance of a Fund, as well as the performance
of other mutual funds or indices, do not reflect sales charges, the inclusion of
which would reduce Fund performance.

26
<PAGE> 28

The Funds, except for the Money Market Fund, may, from time to time,
illustrate the benefits of tax-deferral by comparing taxable investments to
investments made through tax-deferred retirement plans and the Funds may
illustrate in graph or chart form, or otherwise, the benefits of dollar cost
averaging by comparing investments made pursuant to a systematic investment plan
to investments made in a rising market.

The Funds may, from time to time, in reports or other communications to
shareholders or in advertising material, illustrate the benefits of compounding
at various assumed rates of return. Such illustrations may be in the form of
charts or graphs and will not be based on historical returns experienced by the
Funds. The Funds may also utilize performance information in hypothetical
illustrations provided in narrative form. These hypotheticals will be
accompanied by the standard performance information required by the SEC as
described above.

The Trust's Annual Report contains additional performance information with
respect to each Fund discussed in this Prospectus. A copy of the Annual Report
may be obtained without charge by calling or writing the Trust at the telephone
number and address printed on the cover page of this Prospectus.

--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
--------------------------------------------------------------------------------

ORGANIZATION OF THE TRUST. The Trust was organized under the laws of the
Commonwealth of Massachusetts and is a business entity commonly known as a
"Massachusetts business trust." It is a diversified, open-end management
investment company. The Trust is authorized to issue an unlimited number of
shares of beneficial interest of $.01 par value, in the Funds. Shares issued are
fully paid, non-assessable and have no preemptive or conversion rights. In the
event of liquidation of any Fund, shareholders of such Fund are entitled to
share pro rata in the net assets of the Fund available for distribution to
shareholders.

Shareholders are entitled to one vote for each full share held and to
fractional votes for fractional shares held in the election of Trustees (to the
extent hereafter provided) and on other matters submitted to the vote of
shareholders. All shares have equal voting rights, except that only shares of
the respective Fund are entitled to vote on matters concerning only that Fund.
There will normally be no meetings of shareholders for the purpose of electing
Trustees unless and until such time as less than a majority of the Trustees
holding office have been elected by shareholders, at which time the Trustees
then in office will call a shareholders' meeting for the election of Trustees.
Shareholders may, in accordance with the Declaration of Trust, cause a meeting
of shareholders to be held for the purpose of voting on the removal of Trustees.
Except as set forth above, the Trustees shall continue to hold office and
appoint successor Trustees.

The Declaration of Trust establishing the Trust, dated January 29, 1987, a
copy of which together with all amendments thereto (the "Declaration"), is on
file in the office of the Secretary of the Commonwealth of Massachusetts,
provides that the name "Common Sense Trust" refers to the Trustees under the
Declaration collectively as Trustees, not as individuals or personally; and no
Trustee, officer or shareholder of the Trust shall be held to any personal
liability, nor shall resort be had to their private property for the
satisfaction of any obligation or liability of any Fund but the assets of the
applicable Fund only shall be liable.

SHAREHOLDER INQUIRIES. Shareholder inquiries should be directed by writing
the Transfer Agent at 3100 Breckinridge Blvd., Bldg. 200, Duluth, Georgia
30199-0062 or calling (800) 544-5445.

TRANSFER AGENT. Common Sense(R) Shareholder Services, an indirect
subsidiary of Travelers, serves as Transfer Agent for the Fund. See "The Trust
and Its Management."

LEGAL COUNSEL. Sullivan & Worcester, 1025 Connecticut Avenue N.W.,
Washington, D.C. 20036, is legal counsel to the Trust.

INDEPENDENT AUDITORS. Ernst & Young LLP, 1221 McKinney, Suite 2400,
Houston, Texas 77010, are the independent auditors for the Trust.

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<PAGE> 29

STATEMENT OF ADDITIONAL INFORMATION

COMMON SENSE TRUST
2800 POST OAK BLVD.
HOUSTON, TEXAS 77056
FEBRUARY 21, 1995

Common Sense Trust (the "Trust") is a diversified, open-end management
investment company with eleven separate Portfolios, five of which are discussed
herein: the Common Sense Growth Fund (the "Growth Fund"), the Common Sense
Growth and Income Fund (the "Growth and Income Fund"), the Common Sense
Government Fund (the "Government Fund"), the Common Sense Municipal Bond Fund
(the "Municipal Bond Fund") and the Common Sense Money Market Fund (the "Money
Market Fund"). Each Fund is in effect a separate fund issuing its own shares.

This Statement of Additional Information is not a Prospectus but contains
information in addition to and more detailed than that set forth in the
Prospectus bearing the same date and should be read in conjunction with the
Prospectus. A Prospectus may be obtained without charge by writing Common Sense
Distributors at 3100 Breckinridge Boulevard, Bldg. 400, Duluth, Georgia
30199-0001.

TABLE OF CONTENTS

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GENERAL INFORMATION................................................................... 2
GOALS AND INVESTMENT POLICIES......................................................... 2
Growth Fund......................................................................... 2
Growth and Income Fund.............................................................. 2
Government Fund..................................................................... 3
Municipal Bond Fund................................................................. 5
Money Market Fund................................................................... 6
REPURCHASE AGREEMENTS................................................................. 7
OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS........................................ 7
FORWARD COMMITMENTS................................................................... 12
LOANS OF PORTFOLIO SECURITIES......................................................... 13
INVESTMENT RESTRICTIONS............................................................... 13
TRUSTEES AND EXECUTIVE OFFICERS....................................................... 16
INVESTMENT ADVISORY AGREEMENT......................................................... 20
DISTRIBUTOR........................................................................... 21
PORTFOLIO TURNOVER.................................................................... 22
PORTFOLIO TRANSACTIONS AND BROKERAGE.................................................. 22
DETERMINATION OF NET ASSET VALUE...................................................... 25
PURCHASE AND REDEMPTION OF SHARES..................................................... 27
DISTRIBUTIONS AND TAXES............................................................... 29
OTHER INFORMATION..................................................................... 32
FINANCIAL STATEMENTS.................................................................. 35
APPENDIX 1............................................................................ 36
APPENDIX 2............................................................................ 38
</TABLE>
<PAGE> 30

GENERAL INFORMATION

Van Kampen American Capital Asset Management, Inc. (the "Adviser") is a
subsidiary of Van Kampen American Capital, Inc. ("VKAC") which is a wholly owned
subsidiary of VK/AC Holding, Inc. ("VK/AC Holding"). VK/AC Holding is
controlled, through the ownership of a substantial majority of its common stock,
by the Clayton & Dubilier Private Equity Fund IV Limited Partnership (the "C&D
L.P."), a Connecticut limited partnership. C&D L.P. is managed by Clayton,
Dubilier & Rice, Inc., a New York private investment firm. The general partner
of C&D L.P. is Clayton & Dubilier Associates IV Limited Partnership ("C&D
Associates L.P."). The general partners of C&D Associates L.P. are Joseph L.
Rice, III, B. Charles Ames, Alberto Cribiore, Donald J. Gogel and Hubbard C.
Howe. The Adviser together with its predecessors has been in the investment
advisory business since 1926.

Common Sense Distributors (the "Distributor") is a subsidiary of PFS
Distributors, Inc., an affiliate of Primerica Financial Services, Inc.
("Primerica Financial"). Common Sense Shareholder Services (the "Transfer
Agent"), is a subsidiary of PFS Services, Inc., an affiliate of Primerica
Financial. Common Sense Custodial Services, L.P. ("CSCS") is an affiliate of
Primerica Financial Primerica Financial is an indirect wholly owned subsidiary
of Travelers. Travelers is engaged primarily in the financial and service
businesses.

As of January 19, 1995, no person was known to own beneficially or to hold
of record as much as 5% of the outstanding shares of any Fund of the Trust
discussed herein; except that 5.12% of the outstanding shares of the Money
Market Fund were held of record by The Travelers, Primerica Corporation Savings
Plan, One Tower Square, Hartford, Connecticut 06183-6031; and Van Kampen
American Capital Trust Company, P.O. Box 944, Houston, Texas 77001-0944, holds
of record as Custodian for certain employee benefit plans and individual
retirement accounts the following percentages of the outstanding shares of the
listed portfolios:

<TABLE>
<S> <C>
Growth Fund.......................................................... 66.6%
Growth and Income Fund............................................... 57.3%
Government Fund...................................................... 43.6%
Money Market Fund.................................................... 17.4%
Municipal Bond Fund.................................................. 0%
</TABLE>

GOALS AND INVESTMENT POLICIES

The following disclosures supplement disclosures set forth under an
identical caption in the Prospectus and do not, standing alone, present a
complete and accurate explanation of the matters disclosed. Readers must refer
also to this caption in the Prospectus for a complete presentation of the
matters disclosed below.

GROWTH FUND

The Fund seeks capital appreciation by investing in a portfolio of
securities consisting principally of common stocks and options on common stocks.
The Fund may also engage in transactions involving stock index futures contracts
and options on such contracts. Any income received on such securities is
incidental to the goal of capital appreciation.

GROWTH AND INCOME FUND

The Fund seeks reasonable growth and income through investments in equity
securities including common and preferred stocks and securities convertible into
common and preferred stocks.

In general, the Fund intends to invest in securities that have yielded a
dividend or interest return to security holders within the past twelve months,
however, it may invest in non-income producing investments held for anticipated
increase in value. The Fund may also engage in transactions in options, futures
contracts, and options on futures.

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GOVERNMENT FUND

The Fund seeks to provide investors with a high current return consistent
with preservation of capital by investing in debt securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities. The Fund
may also purchase and sell options and engage in transactions in interest rate
futures contracts and options on such contracts in order to hedge against
changes in interest rates.

The Fund seeks high current return consistent with preservation of capital.
The Fund intends to invest at least 80% of its assets in debt securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities.
Repurchase agreements may be entered into with domestic banks or broker-dealers
deemed creditworthy by the Advisers solely for purposes of investing the Fund's
cash reserves or when the Fund is in a temporary defensive posture. The Fund may
write covered or fully collateralized call options on U.S. Government securities
and enter into closing or offsetting purchase transactions with respect to
certain of such options. The Fund may also write secured put options and enter
into closing or offsetting purchase transactions with respect to such options.
The Fund may write both listed and over-the-counter options as described in the
Prospectus.

The Fund seeks to obtain a high current return from the following sources:

- interest paid on the Fund's portfolio securities;

- premiums earned upon the expiration of options written;

- net profits from closing transactions; and

- net gains from the sale of portfolio securities on the exercise of
options or otherwise.

The Fund is not designed for investors seeking long-term capital
appreciation. Moreover, varying economic and market conditions may affect the
value of and yields on U.S. Government securities. Accordingly, there is no
assurance that the Fund's investment objective will be achieved.

MORTGAGE RELATED SECURITIES. The Government Fund may invest in
mortgage-related securities, including those representing an undivided ownership
interest in a pool of mortgage loans, e.g., GNMA, FNMA, FHLMC Certificates.

GOVERNMENT NATIONAL MORTGAGE ASSOCIATION. The Government National Mortgage
Association ("GNMA") is a wholly owned corporate instrumentality of the United
States within the U.S. Department of Housing and Urban Development. GNMA's
principal programs involve its guarantees of privately issued securities backed
by pools of mortgages.

GNMA CERTIFICATES. Certificates of the Government National Mortgage
Association ("GNMA Certificates") are mortgage-backed securities, which evidence
an undivided interest in a pool of mortgage loans. GNMA Certificates differ from
bonds in that principal is paid back monthly by the borrower over the term of
the loan rather than returned in a lump sum at maturity. GNMA Certificates that
the Fund purchases are the "modified pass-through" type. "Modified pass-through"
GNMA Certificates entitle the holder to receive a share of all interest and
principal payments paid and owned on the mortgage pool net of fees paid to the
"issuer" and GNMA, regardless of whether or not the mortgagor actually makes the
payment.

GNMA GUARANTEE. The National Housing Act authorizes GNMA to guarantee the
timely payment of principal and interest on securities backed by a pool of
mortgages insured by the Federal Housing Administration ("FHA") or the Farmers'
Home Administration ("FMHA"), or guaranteed by the Veterans Administration
("VA"). Once a pool of such mortgages is assembled and approved by GNMA, the
GNMA guarantee is backed by the full faith and credit of the U.S. Government.
GNMA is also empowered to borrow without limitation from the U.S. Treasury if
necessary to make any payments required under its guarantee.

LIFE OF GNMA CERTIFICATES. The average life of a GNMA Certificate is likely
to be substantially less than the original maturity of the mortgage pools
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will usually result in the return of the greater part of principal
investment long before maturity of the mortgages in the pool. The Fund normally
will not distribute principal payments

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(whether regular or prepaid) to its shareholders. Rather, it will invest such
payments in additional mortgage-related securities of the types described above
or other U.S. Government securities. Interest received by the Fund will,
however, be distributed to shareholders. Foreclosures impose no risk to
principal investment because of the GNMA guarantee.

As prepayment rates of the individual mortgage pools vary widely, it is not
possible to predict accurately the average life of a particular issue of GNMA
Certificates. However, statistics published by the FHA indicate that the average
life of single-family dwelling mortgages with 25- to 30-year maturities, the
type of mortgages backing the vast majority of GNMA Certificates, is
approximately 12 years. Therefore, it is customary to treat GNMA Certificates as
30-year mortgage-backed securities which prepay fully in the twelfth year.

YIELD CHARACTERISTICS OF GNMA CERTIFICATES. The coupon rate of interest of
GNMA Certificates is lower than the interest rate paid on the VA-guaranteed or
FHA-insured mortgages underlying the Certificates, but only by the amount of the
fees paid to GNMA and the GNMA Certificate issuer. For the most common type of
mortgage pool, containing single-family dwelling mortgages, GNMA receives an
annual fee of 0.06 of one percent of the outstanding principal for providing its
guarantee, and the GNMA Certificate issuer is paid an annual servicing fee of
0.44 of one percent for assembling the mortgage pool and for passing through
monthly payments of interest and principal to Certificate holders.

The coupon rate by itself, however, does not indicate the yield which will
be earned on the GNMA Certificates for the following reasons:

1. Certificates are usually issued at a premium or discount, rather
than at par.

2. After issuance, Certificates usually trade in the secondary market
at a premium or discount.

3. Interest is paid monthly rather than semi-annually as is the case
for traditional bonds. Monthly compounding has the effect of raising the
effective yield earned on GNMA Certificates.

4. The actual yield of each GNMA Certificate is influenced by the
prepayment experience of the mortgage pool underlying the Certificate. If
mortgagors prepay their mortgages, the principal returned to Certificate
holders may be reinvested at higher or lower rates.

In quoting yields for GNMA Certificates, the customary practice is to
assume that the Certificates will have a 12 year life. Compared on this basis,
GNMA Certificates have historically yielded roughly 1/4 of 1% more than high
grade corporate bonds and 1/2 of one percent more than U.S. Government and U.S.
Government agency bonds. As the life of individual pools may vary widely,
however, the actual yield earned on any issue of GNMA Certificates may differ
significantly from the yield estimated on the assumption of a twelve-year life.

MARKET FOR GNMA CERTIFICATES. Since the inception of the GNMA
mortgage-backed securities program in 1970, the amount of GNMA Certificates
outstanding has grown rapidly. The size of the market and the active
participation in the secondary market by securities dealers and many types of
investors make GNMA Certificates highly liquid instruments. Quotes for GNMA
Certificates are readily available from securities dealers and depend on, among
other things, the level of market rates, the Certificate's coupon rate and the
prepayment experience of the pool of mortgages backing each Certificate.

FHLMC SECURITIES. The Federal Home Loan Mortgage Corporation ("FHLMC") was
created in 1970 to promote development of a nationwide secondary market in
conventional residential mortgages. FHLMC issues two types of mortgage
pass-through securities, mortgage participation certificates ("PCs") and
guaranteed mortgage certificates ("GMCs"). PCs resemble GNMA Certificates in
that each PC represents a pro rata share of all interest and principal payments
made and owed on the underlying pool. Like GNMA Certificates, PCs are assumed to
be prepaid fully in their twelfth year. FHLMC guarantees timely monthly payment
of interest of PCs and the ultimate payment of principle.

GMCs also represent a pro rata interest in a pool of mortgages. However,
these instruments pay interest semiannually and return principal once a year in
guaranteed minimum payments. The expected average life of these securities is
approximately 10 years.

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FNMA SECURITIES. The Federal National Mortgage Association ("FNMA") was
established in 1938 to create a secondary market in mortgages insured by the
FHA. FNMA issues guarantee mortgage pass-through certificates ("FNMA
Certificates"). FNMA Certificates resemble GNMA Certificates in that each
Certificate represents a pro rata share of all interest and principal payments
made and owed on the underlying pool. FNMA guarantees timely payment of interest
on FNMA Certificates and the full return of principal. Like GNMA Certificates,
FNMA Certificates are assumed to be prepaid fully in their twelfth year.

Risk of foreclosure of the underlying mortgages is greater with FHLMC and
FNMA securities because, unlike GNMA securities, FHLMC and FNMA securities are
not guaranteed by the full faith and credit of the U.S. Government.

MUNICIPAL BOND FUND

The Fund seeks to provide investors as high a level of current income
exempt from federal income tax as is consistent with the preservation of
capital.

MUNICIPAL BONDS. "Municipal Bonds" include debt obligations issued to
obtain funds for various public purposes, including construction of a wide range
of public facilities, refunding of outstanding obligations and obtaining funds
for general operating expenses and loans to other public institutions and
facilities. In addition, certain types of industrial development obligations are
issued by or on behalf of public authorities to finance various
privately-operated facilities. Such obligations are included within the term
Municipal Bonds if the interest paid thereon is exempt from federal income tax.
Municipal Bonds also include short-term tax-exempt municipal obligations such as
tax anticipation notes, bond anticipation notes, revenue anticipation notes, and
variable rate demand notes.

The two principal classifications of Municipal Bonds are "general
obligations" and "revenue" or "special obligations." General obligations are
secured by the issuer's pledge of full faith, credit, and taxing power for the
payment of principal and interest. Revenue or special obligations are payable
only from the revenues derived from a particular facility or class of facilities
or, in some cases, from the proceeds of a special excise tax or from other
specific revenue sources such as the user of the facility being financed.
Industrial development bonds, including pollution control bonds, are revenue
bonds and do not constitute the pledge of the credit or taxing power of the
issuer of such bonds. The payment of the principal and interest on such
industrial revenue bonds depends solely on the ability of the user of the
facilities financed by the bonds to meet its financial obligations and the
pledge, if any, of real and personal property so financed as security for such
payment. The Fund's portfolio may also include "moral obligation" bonds which
are normally issued by special purpose public authorities. If an issuer of moral
obligation bonds is unable to meet its obligations, the repayment of such bonds
becomes a moral commitment but not a legal obligation of the state or
municipality which is the issuer of the bonds.

When the Fund engages in when-issued and delayed delivery transactions, the
Fund relies on the buyer or seller, as the case may be, to consummate the trade.
Failure of the buyer or seller to do so may result in the Fund missing the
opportunity of obtaining a price considered to be advantageous.

On a temporary basis, due to market conditions, the Fund may invest in
Municipal Notes which include demand notes and short-term municipal obligations
(such as tax anticipation notes, revenue anticipation notes, construction loan
notes and short-term discount notes) and tax-exempt commercial paper, provided
that such obligations have the ratings described in the Prospectus. Demand notes
are obligations which normally have a stated maturity in excess of one year, but
permit any holder to demand payment of principal plus accrued interest upon a
specified number of days' notice. Frequently, such obligations are secured by
letters of credit or other credit support arrangement provided by banks. The
issuer of such notes normally has a corresponding right, after a given period,
to prepay at its discretion the outstanding principal of the note plus accrued
interest upon a specified number of days' notice to the noteholders. The
interest rate on a demand note may be based on a known lending rate, such as a
bank's prime rate, and may be adjusted when such rate changes, or the interest
rate on a demand note may be a market rate that is adjusted at specified
intervals. Participation interests in variable rate demand notes will be
purchased only if, in the opinion of counsel, interest income on such interest
will be tax-exempt when distributed as dividends to shareholders.

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Yields on Municipal Bonds are dependent on a variety of factors, including
the general condition of the money market and of the municipal bond market, the
size of a particular offering, the maturity of the obligation, and the rating of
the issue. The ability of the Fund to achieve its investment objective is also
dependent on the continuing ability of the issuers of the Municipal Bonds in
which the Fund invests to meet their obligations for the payment of interest and
principal when due. There are variations in the risks involved in holding
Municipal Bonds, both within a particular classification and among
classifications, depending on numerous factors. Furthermore, the rights of
holders of Municipal Bonds and the obligations of the issuers of such Municipal
Bonds may be subject to applicable bankruptcy, insolvency and similar laws and
court decisions affecting the rights of creditors generally, and such laws, if
any, which may be enacted by Congress or state legislatures imposing a
moratorium on the payment of principal and interest or imposing other
constraints or conditions on the payments of principal and interest on Municipal
Bonds.

TEMPORARY INVESTMENTS. The taxable securities in which the Municipal Bond
Fund may invest as temporary investments include U.S. Government securities,
domestic bank certificates of deposit and repurchase agreements.

U.S. Government securities include obligations issued or guaranteed as to
principal and interest by the U.S. Government, its agencies and
instrumentalities which are supported by any of the following: (a) the full
faith and credit of the U.S. Government, (b) the right of the issuer to borrow
an amount limited to a specific line or credit from the U.S. Government, (c)
discretionary authority of the U.S. Government agency or instrumentality, or (d)
the credit of the instrumentality. Such agencies or instrumentalities include,
but are not limited to, the Federal National Mortgage Association, the
Government National Mortgage Association, Federal Land Banks, and the Farmer's
Home Administration. The Fund may not invest in a certificate of deposit issued
by a commercial bank unless the bank is organized and operating in the United
States and has total assets of at least $500 million and is a member of the
Federal Deposit Insurance Corporation.

MONEY MARKET FUND

The Fund seeks protection of capital and high current income by investing
in money market instruments.

The Fund seeks to maintain a net asset value of $1.00 per share for
purchases and redemptions. To do so, the Fund uses the amortized cost method of
valuing the Fund's securities pursuant to Rule 2a-7 under the Investment Company
Act of 1940 (the "1940 Act"), certain requirements of which are summarized
below.

In accordance with Rule 2a-7, the Fund is required to maintain a
dollar-weighted average portfolio maturity of 90 days or less, purchase only
instruments having remaining maturities of 13 months or less and invest only in
U.S. dollar denominated securities determined in accordance with procedures
established by the Trustees to present minimal credit risks and which are rated
in one of the two highest rating categories for debt obligations by at least two
nationally recognized statistical rating organizations (or one rating
organization if the instrument was rated by only one such organization) or, if
unrated, are of comparable quality as determined in accordance with procedures
established by the Trustees. The nationally recognized statistical rating
organizations currently rating instruments of the type the Fund may purchase are
Moody's Investors Service, Standard & Poor's Corporation, Fitch Investors
Services, Inc., Duff and Phelps, Inc. and IBCA Limited and IBCA Inc. See
Appendix hereto.

In addition, the Fund will not invest more than 5% of its total assets in
the securities (including the securities collateralizing a repurchase agreement)
of, or subject to puts issued by, a single issuer, except that (i) the Fund may
invest more than 5% of its total assets in a single issuer for a period of up to
three business days in certain limited circumstances, (ii) the Fund may invest
in obligations issued or guaranteed by the U.S. Government without any such
limitation, and (iii) the limitation with respect to puts does not apply to
unconditional puts if no more than 10% of the Fund's total assets is invested in
securities issued or guaranteed by the issuer of the unconditional put.
Investments in rated securities not rated in the highest category by at least
two rating organizations (or one rating organization if the instrument was rated
by only one such organization), and unrated securities not determined by the
Trustees to be comparable to those rated in the highest category, will be
limited to 5% of the Fund's total assets, with the investment in any one such
issuer being limited to no more than the greater of 1% of the Fund's total
assets or $1,000,000. As to each security,

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these percentages are measured at the time the Fund purchases the security.
There can be no assurance that the Fund will be able to maintain a stable net
asset value of $1.00 per share.

REPURCHASE AGREEMENTS

Each Fund may enter into repurchase agreements with broker-dealers or
domestic banks. The Trustees will review on a continuing basis those
institutions which enter into a repurchase agreement with the Fund. A repurchase
agreement is a short-term investment in which the purchaser (i.e., the Fund)
acquires ownership of a debt security and the seller agrees to repurchase the
obligation at a future time and set price, usually not more than seven days from
the date of purchase, thereby determining the yield during the purchaser's
holding period. Repurchase agreements are collateralized by the underlying debt
securities and may be considered to be loans under the 1940 Act. The Fund will
make payment for such securities only upon physical delivery or evidence of book
entry transfer to the account of a custodian or bank acting as agent. The seller
under a repurchase agreement is required to maintain the value of the underlying
securities marked to market daily at not less than the repurchase price. The
underlying securities (normally securities of the U.S. Government, or its
agencies and instrumentalities), may have maturity dates exceeding one year. The
Fund does not bear the risk of a decline in value of the underlying security
unless the seller defaults under its repurchase obligation. In the event of a
bankruptcy or other default of a seller of a repurchase agreement, the Fund
could experience both delays in liquidating the underlying securities and loss
including: (a) possible decline in the value of the underlying security during
the period while the Fund seeks to enforce its rights thereto, (b) possible lack
of access to income on the underlying security during this period, and (c)
expenses of enforcing its rights.

OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS
(ALL FUNDS EXCEPT MONEY MARKET FUND)

SELLING CALL AND PUT OPTIONS
(GROWTH AND INCOME FUND, GROWTH FUND AND GOVERNMENT FUND)

PURPOSE. The principal reason for selling options is to obtain, through
receipt of premiums, a greater current return than would be realized on the
underlying securities alone. A Fund's current return can be expected to
fluctuate because premiums earned from writing options and dividend or interest
income yields on portfolio securities vary as economic and market conditions
change. Writing options on portfolio securities also results in a higher
portfolio turnover.

SELLING OPTIONS. The purchaser of a call option pays a premium to the
writer (i.e., the seller) for the right to buy the underlying security from the
writer at a specified price during a certain period. The Growth and Income Fund
and the Growth Fund sell call options only on a covered basis. The Government
Fund sells call options either on a covered basis, or for cross-hedging
purposes. A call option is covered if the Fund owns or has the right to acquire
the underlying securities subject to the call option at all times during the
option period. Thus, the Government Fund may sell options on U.S. Government
securities or forward commitments of such securities. An option is for
cross-hedging purposes (relative to Government Fund only) to hedge against a
security which the Fund owns or has the right to acquire. In such circumstances,
the Government Fund maintains in a segregated account with the Fund's Custodian,
cash or U.S. Government securities in an amount not less than the market value
of the underlying security, marked to market daily, while the option is
outstanding.

The purchaser of a put option pays a premium to the seller (i.e., the
writer) for the right to sell the underlying security to the writer at a
specified price during a certain period. A Fund sells put options only on a
secured basis, which means that, at all times during the option period, the Fund
would maintain in a segregated account with its Custodian cash, cash equivalents
or U.S. Government securities in an amount of not less than the exercise price
of the option, or will hold a put on the same underlying security at an equal or
greater exercise price. A Fund generally sells put options when the Adviser
wishes to purchase the underlying security for the Fund's portfolio at a price
lower than the current market price of the security.

CLOSING PURCHASE TRANSACTIONS AND OFFSETTING TRANSACTIONS. In order to
terminate its position as writer of a call or put option, a Fund may enter into
a "closing purchase transaction," which is the purchase of a call

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<PAGE> 36

(put) on the same underlying security and having the same exercise price and
expiration date as the call (put) previously sold by the Fund. The Fund will
realize a gain (loss) if the premium plus commission paid in the closing
purchase transaction is less (greater) than the premium it received on the sale
of the option. A Fund would also realize a gain if an option it has sold lapses
unexercised.

A Fund may sell options that are listed on an exchange as well as options
that are traded over-the-counter. A Fund may close out its position as writer of
an option only if a liquid secondary market exists for options of that series,
but there is no assurance that such a market will exist, particularly in the
case of over-the-counter options, since they can be closed out only with the
other party to the transaction. Alternatively, a Fund may purchase an offsetting
option, which does not close out its position as a writer, but provides an asset
of equal value to its obligation under the option sold. If a Fund is not able to
enter into a closing purchase transaction or to purchase an offsetting option
with respect to an option it has sold, it will be required to maintain the
securities subject to the call or the collateral securing the put until a
closing purchase transaction can be entered into (or the option is exercised or
expires), even though it might not be advantageous to do so.

RISKS OF SELLING OPTIONS. By selling a call option, a Fund loses the
potential for gain on the underlying security above the exercise price while the
option is outstanding; by writing a put option a Fund might become obligated to
purchase the underlying security at an exercise price that exceeds the then
current market price.

Each of the United States exchanges has established limitations governing
the maximum number of call or put options on the same underlying security
(whether or not covered) that may be written by a single investor, whether
acting alone or in concert with others, regardless of whether such options are
written on one or more accounts or through one or more brokers. An exchange may
order the liquidation of positions found to be in violation of those limits, and
it may impose other sanctions or restrictions. These position limits may
restrict the number of options the Fund may be able to write.

PURCHASING CALL AND PUT OPTIONS (GROWTH AND INCOME FUND, GROWTH FUND AND
GOVERNMENT FUND)

A Fund may purchase call options to protect (e.g., hedge) against
anticipated increases in the prices of securities it wishes to acquire.
Alternatively, call options may be purchased for their leverage potential. Since
the premium paid for a call option is typically a small fraction of the price of
the underlying security, a given amount of funds will purchase call options
covering a much larger quantity of such security than could be purchased
directly. By purchasing call options, a Fund can benefit from any significant
increase in the price of the underlying security to a greater extent than had it
invested the same amount in the security directly. However, because of the very
high volatility of option premiums, a Fund could bear a significant risk of
losing the entire premium if the price of the underlying security did not rise
sufficiently, or if it did not do so before the option expired.

Conversely, put options may be purchased to protect (e.g., hedge) against
anticipated declines in the market value of either specific portfolio securities
or of a Fund's assets generally. Alternatively, put options may be purchased for
capital appreciation in anticipation of a price decline in the underlying
security and a corresponding increase in the value of the put option. The
purchase of put options for capital appreciation involves the same significant
risk of loss as described above for call options. In any case, the purchase of
options for capital appreciation would increase the Fund's volatility by
increasing the impact of changes in the market price of the underlying
securities on the Fund's net asset value.

The Funds may purchase either listed or over-the-counter options.

OPTIONS ON STOCK INDEXES (GROWTH AND INCOME FUND AND GROWTH FUND)

Options on stock indices are similar to options on stock, but the delivery
requirements are different. Instead of giving the right to take or make delivery
of stock at a specified price, an option on a stock index gives the holder the
right to receive an amount of cash upon exercise of the option. Receipt of this
cash amount will depend upon the closing level of the stock index upon which the
option is based being greater than (in the case of a call) or less than (in the
case of a put) the exercise price of the option. The amount of cash received
will be the difference between the closing price of the index and the exercise
price of the option,

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multiplied by a specified dollar multiple. The writer of the option is
obligated, in return for the premium received, to make delivery of this amount.

Some stock index options are based on a broad market index such as the
Standard & Poor's 500 or the New York Stock Exchange Composite Index, or a
narrower index such as the Standard & Poor's 100. Indexes are also based on an
industry or market segment such as the AMEX Oil and Gas Index or the Computer
and Business Equipment Index. Options are currently traded on The Chicago Board
Options Exchange, the New York Stock Exchange, the American Stock Exchange and
other exchanges.

Gain or loss to a Fund on transactions in stock index options will depend
on price movements in the stock market generally (or in a particular industry or
segment of the market) rather than price movements of individual securities. As
with stock options, the Fund may offset its position in stock index options
prior to expiration by entering into a closing transaction on an Exchange, or it
may let the option expire unexercised.

FUTURES CONTRACTS (ALL FUNDS EXCEPT MONEY MARKET FUND)

The Trust may engage in transactions involving futures contracts and
related options in accordance with rules and interpretations of the Commodity
Futures Trading Commission ("CFTC") under which the Trust and its Funds is
exempt from registration as a "commodity pool".

TYPES OF CONTRACTS. An interest rate futures contract is a bilateral
agreement pursuant to which two parties agree to take or make delivery of a
specific type of debt security at a specified future time and at a specified
price. Although interest rate futures contracts call for delivery of specified
securities, in most cases the contracts are closed out (by an offsetting
purchase or sale) prior to actual delivery, with the difference between the
contract price and the offsetting price paid in cash.

A municipal bond futures contract is an agreement pursuant to which two
parties agree to take and make delivery of an amount of cash equal to a
specified dollar amount times the differences between The Bond Buyer Municipal
Bond Index value at the close of the last trading day of the contract and the
price at which the futures contract is originally struck.

A stock index futures contract is a bilateral agreement pursuant to which
two parties agree to take or make delivery of cash equal to a specified dollar
amount times the difference between the stock index value at a specified time
and the price at which the futures contract is originally struck. A stock index
fluctuates with changes in the market values of the stocks included. No physical
delivery of the underlying stocks in the index is made.

Currently, stock index futures contracts can be purchased with respect to
the Standard & Poor's 500 Stock Index on the Chicago Mercantile Exchange
("CME"), the New York Stock Exchange Composite Index on the New York Futures
Exchange and the Value Line Stock Index on the Kansas City Board of Trade.
Differences in the stocks included in the indexes may result in differences in
correlation of the futures contracts with movements in the value of the
securities being hedged.

Foreign stock index futures traded outside the United States include the
Nikkei Index of 225 Japanese stocks traded on the Singapore International
Monetary Exchange ("Nikkei Index"), Osaka Index of 50 Japanese stocks traded on
the Osaka Exchange, Financial Times Stock Exchange Index of the 100 largest
stocks on the London Stock Exchange, the All Ordinaries Share Price Index of 307
stocks on the Sydney, Melbourne Exchanges, Hang Seng Index of 33 stocks on the
Hong Kong Stock Exchange, Barclays Share Price Index of 40 stocks on the New
Zealand Stock Exchange and Toronto Index of 35 stocks on the Toronto Stock
Exchange. Futures and futures options on the Nikkei Index are traded on the CME
and United States commodity exchanges may develop futures and futures options on
other indices of foreign securities. Futures and options on United States
devised index of foreign stocks are also being developed.

INITIAL AND VARIATION MARGIN. In contrast to the purchase or sale of a
security, no price is paid or received upon the purchase or sale of a futures
contract. Initially, a Fund is required to deposit with its Custodian in an
account in the broker's name an amount of cash, cash equivalents or liquid high
grade debt securities equal to a percentage (which will normally range between
two and ten percent) of the contract amount. This amount is

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<PAGE> 38

known as initial margin. The nature of initial margin in futures transactions is
different from that of margin in securities transactions in that futures
contract margin does not involve the borrowing of funds by the customer to
finance the transaction. Rather, the initial margin is in the nature of a
performance bond or good faith deposit on the contract, which is returned to the
Fund upon termination of the futures contract and satisfaction of its
contractual obligations. Subsequent payments to and from the broker, called
variation margin, are made on a daily basis as the price of the underlying
securities or index fluctuates, making the long and short positions in the
futures contract more or less valuable, a process known as marking to market.

For example, when a Fund purchases a futures contract and the price of the
underlying security or index rises, that position increases in value, and the
Fund receives from the broker a variation margin payment equal to that increase
in value. Conversely, where the Fund purchases a futures contract and the value
of the underlying security or index declines, the position is less valuable, and
the Fund is required to make a variation margin payment to the broker.

At any time prior to expiration of the futures contract, the Fund may elect
to terminate the position by taking an opposite position. A final determination
of variation margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or a gain.

FUTURES STRATEGIES. When a Fund anticipates a significant market or market
sector advance, the purchase of a futures contract affords a hedge against not
participating in the advance at a time when the Fund is not fully invested
("anticipatory hedge"). Such purchase of a futures contract serves as a
temporary substitute for the purchase of individual securities, which may be
purchased in an orderly fashion once the market has stabilized. As individual
securities are purchased, an equivalent amount of futures contracts could be
terminated by offsetting sales. A Fund may sell futures contracts in
anticipation of or in a general market or market sector decline that may
adversely affect the market value of the Fund's securities ("defensive hedge").
To the extent that the Fund's portfolio of securities changes in value in
correlation with the underlying security or index, the sale of futures contracts
substantially reduces the risk to the Fund of a market decline and, by so doing,
provides an alternative to the liquidation of securities positions in the Fund
with attendant transaction costs.

For example, if the Government Fund holds long-term U.S. Government
securities, and a rise in long-term interest rates is anticipated, it could, in
lieu of selling its portfolio securities, sell futures contracts for similar
long-term securities. If interest rates increased and the value of the Fund's
securities declined during the period the contracts were outstanding, the value
of the Fund's futures contracts should increase, thereby protecting the Fund by
preventing net asset value from declining as much as it otherwise would have.

In the event of the bankruptcy of a broker through which a Fund engages in
transactions in listed options, futures or related options, the Fund could
experience delays and/or losses in liquidating open positions purchased or sold
through the broker and/or incur a loss of all or part of its margin deposits
with the broker. Similarly, in the event of the bankruptcy of the writer of an
over-the-counter option purchased by the Government Fund, the Fund could
experience a loss of all or part of the value of the option. Transactions are
entered into by a Fund only with brokers or financial institutions deemed
creditworthy by the Adviser.

SPECIAL RISKS ASSOCIATED WITH FUTURES TRANSACTIONS. There are several risks
connected with the use of futures contracts as a hedging device. These include
the risk of imperfect correlation between movements in the price of the futures
contracts and of the underlying securities, the risk of market distortion, the
illiquidity risk and the risk of error in anticipating price movement.

There may be an imperfect correlation (or no correlation) between movements
in the price of the futures contracts and of the securities being hedged. The
risk of imperfect correlation increases as the composition of the portfolio of
securities being hedged diverges from the securities upon which the futures
contract is based. If the price of the futures contract moves less than the
price of the securities being hedged, the hedge will not be fully effective, but
if the price of the securities being hedged moves in an unfavorable direction,
the Fund would be in a better position than if it had not tried to hedge.
However, if the price of the security being hedged moves in a favorable
direction, the hedge will partially offset this advantage. To compensate for the
imperfect correlation of movements of prices of a futures contract and the
securities being hedged, a Fund

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<PAGE> 39

may buy or sell futures contracts in a greater dollar amount than the dollar
amount of the securities being hedged if the historical volatility of the
securities being hedged has been greater than the historical volatility of the
securities underlying the futures contract, or may buy or sell fewer futures
contracts if the historical volatility of the securities being hedged is less
than the historical volatility of the securities underlying the futures
contract. Nevertheless, the price of the futures contract may move less than the
price of the securities which are the subject of the hedge (or the value of
futures contracts and securities held by a Fund may decline simultaneously),
resulting in the hedge not being fully effective.

There is also the risk that the price of futures contracts may not
correlate perfectly with movements in the securities underlying the futures
contract due to certain market distortions. First, all participants in the
futures market are subject to initial margin depository and maintenance
requirements. Rather than meet additional margin deposit requirements, investors
may close futures contracts through offsetting transactions, which could distort
the normal relationship between the futures market and the securities underlying
the futures contract. Second, from the point of view of speculators, the deposit
requirements in the futures market are less onerous than margin requirements in
the securities markets. Therefore, increased participation by speculators in the
futures markets may cause temporary price distortions. Due to the possibility of
price distortion in the futures markets and because of the imperfect correlation
between movements in futures contracts and movements in the securities
underlying them, a correct forecast of general market trends by the Adviser may
still not result in a successful hedging transaction judged over a very short
time frame.

There is also the risk that futures markets may not be sufficiently liquid.
Futures contracts may be closed out only on an Exchange or Board of Trade that
provides a market for such futures contracts. Although a Fund intends to
purchase or sell futures only on Exchanges and Boards of trade where there
appears to be an active secondary market, there can be no assurance that an
active secondary market will exist for any particular contract or at any
particular time. In the event of such illiquidity, it might not be possible to
close a futures position and, in the event of adverse price movement, a Fund
would continue to be required to make daily payments of variation margin. Since
the securities being hedged will not be sold until the related futures contract
is sold, an increase, if any, in the price of the securities may to some extent
offset losses on the related futures contract. In such event, the Fund would
lose the benefit of the appreciation in value of the securities.

Successful use of futures is also subject to the Adviser's ability
correctly to predict the direction of movements in the market. For example, if
the Fund hedges against a decline in the market, and market prices instead
advance, the Fund will lose part or all of the benefit of the increase in value
of its securities holdings because it will have offsetting losses in futures
contracts. In such cases, if the Fund has insufficient cash, it may have to sell
portfolio securities at a time when it is disadvantageous to do so in order to
meet the daily variation margin.

CFTC regulations require, among other things, (i) that futures and related
options be used solely for bona fide hedging purposes (or meet certain
conditions as specified in CFTC regulations) and (ii) that a Fund not enter into
futures and related options for which the aggregate initial margin and premiums
exceed 5% of the fair market value of a Fund's assets. Relative to the purchase
or sale of futures contracts by a Fund, an amount of cash, cash equivalents or
U.S. Government securities equal to the market value of the obligation under the
futures contracts (less any related margin deposits) will be maintained in a
segregated account with the Custodian.

ADDITIONAL RISKS TO OPTIONS AND FUTURES TRANSACTIONS. Each of the Exchanges
has established limitations governing the maximum number of call or put options
on the same underlying security or futures contract (whether or not covered)
which may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different Exchanges or are held or written on one or more accounts or through
one or more brokers). Option positions of all investment companies advised by
the Adviser are combined for purposes of these limits. An Exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose other sanctions or restrictions. These position limits may restrict the
number of listed options which the Fund may sell.

Although a Fund intends to enter into futures contracts only if there is an
active market for such contracts, there is no assurance that an active market
will exist for the contracts at any particular time. Most

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<PAGE> 40

U.S. futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single trading day. Once the daily
limit has been reached in a particular contract, no trades may be made that day
at a price beyond that limit. It is possible that futures contract prices would
move to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses. In such event, and in the
event of adverse price movements, a Fund would be required to make daily cash
payments of variation margin. In such circumstances, an increase in the value of
the portion of the portfolio being hedged, if any, may partially or completely
offset losses on the futures contract. However, there is no guarantee that the
price of the securities being hedged will, in fact, correlate with the price
movements in a futures contract and thus provide an offset to losses on the
futures contract.

A Fund pays commissions on futures contracts and options transactions.

OPTIONS ON FUTURES CONTRACTS (ALL FUNDS EXCEPT MONEY MARKET FUND)

A Fund may also purchase and sell options on futures contracts which are
traded on an Exchange. An option on a futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in a futures
contract (a long position if the option is a call and a short position if the
option is a put), at a specified exercise price at any time during the option
period. As a seller of an option on a futures contract, a Fund is subject to
initial margin and maintenance requirements similar to those applicable to
futures contracts. In addition, net option premiums received by a Fund are
required to be included as initial margin deposits. When an option on a futures
contract is exercised, delivery of the futures position is accompanied by cash
representing the difference between the current market price of the futures
contract and the exercise price of the option. A Fund may purchase put options
on futures contracts in lieu of, and for the same purposes as, the sale of a
futures contract. The purchase of call options on futures contracts in intended
to serve the same purpose as the actual purchase of the futures contract.

RISKS OF TRANSACTIONS IN OPTIONS ON STOCK INDEX FUTURES. In addition to the
risks described above which apply to all options transactions, there are several
special risks relating to options on stock index futures. The Advisers will not
purchase options on stock index futures on any Exchange unless and until, in the
Adviser's opinion, the market for such options has developed sufficiently that
the risks in connection with options on futures transactions are no greater than
the risks in connection with stock index futures transactions. Compared to the
use of stock index futures, the purchase of options on stock index futures
involves less potential risk to the Growth Fund because the maximum amount at
risk is the premium paid for the options (plus transaction costs). However there
may be circumstances, such as when there is no movement in the level of the
index, when the use of an option on a stock index future would result in a loss
to the Fund when the use of a stock index future would not.

FORWARD COMMITMENTS (GOVERNMENT FUND ONLY)

Relative to a Forward Commitment purchase, the Fund maintains a segregated
account (which is marked to market daily) of cash or U.S. Government securities
(which may have maturities which are longer than the term of the Forward
Commitment) with the Fund's custodian in an aggregate amount equal to the amount
of its commitment as long as the obligation to purchase continues. Since the
market value of both the securities subject to the Forward Commitment and the
securities held in the segregated account may fluctuate, the use of the Forward
Commitments may magnify the impact of interest rate changes on the Fund's net
asset value.

A Forward Commitment sale is covered if the Fund owns or has the right to
acquire the underlying securities subject to the Forward Commitment. A Forward
Commitment sale is for cross-hedging purposes if it is not covered, but is
designed to provide a hedge against a decline in value of a security which the
Fund owns or has the right to acquire. In either circumstance, the Fund
maintains in a segregated account (which is marked to market daily) either the
security covered by the Forward Commitment or cash or U.S. Government securities
(which may have maturities which are longer than the term of the Forward
Commitment) with the Fund's custodian in an aggregate amount equal to the amount
of its commitment as long as the obligation to

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<PAGE> 41

sell continues. By entering into a Forward Commitment sale transaction, the Fund
forgoes or reduces the potential for both gain and loss in the security which is
being hedged by the Forward Commitment sale.

LOANS OF PORTFOLIO SECURITIES

Each of the Funds may lend portfolio securities to unaffiliated brokers,
dealers and financial institutions provided that cash equal to 100% of the
market value of the securities loaned is deposited by the borrower with the
particular Fund and is marked to market daily. While such securities are on
loan, the borrower is required to pay the Fund any income accruing thereon.
Furthermore, the Fund may invest the cash collateral in portfolio securities
thereby increasing the return to the Fund as well as increasing the market risk
to the Fund. A Fund will not lend its portfolio securities if such loans are not
permitted by the laws or regulations of any state in which its shares are
qualified for sale. However, should the Fund believe that lending securities is
in the best interests of the Fund's shareholders, it would consider withdrawing
its shares from sale in any such state.

Loans would be made for short-term purposes and subject to termination by
the Fund in the normal settlement time, currently five business days after
notice, or by the borrower on one day's notice. Borrowed securities must be
returned when the loan is terminated. Any gain or loss in the market price of
the borrowed securities which occurs during the term of the loan inures to the
Fund and its shareholders, but any gain can be realized only if the borrower
does not default. Each Fund may pay reasonable finders', administrative and
custodial fees in connection with a loan.

INVESTMENT RESTRICTIONS

Each Fund has adopted the following restrictions which, may not be changed
with respect to any Fund without the approval of the holders of a majority of
the outstanding shares of such Fund. Such majority (as defined by the 1940 Act)
is the lesser of (i) 67% or more of the voting securities present at a meeting,
if the holders of more than 50% of the outstanding voting securities of the Fund
are present or represented by proxy; or (ii) more than 50% of the Fund's
outstanding voting securities. The percentage limitations need only be met at
the time the investment is made or after relevant action is taken. These
restrictions provide that a Fund shall not:

1. Make any investment in real estate, commodities or commodities
contracts, or warrants except that the Growth and Income Fund, the Growth
Fund, the Government Fund and the Municipal Bond Fund may engage in
transactions in futures and related options, the Government Fund may
purchase or sell securities which are secured by real estate, and the
Growth Fund may acquire warrants or other rights to subscribe to securities
of companies issuing such warrants or rights, or of parents or subsidiaries
of such companies, although the Growth Fund may not invest more than 5% of
its net assets in such securities valued at the lower of cost or market,
nor more than 2% of its net assets in such securities (valued on such
basis) which are not listed on the New York or American Stock Exchanges
(warrants and rights represent options, usually for a specified period of
time, to purchase a particular security at a specified price from the
issuer). Warrants or rights acquired in units or attached to other
securities are not subject to the foregoing limitations;

2. Lend money except by the purchase of bonds or other debt
obligations of types commonly offered publicly or privately and purchased
by financial institutions, including investments in repurchase agreements.
A Fund will not invest in repurchase agreements maturing in more than seven
days (unless subject to a demand feature) if any such investment, together
with any illiquid securities (including securities which are subject to
legal or contractual restrictions on resale) held by the Fund, exceeds 10%
of the market or other fair value of its total net assets; provided,
however, that with respect to the Growth Fund and the Growth and Income
Fund, illiquid securities shall exclude shares of other open-end investment
companies owned by the Fund but include the Fund's pro rata portion of the
securities and other assets owned by any such company. See "Repurchase
Agreements";

3. Purchase securities on margin, except that a Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities. The deposit or payment by a Fund of an

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<PAGE> 42

initial or variation margin in connection with futures contracts or related
option transactions is not considered the purchase of a security on margin.

4. Invest in securities of any company if any officer or trustee of
the Trust or of the Adviser owns more than 1/2 of 1% of the outstanding
securities of such company, and such officers and trustees own more than 5%
of the outstanding securities of such issuer.

5. Invest in oil or other mineral leases, rights or royalty contracts
or exploration or development programs, except that the Growth Fund, and
the Growth and Income Fund, may invest in the securities of companies which
invest in or sponsor such programs.

6. Invest in companies for the purpose of acquiring control or
management thereof.

7. Underwrite securities of other companies, except insofar as a Fund
might be deemed to be an underwriter for purposes of the Securities Act of
1933 ("1933 Act") in the resale of any securities owned by the Fund;

8. Lend its portfolio securities in excess of 10% of its total assets,
both taken at market value provided that any loans shall be in accordance
with the guidelines established for such loans by the Trustees as described
under "Loans of Portfolio Securities", including the maintenance of
collateral from the borrower equal at all times to the current market value
of the securities loaned;

9. Invest in the securities of other open-end investment companies, or
invest in the securities of closed-end investment companies except through
purchase in the open market in a transaction involving no commission or
profit to a sponsor or dealer (other than the customary brokers commission)
or as part of a merger, consolidation or other acquisition, except that the
Growth Fund and the Growth and Income Fund may acquire shares of other
open-end investment companies to the extent permitted by rule or order of
the SEC exempting them from the limitations imposed by Section 12(d)(1) of
the 1940 Act.

10. With respect to 75% of its assets, invest more than 5% of its
assets in the securities of any one issuer (except obligations of the U.S.
Government, its agencies or instrumentalities and repurchase agreements
secured thereby), or purchase more than 10% of the outstanding voting
securities of any one issuer. Neither limitation shall apply to the
acquisition of shares of other open-end investment companies by the Growth
Fund, and the Growth and Income Fund, to the extent permitted by rule or
order of the SEC exempting them from the limitations imposed by Section
12(d)(1) of the 1940 Act;

11. Purchase a restricted security or a security for which market
quotations are not readily available if as a result of such purchase more
than 5% of the Fund's assets would be invested in such securities;
provided, however, that with respect to the Growth Fund and the Growth and
Income Fund, this limitation shall exclude shares of other open-end
investment companies owned by the Fund but include the Fund's pro rata
portion of the securities and other assets owned by any such company.
Illiquid securities include securities subject to legal or contractual
restrictions on resale, which include repurchase agreements which have a
maturity of longer than seven days. This policy does not apply to
restricted securities eligible for resale pursuant to Rule 144A under the
1933 Act which the Trustees or the Adviser under Board approved guidelines
may determine are liquid nor does it apply to other securities for which,
notwithstanding legal or contractual restrictions on resale, a liquid
market exists.

12. Invest more than 25% of the value of its total assets in
securities of issuers in any particular industry; provided, however, that
with respect to the Growth Fund and the Growth and Income Fund, this
limitation shall exclude shares of other open-end investment companies
owned by the Fund but include the Fund's pro rata portion of the securities
and other assets owned by any such company. (This does not restrict any of
the Funds from investing in obligations of the U.S. Government and
repurchase agreements secured thereby, and, in the case of the Money Market
Fund, does not restrict investments in money market instruments of banks.);

13. Borrow in excess of 10% of the market or other fair value of its
total assets, or pledge its assets to an extent greater than 5% of the
market or other fair value of its total assets, provided that so long as
any borrowing exceeds 5% of the value of the Fund's total assets, the fund
shall not purchase portfolio

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<PAGE> 43

securities. Any such borrowings shall be from banks and shall be undertaken
only as a temporary measure for extraordinary or emergency purposes.
Deposits in escrow in connection with the writing of covered call or
secured put options, or in connection with the purchase or sale of forward
contracts, futures contracts, foreign currency futures and related options,
are not deemed to be a pledge or other encumbrance;

14. Invest more than 5% of its assets in companies having a record
together with predecessors, of less than three years' continuous operation,
except that the Growth Fund and the Growth and Income Fund, may acquire
shares of other open-end investment companies to the extent permitted by
rule or order of the SEC exempting them from the limitations imposed by
Section 12(d)(1) of the 1940 Act.

15. Engage in option writing for speculative purposes or purchase call
or put options on securities if, as a result, more than 5% of its net
assets of the Fund would be invested in premiums on such options; or

16. Purchase any security issued by any company deriving more than 25%
of its gross revenues from the manufacture of alcohol or tobacco.

In addition to the fundamental policies which may only be changed by
shareholders, the Trust has made an undertaking with one state that the Growth
Fund shall not invest more than 5% of its total assets in special situations.
For purposes of this limitation, the Trust will consider a "special situation"
to include companies coming out of bankruptcy, companies in the process of
merger or reorganization or companies which in the opinion of management for
other reasons are in a severe state of flux. The Trust has made an undertaking
with another state that a Fund shall not acquire the securities of a closed-end
investment company if immediately following such acquisition the aggregate value
of all securities issued by closed-end investment companies owned by all Funds
shall exceed 10% of the value of the total assets of the acquiring Fund. When a
Fund invests in other investment companies, such investments may result in a
duplication of management and distribution fees and other operating expenses.
The Trust has also made an undertaking with that state that the Growth Fund,
Growth and Income Fund and Government Fund shall not invest in real estate
partnerships. The Trust has made an undertaking with certain states that at
least 30 days prior to any change by a Fund in its investment objective the Fund
will provide written notice to shareholders of such change and will waive any
fee if the shareholder redeems or exchanges the account. The Trust has
undertaken with a certain state that the Growth Fund and the Growth and Income
Fund limit its investments in restricted securities, unseasoned issuers and not
readily marketable securities to 15% of its total assets, provided, however,
that its investment in restricted securities will be limited to a maximum of 10%
of total assets.

The Trust has adopted additional investment restrictions, which may be
changed by the Trustees without a vote of shareholders, as follows:

The Trust shall not make short sales of securities unless at the time of
sale a Fund owns or has the right to acquire at no additional cost securities
identical to those sold short; provided that this prohibition does not apply to
the writing of options or the sale of forward contracts, futures, foreign
currency futures or related options.

FOREIGN INVESTMENTS. The Growth Fund, and the Growth, and Income Fund may
not invest in the securities of a foreign issuer if, at the time of acquisition,
more than 20% of the value of the Fund's total assets would be invested in such
securities.

FUTURES CONTRACTS AND OPTIONS. In addition, the Growth Fund and the Growth
and Income Fund may not write, purchase or sell puts, calls or combinations
thereof, except that each Fund may (a) write covered call options with respect
to any part or all of its portfolio securities, write secured put options, or
enter into closing purchase transactions with respect to such options, (b)
purchase and sell put options to the extent that the premiums paid for all such
options do not exceed 10% of its total assets and only if the Fund owns the
securities covered by the put option at the time of purchase, and (c) engage in
futures contracts and related options transactions as described herein.

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<PAGE> 44

closing or offsetting purchase transactions with respect to such options, (b)
purchase and sell options to the extent that the premiums paid for all such
options owned at any time do not exceed 10% of its total assets, and (c) engage
in futures contracts and related options transactions as described herein.

The Municipal Bond Fund may engage in futures contracts and related options
as described herein.

TRUSTEES AND EXECUTIVE OFFICERS

The Trustees and executive officers and their principal occupations for the
past five years are listed below.

DONALD M. CARLTON, Trustee. Radian Corporation, 8501 N. Mopac Blvd.,
Building No. 6, Austin, Texas 78759. Chief Executive Officer of Radian
Corporation (research and development); Director of The Hartford Steam Boiler
Inspection and Insurance Company (insurance/engineering services), Joy
Technologies, Inc. (manufacturer/servicer of coal mining equipment), and Medical
Polymers Technologies, Inc.(2)

A. BENTON COCANOUGHER, Trustee. Texas A & M University, 601 Blocker Bldg.,
College Station, Texas 77843-4113. Interim Senior Vice President and Dean of
College of Business Administration and Graduate School of Business of Texas A &
M University; Director of Randall's Food Markets, Inc.; formerly Senior Vice
President and Dean of the University of Houston.

STEPHEN RANDOLPH GROSS, Trustee. 2625 Cumberland Parkway, Suite 400,
Atlanta, Georgia 30339. Managing Partner of Gross, Collins & Cress, P.C.
(accounting firm); Director of Charter Bank & Trust.

NORMAN HACKERMAN, Trustee. The Robert A. Welch Foundation, 4605 Post Oak
Place, Suite 200, Houston, Texas 77027. Chairman of the Scientific Advisory
Board of The Robert A. Welch Foundation; Director of Scientific Measurement
Systems, Inc. (industrial tomography), Radian Corporation (research and
development), Fueltech, Inc. (combustion), Columbia Scientific Instruments, Inc.
(instrument manufacturing), Carbon Fuels Corp. (coal refinery), and American
General Series Portfolio Co. (mutual fund); President Emeritus of Rice
University, Houston, Texas; formerly Director of Electrosource, Inc. (lead
storage battery manufacturer), and Vista Chemical Co.(2)(3)

ROBERT D.H. HARVEY, Trustee. Nations Bank, 10 Light Street, P.O. Box 987,
Baltimore, Maryland 21203. Formerly Chairman of the Board, Chief Executive
Officer and Vice Chairman of the Board of Maryland National Bank, Baltimore,
Maryland (bank holding company).(2)

JEFFREY B. LANE, Trustee. 1345 Avenue of the Americas, New York, New York
10105. President, Director and Member of the Executive Committee of Smith
Barney, Harris Upham International Incorporated; Vice Chairman and Director of
Smith Barney Shearson Inc.; Director and Vice Chairman of Smith Barney, Inc.;
Director of the Long Island Jewish Medical Center, and Woodmere Academy;
formerly President of Shearson Lehman Brothers, Inc.; formerly President and
Director of Primerica Holdings, Inc.;

ALAN G. MERTEN, Trustee. Johnson Graduate School of Management, 303 Malott
Hall, Cornell University, Ithaca, New York 14853. The Anne and Elmer Lindseth
Dean of Johnson Graduate School of Management of Cornell University; Director of
Comshare, Inc. (information technology), and Tompkins County Trust Company,
Ithaca, New York.

STEVEN MULLER, Trustee. 1619 Massachusetts Avenue, N.W., Suite 711,
Washington, DC 20036. Chairman of The 21st Century Foundation (public affairs);
President Emeritus of The Johns Hopkins University; Director of Alex. Brown &
Sons, Inc., Beneficial Corp., and Millipore Corp. (bio-technology)(2)

F. ROBERT PAULSEN, Trustee. 2801 N. Indian Ruins, Tucson, Arizona 85715.
Dean Emeritus and Professor Emeritus of Higher Education of The University of
Arizona, Tucson, Arizona; Director of American General Series Portfolio Co.
(mutual fund). (2)(3)

R. RICHARDSON PETTIT, Trustee. Department of Finance, College of Business,
University of Houston, 4800 Calhoun, Houston, Texas 77204-6283. Duncan Professor
of Finance of the University of Houston; formerly Hanson Distinguished Professor
of Business of the University of Washington.

16
<PAGE> 45

DON G. POWELL, Chairman of the Board, Trustee and President. 2800 Post Oak
Blvd., Houston, Texas 77056. President, Chief Executive Officer and Director of
the Adviser; President, Chief Executive Officer and Director of VKAC.(1)(2)(4)

ALAN B. SHEPARD, JR., Trustee. 1512 Bonifacio Road, P.O. Box 63, Pebble
Beach, California 93953-0063. President of Seven Fourteen Enterprises, Inc.
(investments); Partner of Houston Partners (venture capital); Director of
Kwik-Kopy Corporation; formerly Director of Shaklee Corporation (direct
sales).(2)

MILLER UPTON, Trustee. 914 Tarrant Drive, Route 3, Box 85-A, Fontana,
Wisconsin 53125. Economist; Consultant; Director of American General Series
Portfolio Co. (mutual fund); formerly Director of Home Life Insurance Company of
New York, and Household International, Inc.(2)(3)

BENJAMIN N. WOODSON, Trustee. 2727 Allen Parkway, Suite 460, Houston, Texas
77019-2115. Consultant; formerly Partner of John L. Wortham and Son (insurance);
Director of Mitchell Energy and Development Corp.; formerly Chairman of the
Board and Chief Executive Officer of American General Corporation; and formerly
Chairman of the Board and Director of the Subadviser.(2)

STEPHEN L. BOYD, Vice President. 2800 Post Oak Blvd., Houston, Texas 77056.
Senior Vice President -- Portfolio Manager of the Adviser; Vice President and
Portfolio Manager of American Capital Enterprise Fund, Inc., American Capital
Exchange Fund, and the Growth Fund of Common Sense Trust; formerly Senior Vice
President and Chief Investment Officer of Wertheim Asset Management Services,
Inc.(4)

KENNETH S. DURHAM, Vice President. 3100 Breckinridge Blvd., Bldg. 200,
Duluth, Georgia 30199-0001. President of the Distributor; President and Director
of PFS Distributors, Inc.; President of PFS Investments Inc., ("PFS
Investments"); Vice President of the Transfer Agent; Vice President of PFS
Services, Inc.; Director of PFS Asset Management, Inc.; formerly Marketing
Manager of PFS Distributors, Inc.

ROBERT B. EVANS, Vice President. 2800 Post Oak Blvd., Houston, Texas 77056.
Vice President and Portfolio Manager of American Capital Municipal Bond Fund,
Inc., the High Yield Municipal Portfolio and the Insured Municipal Portfolio of
American Capital Tax-Exempt Trust, American Capital Texas Municipal Securities,
Inc., the Municipal Bond Fund of Common Sense Trust, and Mosher, Inc. Mr. Evans
has been associated with the Adviser since 1991.(4)

HUEY P. FALGOUT, JR. Assistant Secretary. 2800 Post Oak Blvd., Houston,
Texas 77056. Vice President and Assistant Secretary of the Adviser. Formerly
associate with Johnson and Gibbs.(4)

NORI L. GABERT, Vice President and Secretary. 2800 Post Oak Blvd., Houston,
Texas 77056. Vice President, Associate General Counsel and Secretary of the
Adviser.(4)

JAMES A. GILLIGAN, Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Vice President-Portfolio Manager of the Adviser; Vice President and
Portfolio Manager of American Capital Equity Income Fund, Inc., American Capital
Growth and Income Fund, Inc., and American Capital Utilities Income Fund, Inc.
Formerly Security Analyst of the Adviser.(4)

JOHN A. HELMS, Vice President. 3120 Breckinridge Blvd., Bldg. 1200, Duluth,
Georgia 30199-0001. Executive Vice President and Secretary of PFS Asset
Management, Inc., PFS Custodial Services, Inc., PFS Investments Inc., PFS
Distributors, Inc., PFS Services, Inc., PFS Primerica Corporation and Primerica
Financial; Vice President and Secretary of the Distributor, the Transfer Agent
and CSCS; Executive Vice President, Clerk/Secretary and Director of Primerica
Life Insurance Company; Assistant General Counsel of Primerica; Executive Vice
President, Vice President and/or Secretary of several other affiliates and
subsidiaries of PFS Primerica Corporation; formerly a Partner in the law firm of
Trotter, Smith and Jacobs; formerly Senior Vice President, General Counsel,
Secretary and Director of Life of Georgia; and Senior Vice President, General
Counsel and Secretary of Georgia U.S. Corporation.

GARY M. LEWIS, Vice President. 2800 Post Oak Blvd., Houston, Texas 77056.
Vice President -- Portfolio Manager of the Adviser since December 1987.

17
<PAGE> 46

TANYA M. LODEN, Vice President and Controller. 2800 Post Oak Blvd.,
Houston, Texas 77056. Vice President and Controller of most of the investment
companies advised by the Adviser; formerly Tax Manager/Assistant Controller.(4)

CURTIS W. MORELL, Vice President and Treasurer. 2800 Post Oak Blvd.,
Houston, Texas 77056. Vice President and Treasurer of most of the investment
companies advised by the Adviser.(4)

ROBERT C. PECK, JR., Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Senior Vice President -- Chief Investment Officer/Fixed Income and
Director of the Adviser.(4)

JOHN R. REYNOLDSON, Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Senior Vice President -- Portfolio Manager of the Adviser; Vice President
and Portfolio Manager of the Government Fund of Common Sense Trust, American
Capital Government Target Series -- Portfolio '97, American Capital Life
Investment Trust -- Government Portfolio, American Capital World Portfolio
Series, Inc. -- American Capital Global Government Securities Fund, American
Capital Federal Mortgage Trust, American Capital Government Securities, Inc. and
American Capital U.S. Government Trust for Income.(4)

ALAN T. SACHTLEBEN, Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Senior Vice President -- Chief Investment Officer/Equity and Director of
the Subadviser; Executive Vice President Van Kampen American Capital, Inc.(4)

DAVID R. TROTH, Vice President. 2800 Post Oak Blvd., Houston, Texas 77056.
Senior Investment Vice President of the Adviser; Vice President and Portfolio
Manager of American Capital Bond Fund, Inc., American Capital Corporate Bond
Fund, Inc., the Money Market Fund of Common Sense Trust, American Capital
Reserve Fund, Inc., and the Money Market Portfolio of American Capital Life
Investment Trust.(4)

D. RICHARD WILLIAMS, Vice President. 3120 Breckinridge Blvd., Duluth,
Georgia 30199-0001. Chief Executive Officer and General Manager of the
Distributor; President, General Manager, and Chief Executive Officer of the
Transfer Agent; President of CSCS; Chief Financial Officer and Treasurer of
Primerica Financial; Director, Chief Executive Officer and Executive Committee
Member of PFS Investments Inc.; Director and Chief Executive Officer of PFS
Distributors, Inc.; President Chief Executive Officer and Director of PFS Asset
Management, Inc. and PFS Services, Inc.; President and Director of PFS Custodial
Services, Inc.; Vice Chairman, Executive Committee Member, Investment Committee
Member, Co-Chief Executive Officer, Chief Financial Officer and Director of
Primerica Life Insurance Company.

J. DAVID WISE, Assistant Secretary. 2800 Post Oak Blvd., Houston, Texas
77056. Vice President, Associate General Counsel, Compliance Review Officer and
Assistant Secretary of the Adviser.(4)

PAUL R. WOLKENBERG, Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. President and Senior Vice President of the Adviser; President and Chief
Operating Officer of Van Kampen American Capital Services, Inc.; Executive Vice
President and Chief Operating Officer of Van Kampen American Capital Trust
Company; Executive Vice President of Van Kampen American Capital Shareholder
Services, Inc.(4)
---------------

(1) A director or trustee of American Capital Comstock Fund, Inc., American
Capital Corporate Bond Fund, Inc., American Capital Emerging Growth Fund,
Inc., American Capital Enterprise Fund, Inc., American Capital Equity
Income Fund, Inc., American Capital Federal Mortgage Trust, American
Capital Global Managed Assets Fund, Inc., American Capital Government
Securities, Inc., American Capital Government Target Series, American
Capital Growth and Income Fund, Inc., American Capital American Capital
Harbor Fund, Inc., American Capital High Yield Investments, Inc., American
Capital Life Investment Trust, American Capital Municipal Bond Fund, Inc.,
American Capital Pace Fund, Inc., American Capital Real Estate Securities
Fund, Inc., American Capital Reserve Fund, Inc., American Capital Small
Capitalization Fund, Inc., American Capital Tax-Exempt Trust, American
Capital Texas Municipal Securities, Inc., American Capital U.S. Government
Trust for Income, American Capital Utilities Income Fund, Inc. and American
Capital World Portfolio Series, Inc.
(Footnotes continued on following page)

18
<PAGE> 47

(2) A director of American Capital Bond Fund, Inc., American Capital
Convertible Securities, Inc. and American Capital Income Trust, closed-end
investment companies not advised by the Adviser.

(3) Managing General Partner of American Capital Exchange Fund, an open-end
investment company not advised by the Adviser.

(4) An officer and/or director/trustee of other investment companies advised or
subadvised by the Adviser.

The trustees and officers of the Trust as a group own less than one percent
of the outstanding shares of the Trust. The trustees who are not affiliated with
the Adviser or Distributor initially will be compensated by the Trust at the
annual rate of $19,480 plus a fee of $1,299 per day for each Board meeting
attended. During the fiscal period ended October 31, 1994, the Trustees who were
not affiliated with the Adviser received as a group $129,554, $66,512, $46,460,
$34,392, and $30,688 in Trustees' fees from Growth Fund, Growth and Income Fund,
Government Fund, Municipal Bond Fund and Money Market Fund, respectively, in
addition to certain out-of-pocket expenses.

Additional information regarding compensation paid by the Funds and the
related mutual funds for which the Trustees serve as directors or trustees noted
above is set forth below. The compensation shown for the Funds is for the fiscal
year ended October 31, 1994, while the total compensation shown for the Funds
and other related mutual funds is for the calendar year ended December 31, 1994.
Messrs. Lane and Powell are not compensated for their service as Trustees,
because of their affiliation with the Distributor and the Advisor, respectively.

COMPENSATION TABLE

<TABLE>
<CAPTION>
PENSION OR TOTAL(1)
RETIREMENT COMPENSATION
AGGREGATE COMPENSATION BENEFITS FROM REGISTRANT
FROM REGISTRANT ACCRUED AS AND FUND
------------------------------------------ PART OF FUND COMPLEX PAID
NAME OF PERSON G G/I GVT MB MM EXPENSES TO DIRECTORS
------------------------------ ------ ----- ----- ----- ----- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Dr. Donald M. Carlton......... 9,720 4,426 3,148 2,195 2,006 N/A 38,000
Dr. A. Benton Cocanougher..... 12,410 5,770 4,163 2,935 2,716 N/A 38,000
Stephen Randolph Gross........ 13,784 6,470 4,603 3,245 2,996 N/A 42,000
Dr. Norman Hackerman.......... 9,720 4,426 3,148 2,195 2,006 N/A 47,000
Robert D. H. Harvey........... 11,094 5,126 3,588 2,505 2,286 N/A 42,000
Dr. Alan G. Merten............ 11,720 5,460 3,943 2,780 2,576 N/A 36,000
Dr. Steven Muller............. 9,720 4,426 3,148 2,195 2,006 N/A 38,000
Dr. F. Robert Paulsen......... 13,955 6,548 4,658 3,284 3,031 N/A 52,000
Dr. R. Richardson Pettit...... 12,410 5,770 4,163 2,935 2,716 N/A 38,000
Alan B. Shepard, Jr........... 13,285 6,238 4,433 3,129 2,891 N/A 48,250
Miller Upton.................. 9,720 4,426 3,148 2,195 2,006 N/A 47,000
Benjamin N. Woodson........... 9,720 4,426 3,148 2,195 2,006 N/A 38,000
</TABLE>

---------------

(1) Reflects thirteen investment companies in the fund complex. Amounts
reflected are for the calendar year ended December 31, 1994.

Legend:

G = Growth Fund
G/I = Growth and Income Fund
GVT = Government Fund
MB = Municipal Bond Fund
MM = Money Market Fund

19
<PAGE> 48

INVESTMENT ADVISORY AGREEMENT

The Trust and the Adviser are parties to a separate Investment Advisory
Agreement, for each Fund dated December 20, 1994 (each, an "Advisory Agreement"
and together, the "Advisory Agreements"). Under the Advisory Agreements, the
Trust retains the Adviser to manage the investment of its assets and to place
orders for the purchase and sale of its portfolio securities. The Adviser is
responsible for obtaining and evaluating economic, statistical, and financial
data and for formulating and implementing investment programs in furtherance of
each Fund's investment objectives. The Adviser also furnishes at no cost to the
Trust (except as noted herein) the services of sufficient executive and clerical
personnel for the Trust as are necessary to prepare registration statements,
prospectuses, shareholder reports, and notices and proxy solicitation materials.
In addition, the Adviser furnishes at no cost to the Trust the services of a
President of the Trust, one or more Vice Presidents as needed, and a Secretary.

Under the Advisory Agreements, the Trust bears the cost of its accounting
services, which includes maintaining its financial books and records and
calculating the daily net asset value of each Fund. The costs of such accounting
services include the salaries and overhead expenses of a Treasurer or other
principal financial officer and the personnel operating under his direction. The
services are provided at cost which is allocated among all investment companies
advised or subadvised by the Adviser. The Trust also pays transfer agency fees,
custodian fees, legal fees, the costs of reports to shareholders and all other
ordinary expenses not specifically assumed by the Adviser.

The Trust retains the Adviser to manage the investment of its assets and to
place orders for the purchase and sale of its portfolio securities. Under the
relevant Advisory Agreement, the Trust pays the Adviser an annual fee for the
Growth and Income Fund and the Growth Fund calculated separately for each Fund,
at the rate of 0.65% of the first $1 billion of the Fund's average daily net
assets; 0.60% of the next $1 billion of the Fund's average daily net assets;
0.55% of the next $1 billion of the Fund's average daily net assets; 0.50% of
the next $1 billion of the Fund's average daily net assets; and 0.45% of the
Fund's average daily net assets in excess of $4 billion. The Trust pays the
Adviser an annual fee for the Government Fund at the rate of 0.60% of the first
$1 billion of the Fund's average daily net assets; 0.55% of the next $1 billion
of the Fund's average daily net assets; 0.50% of the next $1 billion of the
Fund's average daily net assets; 0.45% of the next $1 billion of the Fund's
average daily net assets; 0.40% of the next $1 billion of the Fund's average
daily net assets; and 0.35% of the Fund's average daily net assets in excess of
$5 billion. The Trust pays the Adviser an annual fee for the Money Market Fund
at the rate of 0.50% of the first $2 billion of the Fund's average daily net
assets; 0.475% of the next $2 billion of the Fund's average daily net assets;
and 0.45% of the Fund's average daily net assets in excess of $4 billion. The
Trust pays the Adviser an annual fee for the Municipal Bond Fund at the rate of
0.60% of the first $1 billion of the Fund's average daily net assets; 0.55% of
the next $1 billion of the Fund's average daily net assets; 0.50% of the next $1
billion of the Fund's average daily net assets; and 0.45% of the Fund's average
daily net assets in excess of $3 billion.

The average daily net assets of each Fund are determined by taking the
average of all of the determinations of net asset value of such Fund for each
business day during a given calendar month. Such fee is payable for each
calendar month as soon as practicable after the end of that month. The fee
payable to the Adviser is reduced by any commissions, tender solicitation and
other fees, brokerage or similar payments received by the Adviser or any direct
or indirect majority owned subsidiary of VKAC in connection with the purchase
and sale of portfolio investments of the Trust, less any direct expenses
incurred by such person in connection with the purchase and sale of portfolio
investments of the Trust, less any direct expense incurred by the Adviser or
such person under common control with the Adviser in connection with obtaining
such payments. The Adviser agrees to use its best efforts to recapture tender
solicitation fees and exchange offer fees for the Trust's benefit, and to advise
the Trustees of any other commissions, fees, brokerage or similar payments which
may be possible under applicable laws for the Adviser or any direct or indirect
majority owned subsidiary of VKAC to receive in connection with the Trust's
portfolio transactions or other arrangements which may benefit the Trust.

20
<PAGE> 49

The following table shows expenses paid under the relevant investment
advisory agreement during the periods ended October 31, 1992, 1993 and 1994:

<TABLE>
<CAPTION>
GROWTH/ MONEY
GROWTH INCOME GOVERNMENT MUNICIPAL MARKET
---------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
OCTOBER 31, 1992
Accounting Services................... $ 163,784 $ 93,394 $ 66,407 $ 70,515 $ 48,280
Gross Advisory Fees................... 9,378,000 3,542,235 1,377,297 300,065 389,646
Contractual Expense Reimbursement..... -- -- -- -- --
Voluntary Expense Reimbursement....... -- -- -- -- (464,111)

OCTOBER 31, 1993
Accounting Services................... $ 245,804 $ 127,908 $ 93,300 $ 87,585 $ 61,162
Gross Advisory Fees................... 11,859,114 4,286,890 1,980,457 462,361 329,080
Contractual Expense Reimbursement..... -- -- -- -- --
Voluntary Expense Reimbursement....... -- -- -- (66,000) (486,724)

OCTOBER 31, 1994
Accounting Services................... $ 257,665 $ 122,188 $ 98,937 $ 95,639 $ 59,296
Gross Advisory Fees................... 13,176,814 4,599,033 2,122,662 639,343 282,897
Contractual Expense Reimbursement..... -- -- -- -- --
Voluntary Expense Reimbursement....... -- -- -- -- (475,398)
</TABLE>

The Advisory Agreements also provide that, in the event the ordinary
business expenses of the Trust, calculated separately for each Fund, for any
fiscal year should exceed the most restrictive expense limitation applicable in
the states where the Trust's shares are qualified for sale, unless waived, the
compensation due the Adviser will be reduced by the amount of such excess and
that, if a reduction in and refund of the advisory fee is insufficient, the
Adviser will pay the Trust monthly an amount sufficient to make up the
deficiency, subject to readjustment during the year. Ordinary business expenses
do not include (1) interest and taxes, (2) brokerage commissions and (3) certain
litigation and indemnification expenses as described in the Advisory Agreements.
The Advisory Agreements also provide that the Adviser shall not be liable to the
Trust for any actions or omissions if it acted in good faith without negligence
or misconduct.

Each Advisory Agreement has an initial term of two years and thereafter
with respect to each Fund may be continued from year to year if specifically
approved at least annually (a)(i) by the Trustees or (ii) by vote of a majority
of the Fund's outstanding voting securities, and (b) by the affirmative vote of
a majority of the Trustees who are not parties to the agreement or interested
persons of any such party by votes cast in person at a meeting called for such
purpose. The Advisory Agreements provide that they shall terminate automatically
if assigned and that they may be terminated without penalty by either party on
60 days' written notice.

Currently, the most restrictive applicable limitations are 2 1/2% of the
first $30 million, 2% of the next $70 million, and 1 1/2% of the remaining
average net assets. The Trust has received from California (the state with the
most restrictive expense limitation) a waiver, effective retroactive to the
inception of the Trust, which allows each Fund to exclude shareholder service
costs from the calculation of the expense limitation.

DISTRIBUTOR

The Distributor acts as the principal underwriter of the shares of the
Trust pursuant to a written agreement, dated December 15, 1988 for the Funds
("Underwriting Agreement"). The Distributor has entered into a selling agreement
with PFS Investments giving PFS Investments the exclusive right to sell shares
of each Fund of the Trust on behalf of the Distributor. The Distributor's
obligation is an agency or "best efforts" arrangement under which the
Distributor is required to take and pay only for such shares of each Fund as may
be sold to the public. The Distributor is not obligated to sell any stated
number of shares. The Underwriting Agreement is renewable from year to year if
approved (a) by the Trustees or by a vote of a majority of the Trust's
outstanding voting securities, and (b) by the affirmative vote of a majority of
Trustees

21
<PAGE> 50

who are not parties to the Agreement or interested persons of any party by votes
cast in person at a meeting called for such purpose. The Underwriting Agreement
provides that it will terminate if assigned, and that it may be terminated
without penalty by either party on 60 days' written notice.

The following table shows commissions paid, amounts retained by the
Distributor and amounts received by PFS Investments under a predecessor
Underwriting Agreement during the periods ended October 31, 1992, 1993 and 1994:

<TABLE>
<CAPTION>
GROWTH/ MONEY
GROWTH INCOME GOVERNMENT MUNICIPAL MARKET
---------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
OCTOBER 31, 1992
Total Underwriting
Commissions................... $30,250,895 $8,845,022 $5,508,146 $1,068,546 *
Amount Retained By
Distributor................... 5,235,207 1,508,633 804,176 76,381 *
Amount Received By PFS
Investments................... 25,015,688 7,336,389 4,703,970 992,165 *

OCTOBER 31, 1993
Total Underwriting
Commissions................... $31,727,768 $8,782,190 $5,678,658 $1,573,390 *
Amount Retained By
Distributor................... 5,573,955 1,521,976 839,178 178,528 *
Amount Received By PFS
Investments................... 26,153,813 7,260,214 4,839,480 1,394,862 *

OCTOBER 31, 1994
Total Underwriting
Commissions................... $27,792,315 $7,234,018 $3,530,139 $1,718,186 *
Amount Retained By
Distributor................... 4,911,391 1,262,647 516,793 197,479 *
Amount Received By PFS
Investments................... 22,880,924 5,971,371 3,013,346 1,520,707 *
</TABLE>

---------------

* Not Applicable.

The Distributor bears the cost of printing (but not typesetting)
prospectuses used in connection with this offering and the cost and expense of
supplemental sales literature, promotion and advertising. The Trust pays all
expenses attributable to the registrations of its shares under federal and state
blue sky laws, including registration and filing fees, the cost of preparation
of the prospectuses, related legal and auditing expenses, and the cost of
printing prospectuses for current shareholders.

PORTFOLIO TURNOVER

The portfolio turnover rate may vary greatly from year to year as well as
within a year. Each Fund's portfolio turnover rate for prior years is shown
under the "Financial Highlights" in the Prospectus.

PORTFOLIO TRANSACTIONS AND BROKERAGE

The Adviser is responsible for decisions to buy and sell securities for the
Trust and for the placement of its portfolio business and the negotiation of any
commissions paid on such transactions. It is the policy of the Adviser to seek
the best security price available with respect to each transaction. In
over-the-counter transactions, orders are placed directly with a principal
market maker unless it is believed that a better price and execution can be
obtained by using a broker. Except to the extent that the Trust may pay higher
brokerage commissions for brokerage and research services (as described below)
on a portion of its transactions executed on securities exchanges, the Adviser
seeks the best security price at the most favorable commission rate. From time
to time the Fund may place brokerage transactions with affiliated persons of the
Adviser. In selecting broker/dealers and in negotiating commissions, the Adviser
considers the firm's reliability, the quality of its execution services on a
continuing basis and its financial condition. When more than one firm is
believed to meet these criteria, preference may be given to firms which also
provide research services to the Trust or the Adviser.

22
<PAGE> 51

Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)")
permits an investment adviser, under certain circumstances, to cause an account
to pay a broker or dealer who supplies brokerage and research services a
commission for effecting a securities transaction in excess of the amount of
commission another broker or dealer would have charged for effecting the
transaction. Brokerage and research services include (a) furnishing advice as to
the value of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of
securities, (b) furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy, and the performance
of accounts, (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody), and (d)
furnishing other products or services that assist the Adviser in fulfilling
their investment-decision making responsibilities.

Pursuant to provisions of the relevant Advisory Agreement, the Trustees
have authorized the Adviser to cause the Trust to incur brokerage commissions in
an amount higher than the lowest available rate in return for research services
provided to the Adviser. The Adviser is of the opinion that the continued
receipt of supplemental investment research services from dealers is essential
to its provision of high quality portfolio management services to the Trust. The
Adviser undertakes that such higher commissions will not be paid by the Trust
unless (a) the Adviser determines in good faith that the amount is reasonable in
relation to the services in terms of the particular transaction or in terms of
the Adviser's overall responsibilities with respect to the accounts as to which
it exercises investment discretion, (b) such payment is made in compliance with
the provisions of Section 28(e) and other applicable state and federal laws, and
(c) in the opinion of the Adviser, the total commissions paid by the Trust are
reasonable in relation to the expected benefits to the Trust over the long term.
The investment advisory fees paid by the Trust under the Advisory Agreements are
not reduced as a result of the Adviser's receipt of research services.

Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to seeking best execution and such other
policies as the Trustees may determine, the Adviser may consider sales of shares
of the Trust as a factor in the selection of firms to execute portfolio
transactions for the Trust.

The Adviser places portfolio transactions for other advisory accounts
including other investment companies. Research services furnished by firms
through which the Trust effects its securities transactions may be used by the
Adviser in servicing all of its accounts; not all of such services may be used
by the Adviser in connection with the Trust. In the opinion of the Adviser, the
benefits from research services to the Funds of the Trust and to the accounts
managed by the Subadviser cannot be measured separately. Because the volume and
nature of the trading activities of the accounts are not uniform, the amount of
commissions in excess of the lowest available rate paid by each account for
brokerage and research services will vary. However, in the opinion of the
Adviser, such costs to the Trust will not be disproportionate to the benefits
received by the Trust on a continuing basis.

The Adviser will seek to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities by the Trust and
other accounts that the Adviser may establish in the future. In some cases, this
procedure could have an adverse effect on the price or the amount of securities
available to the Trust. In making such allocations among the Trust and other
advisory accounts, the main factors considered by the Adviser are the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investment commitments generally held, and opinions of the persons responsible
for recommending the investment.

23
<PAGE> 52

The following table summarizes for each Fund the total brokerage
commissions paid, the amount of commissions paid to brokers selected primarily
on the basis of research services provided to the Adviser and the value of these
specific transactions.

<TABLE>
<CAPTION>
GROWTH/ MONEY
GROWTH INCOME GOVERNMENT MUNICIPAL MARKET
-------------- ------------ ---------- --------- --------
<S> <C> <C> <C> <C> <C>
1992
Total Brokerage Commission......... $ 5,492,762 $ 627,887 $ 80,115 $ -- $ --
Commissions for Research
Services......................... 787,306 187,799 -- -- --
Value of Research Transactions..... 753,698,425 136,084,797 -- -- --

1993
Total Brokerage Commissions........ 8,686,133 930,176 117,279 -- --
Commissions for Research
Services......................... 2,438,199 394,229 -- -- --
Value of Research Transactions..... 3,176,926,784 500,523,383 -- -- --

1994
Total Brokerage Commissions........ 8,521,566 1,845,028 94,887 -- --
Commissions for Research
Services......................... 2,509,260 539,629 -- -- --
Value of Research Transactions..... 1,715,386,926 350,246,609 -- -- --
</TABLE>

The Funds may from time to time place brokerage transactions with brokers
that may be considered affiliated persons of the Adviser. The negotiated
commission paid to an affiliated broker on any transaction would be comparable
to that payable to a non-affiliated broker in a similar transaction. The Funds
(except Growth Fund) conducted no affiliated brokerage transactions with
Jefferies prior to the end of the last fiscal year.

The Funds paid the following commissions to these brokers during the
periods shown:

Commissions Paid:

<TABLE>
<CAPTION>
SMITH DAIN RAUSCHER
FISCAL 1992 COMMISSIONS JEFFERIES BARNEY FOX-PITT BOSWORTH PIERCE
------------------------------------ --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Growth........................................ $ 9,471 $112,518 -- $ 700 --
Growth & Income............................... -- 33,157 -- 1,400 --
Government.................................... -- 16,609 -- -- --
Municipal Bond................................ -- -- -- -- --
Money Market.................................. -- -- -- -- --
</TABLE>

<TABLE>
<CAPTION>
SMITH DAIN RAUSCHER
FISCAL 1992 PERCENTAGES JEFFERIES BARNEY FOX-PITT BOSWORTH PIERCE
------------------------------------ --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commissions with affiliates to total
commissions
Growth...................................... .17% 2.05% -- .01% --
Growth & Income............................. -- 5.28% -- .22% --
Government.................................. -- 20.73% -- -- --
Municipal Bond.............................. -- -- -- -- --
Money Market................................ -- -- -- -- --
</TABLE>

<TABLE>
<CAPTION>
VALUE OF TRANSACTIONS WITH SMITH DAIN RAUSCHER
AFFILIATES TO TOTAL TRANSACTIONS JEFFERIES BARNEY FOX-PITT BOSWORTH PIERCE
------------------------------------ --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Growth........................................ .09% 5.99% -- .01% --
Growth & Income............................... -- 13.81% -- .12% --
Government.................................... -- 20.61% -- -- --
Municipal Bond................................ -- -- -- -- --
Money Market.................................. -- -- -- -- --
</TABLE>

(Table continued on following page)

24
<PAGE> 53

<TABLE>
<CAPTION>
ROBINSON SMITH DAIN RAUSCHER
FISCAL 1993 COMMISSIONS HUMPHREY JEFFERIES BARNEY FOX-PITT BOSWORTH PIERCE
------------------------------------ -------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Growth.............................. $ 4,354 -- $163,304 -- -- --
Growth & Income..................... 2,023 -- 96,883 -- -- --
Government.......................... -- -- 21,696 -- -- --
Municipal Bond...................... -- -- -- -- -- --
Money Market........................ -- -- -- -- -- --
</TABLE>

<TABLE>
<CAPTION>
ROBINSON SMITH DAIN RAUSCHER
FISCAL 1993 PERCENTAGES HUMPHREY JEFFERIES BARNEY FOX-PITT BOSWORTH PIERCE
------------------------------------ -------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Growth.............................. .05% -- 1.88% -- -- --
Growth & Income..................... .22% -- 10.42% -- -- --
Government.......................... -- -- 18.50% -- -- --
Municipal Bond...................... -- -- -- -- -- --
Money Market........................ -- -- -- -- -- --
</TABLE>

<TABLE>
<CAPTION>
VALUE OF TRANSACTIONS WITH ROBINSON SMITH DAIN RAUSCHER
AFFILIATES TO TOTAL TRANSACTIONS HUMPHREY JEFFERIES BARNEY FOX-PITT BOSWORTH PIERCE
------------------------------------ -------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Growth.............................. .05% -- 6.61% -- -- --
Growth & Income..................... .25% -- 20.87% -- -- --
Government.......................... -- -- 17.37% -- -- --
Municipal Bond...................... -- -- -- -- -- --
Money Market........................ -- -- -- -- -- --
</TABLE>

<TABLE>
<CAPTION>
ROBINSON SMITH
FISCAL 1994 COMMISSIONS HUMPHREY BARNEY
------------------------------------ -------- --------
<S> <C> <C>
Growth.............................. $17,369 $259,504
Growth & Income..................... 1,673 102,408
Government.......................... -- 14,718
Municipal Bond...................... -- --
Money Market........................ -- --
</TABLE>

<TABLE>
<CAPTION>
ROBINSON SMITH
FISCAL 1994 PERCENTAGES HUMPHREY BARNEY
------------------------------------ -------- --------
<S> <C> <C>
Commissions with affiliates to total
commissions
Growth............................ .20% 3.05%
Growth & Income................... .09% 5.55%
Government........................ -- 15.51%
Municipal Bond.................... -- --
</TABLE>

<TABLE>
<CAPTION>
VALUE OF TRANSACTIONS WITH ROBINSON SMITH
AFFILIATES TO TOTAL TRANSACTIONS HUMPHREY BARNEY
------------------------------------ -------- --------
<S> <C> <C>
Growth.............................. .13% 10.14%
Growth & Income..................... .06% 13.44%
Government.......................... -- 16.67%
Municipal Bond...................... -- --
Money Market........................ -- --
</TABLE>

DETERMINATION OF NET ASSET VALUE

The net asset value of the shares of each Fund is determined each day the
New York Stock Exchange (the "Exchange") is open. The Exchange is currently
closed on weekends and on the following holidays: New Year's Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.

25
<PAGE> 54

GROWTH FUND AND GROWTH AND INCOME FUND NET ASSET VALUATION

The net asset value of each Fund is computed by (i) valuing securities
listed or traded on a national securities exchange at the last reported sales
price, or if there has been no sale that day at the last reported bid price,
using prices as of the close of trading on the Exchange, (ii) valuing unlisted
securities for which over-the-counter market quotations are readily available at
the most recent bid price as supplied by the National Association of Securities
Dealers Automated Quotations (NASDAQ) or by broker-dealers, and (iii) valuing
any securities for which market quotations are not readily available, and any
other assets at fair value as determined in good faith by the Trustees. Options
on stocks, options on stock indexes and stock index futures contracts and
options thereon, which are traded on exchanges, are valued at their last sales
or settlement price as of the close of such exchanges, or, if no sales are
reported, at the mean between the last reported bid and asked prices. Debt
securities with a remaining maturity of 60 days or less are valued on an
amortized cost basis which approximates market value.

Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
on each business day in New York (i.e., a day on which the Exchange is open). In
addition, European or Far Eastern trading generally or in a particular country
or countries may not take place on all business days in New York. Furthermore,
trading takes place on all business days in Japanese markets on certain
Saturdays and in various foreign markets on days which are not business days in
New York and on which the Funds' net asset values are not calculated and on
which the Trust does not effect sales, redemptions and repurchases of its
shares. There may be significant variations in the net asset value of Fund
shares on days when net asset value is not calculated and on which shareholders
cannot redeem on account of changes in prices of stocks traded in foreign stock
markets.

GOVERNMENT FUND NET ASSET VALUATION

U.S. Government securities are traded in the over-the-counter market and
are valued at the last available bid price. Such valuations are based on
quotations of one of more dealers that make markets in the securities as
obtained from such dealers or from a pricing service. Options and interest rate
futures contracts and options thereon, which are traded on exchanges, are valued
at their last sales or settlement price as of the close of such exchanges, or,
if no sales are reported, at the mean between the last reported bid and asked
prices. Securities with a remaining maturity of 60 days or less are valued on an
amortized cost basis which approximates market value. Securities and assets for
which market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Trustees. Such
valuations and procedures will be reviewed periodically by the Trustees.

MUNICIPAL BOND FUND NET ASSET VALUATION

Municipal Bonds owned by the Fund are valued by an independent pricing
service ("Service"). When, in the judgment of the Service, quoted bid prices for
investments are readily available and are representative of the bid side of the
market, these investments are valued at such quoted bid prices (as obtained by
the Service from dealers in such securities). Other investments are carried at
fair value as determined by the Service, based on methods which include
consideration of: yields or prices of municipal bonds of comparable quality,
coupon, maturity and type; indications as to values from dealers; and general
market conditions. The Service may employ electronic data processing techniques
and/or a matrix system to determine valuations. Any assets which are not valued
by the Service would be valued at fair value using methods determined in good
faith by the Trustees.

MONEY MARKET FUND NET ASSET VALUATION

The valuation of the Fund's portfolio securities is based upon their
amortized cost, which does not take into account unrealized capital gains or
losses. Amortized cost valuation involves initially valuing an instrument at its
cost and thereafter, assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating interest rates on
the market value of the instrument. While

26
<PAGE> 55

this method provides certainty in valuation, it may result in periods during
which value, as determined by amortized cost, is higher or lower than the price
that the Fund would receive if it sold the instrument.

The Fund's use of the amortized cost method of valuing its portfolio
securities is permitted by a rule adopted by the Securities and Exchange
Commission ("SEC"). Under this rule, the Fund must maintain a dollar-weighted
average portfolio maturity of 90 days or less, purchase only instruments having
remaining maturities of thirteen months or less and invest only in securities
determined by the Adviser to be of eligible quality with minimal credit risks.

The Trustees have established procedures reasonably designed, taking into
account current market conditions and the Fund's investment objective, to
stabilize the net asset value per share for purposes of sales and redemptions at
$1.00. These procedures include review by the Trustees, at such intervals as it
deems appropriate, to determine the extent, if any, to which the net asset value
per share calculated by using available market quotations deviates from $1.00
per share based on amortized cost. In the event such deviation should exceed
four tenths of one percent, the Trustees are required to promptly consider what
action, if any, should be initiated. If the Trustees believe that the extent of
any deviation from a $1.00 amortized cost price per share may result in material
dilution or other unfair results to new or existing shareholders, it will take
such steps as it considers appropriate to eliminate or reduce these consequences
to the extent reasonably practicable. Such steps may include selling portfolio
securities prior to maturity; shortening the average maturity of the portfolio;
withholding or reducing dividends; suspending sales of new shares; or utilizing
a net asset value per share determined by using available market quotations.

PURCHASE AND REDEMPTION OF SHARES

Shares of the Trust are offered continuously, and may be purchased on any
business day, through PFS Investments. The offering price for the Government
Fund, the Growth Fund, the Growth and Income Fund and the Municipal Bond Fund,
the is the net asset value per share next determined after an order is received
(see "Determination of Net Asset Value"), plus a sales charge as shown in the
Prospectus under "Sales Charge Tables." Shares of the Money Market Fund are
offered at net asset value without a sales charge.

INVESTMENTS BY MAIL

A Shareholder Investment Account may be opened by completing the
application included in the Prospectus and forwarding the application, through
PFS Investments to the Transfer Agent at 3100 Breckinridge Boulevard, Bldg. 200,
Duluth, Georgia 30199-0062. The account is opened only upon acceptance of the
application by the Transfer Agent. The minimum initial investment of $250 or
more in the form of a check payable to the Trust, must accompany the
application. This minimum may be waived by the Distributor for plans involving
continuing investments. Subsequent investments of $25 or more may be mailed
directly to the Transfer Agent. All such investments (except purchase of shares
of the Money Market Fund) are made at the public offering price of the Fund's
shares next computed following receipt of payment by the Transfer Agent.
Confirmations of the opening of an account and of all subsequent transactions in
the account are forwarded by the Transfer Agent to the shareholder.

In processing applications and investments, the Transfer Agent acts as
agent for the investor and for PFS Investments and also as agent for the
Distributor, in accordance with the terms of the Prospectus. If the Transfer
Agent ceases to act as such, a successor company named by the Trust will act in
the same capacity so long as the account remains open.

CUMULATIVE PURCHASE DISCOUNT

The reduced sales load reflected in the sales charge table as shown in the
Prospectus under "Sales Charge Tables" applies to purchases of Growth Fund's and
Growth and Income Fund's shares where the aggregate investment is $10,000 or
more, to purchases of Government Fund's shares where the aggregate investment is
$25,000 or more, to purchases of Municipal Bond Fund's shares where the
aggregate investment is $100,000 or more. An aggregate investment includes all
shares of all of the above Funds and shares of other Common Sense Funds (except
the Money Market Fund) previously purchased and still owned, plus the shares
being

27
<PAGE> 56

purchased. The current offering price is used to determine the value of all such
shares. If, for example, any purchaser has previously purchased and still holds
shares of one of the above Funds having a current value of $7,500, and that
person purchases $7,500 of additional shares of Growth Fund or Growth and Income
Fund, the sales charge applicable to the $7,500 purchase would be the sales
charge normally applicable to purchases of $10,000 or more. The same reduction
is applicable to purchases under a Letter of Intent as described in the next
paragraph. PFS Investments must notify the Distributor at the time an order is
placed for a purchase which would qualify for the reduced charge on the basis of
previous purchases. Similar notification must be given in writing when such an
order is placed by mail. The reduced sales charge will not be applied if such
notification is not furnished at the time of the order. The reduced sales charge
will also not be applied unless the records of the Distributor or the Transfer
Agent confirm the investor's representations concerning his holdings.

LETTER OF INTENT

A Letter of Intent applies to purchases of all Funds except the Money
Market Fund. When an investor submits a Letter of Intent to attain an investment
goal within a 13-month period, the Transfer Agent escrows shares totaling five
percent of the dollar amount of the Letter of Intent in the name of the
investor. The Letter of Intent does not obligate the investor to purchase the
indicated amount. In the event the Letter of Intent goal is not achieved within
the 13-month period, the investor is required to pay the difference between the
sales charge otherwise applicable to the purchases made during this period and
the sales charge actually paid. Such payment may be made directly to the
Distributor or, if not paid, the Distributor will liquidate sufficient escrow
shares to obtain such difference. If the goal is exceeded in an amount which
qualifies for a lower sales charge, a price adjustment is made at the end of the
13-month period by refunding to the investor the amount of excess sales
commissions, if any, paid during the 13-month period.

EXCHANGE PRIVILEGE

The following supplements the discussion of "Exchange Privilege" in the
Prospectus:

By use of the exchange privilege, the investor authorizes Common Sense
Shareholder Services ("CSSS") to act on written exchange instructions from any
person representing himself to be the investor or the agent of the investor and
believed by CSSS to be genuine. CSSS' records of such instructions are binding.

Shareholders of any of the Funds in the Trust have an exchange privilege
whereby they may exchange all or part of their shares for shares of any other
Funds in the Trust as described in the Prospectus. For purposes of determining
the sales charge rate previously paid, all sales charges paid on the exchanged
security and on any security previously exchanged for such security or for any
of its predecessors shall be included. If the exchanged security was acquired
through reinvestment, that security is deemed to have been sold with a sales
charge rate equal to the rate previously paid on the security on which the
dividend or distribution was paid. If a shareholder exchanges less than all of
his securities, the security upon which the highest sales charge rate was
previously paid is deemed exchanged first.

Exchange requests received on a business day prior to the time shares of a
Fund involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares in a Fund from which the
shareholder is withdrawing an investment will be redeemed at the net asset value
per share next determined on the date of receipt. Shares of the new Fund into
which the shareholder is investing will also normally be purchased at the net
asset value per share, plus any applicable sales charge, next determined on the
date of receipt. Exchange requests received on a business day after the time
shares of the Funds involved in the request are priced will be processed on the
next business day in the manner described above.

REDEMPTION OF SHARES

Redemptions are not made on days during which the New York Stock Exchange
is closed, including those holidays listed under "Determination of Net Asset
Value." The right of redemption may be suspended and the payment therefor may be
postponed for more than seven days during any period when (a) the New York Stock
Exchange is closed for other than customary weekends or holidays; (b) trading on
the New York

28
<PAGE> 57

Stock Exchange is restricted; (c) an emergency exists as a result of which
disposal by the Trust of securities owned by it is not reasonably practicable or
it is not reasonably practicable for the Trust to fairly determine the value of
its net assets; or (d) the Securities and Exchange Commission, by order, so
permits.

DISTRIBUTIONS AND TAXES

Each Fund intends to qualify as a "regulated investment company" under
Subchapter M of the Internal Revenue Code ("Code"). By so qualifying, a Fund
will not be subject to federal income taxes on amounts paid by it as dividends
and distributions to shareholders. If any Fund were to fail to qualify as a
regulated investment company under the Code, all of its income (without
deduction for income dividends or capital gain distributions paid to
shareholders) would be subject to tax at corporate rates. Each Fund expects to
be treated as a separate entity for purposes of determining federal tax
treatment.

The Code permits a regulated investment company whose assets consist
primarily of tax-exempt Municipal Bonds to pass through to its investors,
tax-exempt, net Municipal Bond interest income. In order for the Municipal Bond
Fund to be eligible to pay exempt-interest dividends during any taxable year, at
the close of each fiscal quarter, at least 50% of the aggregate value of the
Fund's assets must consist of exempt-interest obligations. In addition, the Fund
must distribute at least (i) 90% of the excess of its exempt-interest income
over certain disallowed deductions, and (ii) 90% of its "investment company
taxable net income" (i.e., its ordinary taxable income and the excess, if any,
of its net short-term capital gains over any net long-term capital losses)
recognized by the Fund during the taxable year (the "Distribution
Requirements").

Not later than 60 days after the close of its taxable year, the Municipal
Bond Fund will notify its shareholders of the portion of the dividends paid by
the Fund to the shareholders for the taxable year which constitutes exempt
interest dividends. The aggregate amount of dividends so designated cannot
exceed, however, the excess of the amount of interest exempt from tax under
Section 103 of the Code received by the Fund during the year over any amounts
disallowed as deductions under Sections 265 and 171(a)(2) of the Code. Since the
percentage of dividends which are "exempt-interest" dividends is determined on
an average annual method for the fiscal year, the percentage of income
designated as tax-exempt for any particular dividend may be substantially
different from the percentage of the Fund's income that was tax-exempt during
the period covered by the dividend.

Although exempt-interest dividends generally may be treated by the
Municipal Bond Fund's shareholders as items of interest excluded from their
gross income, each shareholder is advised to consult his or her tax adviser with
respect to whether exempt-interest dividends retain this exclusion if the
shareholder should be treated as a "substantial user" or a "related person" with
respect to any of the tax-exempt obligations held by the Fund. "Substantial
user" is defined under U.S. Treasury Regulations to include a non-exempt person
who regularly uses in his trade or business a part of any facilities financed
with the tax-exempt obligations and whose gross revenues derived from such
facilities exceed five percent of the total revenues derived from the facilities
by all users, or who occupies more than five percent of the usable area of the
facilities or for whom the facilities or a part thereof were specifically
constructed, reconstructed or acquired. Examples of "related persons" include
certain related natural persons, affiliated corporations, a partnership and its
partners and an S corporation and its shareholders.

Interest on indebtedness incurred by a shareholder to purchase or carry
shares of the Municipal Bond Fund is not deductible for federal income tax
purposes if the Fund distributes exempt-interest dividends during the
shareholder's taxable year. If a shareholder receives an exempt-interest
dividend with respect to any shares and such shares are held for six months or
less, any short-term capital loss on the sale or exchange of the shares will be
disallowed to the extent of the amount of such exempt-interest dividend.

If, during any taxable year, the Municipal Bond Fund realizes net capital
gains (the excess of net long-term capital gains over net short-term capital
losses) from the sale or other disposition of Municipal Bonds or other assets,
the Fund will have no tax liability with respect to such gains if they are
distributed to shareholders. Distributions designated as capital gains dividends
are taxable to shareholders as long-term capital gains, regardless of how long a
shareholder has held his or her shares. Not later than 60 days after the

29
<PAGE> 58

close of the Fund's taxable year, the Fund will send to its shareholders a
written notice designating the amount of any distributions made during the year
which constitute capital gain.

While the Municipal Bond Fund expects that a major portion of its
investment income will constitute tax-exempt interest, a portion may consist of
"investment company taxable income" and "net capital gains". As pointed out
above, the Fund will be subject to tax for any year on its undistributed
investment company taxable income and net capital gains.

A capital gain dividend received after the purchase of the shares of any
one of the Funds in the Trust reduces the net asset value of the shares by the
amount of the distribution and will be subject to income taxes. A loss on the
sale of shares held for less than six months (to the extent not disallowed on
account of the receipt of exempt-interest dividends) attributable to a capital
gain dividend is treated as a long-term capital loss for Federal income tax
purposes.

Each Fund is subject to a four percent excise tax to the extent it fails to
distribute to its shareholders during any calendar year at least (1) 98% of its
ordinary taxable income for the twelve months ended December 31, plus (2) 98% of
its capital gain net income for the twelve months ended October 31 of such year.
Each Fund intends to distribute sufficient amounts to avoid liability for the
excise tax.

The Tax Reform Act added a provision that, for years beginning after
December 31, 1989, 75% of the excess of a corporation's adjusted current
earnings (generally, earning and profits, with adjustments) over its other
alternative minimum taxable income is an item of tax preference for
corporations. All tax-exempt interest is included in the definition of "adjusted
current earnings" so a portion of such interest is included in computing the
alternative minimum tax on corporations. For shareholders that are financial
institutions, the Tax Reform Act eliminates their ability to deduct interest
payments to the extent allocated on a pro rata basis to the purchase of Fund
shares.

Dividends from net investment income and distributions from any short-term
capital gains are taxable to shareholders as ordinary income. A portion of
dividends taxable as ordinary income paid by the Emerging Growth Fund, the
Global Equity Fund, the Growth Fund and the Growth and Income Fund qualify for
the 70% dividends received deduction for corporations. To qualify for the
dividends received deduction, a corporate shareholder must hold the shares on
which the dividend is paid for more than 45 days.

Dividends and distributions declared payable to shareholders of record
after September 30 of any year and paid before February 1 of the following year
are considered taxable income to shareholders on December 31 even though paid in
the next year.

Distributions from long-term capital gains are taxable to shareholders as
long-term capital gains, regardless of how long the shareholder has held Fund
shares. Such dividends and distributions from short-term capital gains are not
eligible for the dividends received deduction referred to above. Any loss on the
sale of Fund shares held for less than six months is treated as a long-term
capital loss to the extent of any long-term capital gain distribution paid on
such shares, subject to any exception that may be provided by IRS regulations
for losses incurred under certain systematic withdrawal plans. All dividends and
distributions are taxable to the shareholder whether or not reinvested in
shares. Shareholders are notified annually by the Fund as to the federal tax
status of dividends and distributions paid by the Fund.

If shares of each Fund are sold or exchanged within 90 days of acquisition,
and shares of the same or a related mutual fund are acquired, to the extent the
sales charge is reduced or waived on the subsequent acquisition, the sales
charge may not be used to determine the basis in the disposed shares for
purposes of determining gain or loss. To the extent the sales charge is not
allowed in determining gain or loss on the initial shares, it is capitalized in
the basis of the subsequent shares.

Dividends to shareholders who are non-resident aliens may be subject to a
United States withholding tax at a rate of up to 30% under existing provisions
of the Code applicable to foreign individuals and entities unless a reduced rate
of withholding or a withholding exemption is provided under applicable treaty
laws. Non-resident shareholders are urged to consult their own tax advisers
concerning the applicability of the United States withholding tax.

30
<PAGE> 59

Dividends and capital gains distributions may also be subject to state and
local taxes. Shareholders are urged to consult their attorneys or tax advisers
regarding specific questions as to federal, state or local taxes.

BACK-UP WITHHOLDING. The Trust is required to withhold and remit to the
United States Treasury 31% of (i) reportable taxable dividends and distributions
and (ii) the proceeds of any redemptions of Trust shares with respect to any
shareholder who is not exempt from withholding and who fails to furnish the
Trust with a correct taxpayer identification number, who fails to report fully
dividend or interest income or who fails to certify to the Trust that he has
provided a correct taxpayer identification number and that he is not subject to
withholding. (An individual's taxpayer identification number is his or her
social security number.) The 31% "Back-up withholding tax" is not an additional
tax and may be credited against a taxpayer's regular federal income tax
liability.

The Code includes special rules applicable to certain listed options
(excluding equity options as defined in the Code), futures contracts, and
options on futures contracts which the Growth Fund, the Growth and Income Fund,
the Global Equity Fund, the Emerging Growth Fund, the Government Fund and the
Municipal Bond Fund may write, purchase or sell. Such options and contracts are
classified as Section 1256 contracts under the Code. The character of gain or
loss resulting from the sale, disposition, closing out, expiration or other
termination of Section 1256 contracts is generally treated as long-term capital
gain or loss to the extent of 60 percent thereof and short-term capital gain or
loss to the extent of 40 percent thereof ("60/40 gain or loss"). Such contracts,
when held by the Fund at the end of a fiscal year, generally are required to be
treated as sold at market value on the last day of such fiscal year for federal
income tax purposes ("marked-to-market"). Over-the-counter options are not
classified as Section 1256 contracts and are not subject to the marked-to-market
rule or to 60/40 gain or loss treatment. Any gains or losses recognized by the
Government Fund from transactions in over-the-counter options generally
constitute short-term capital gains or losses. If over-the-counter call options
written, or over-the-counter put options purchased, by the Government Fund are
exercised, the gain or loss realized on the sale of the underlying securities
may be either short-term or long-term, depending on the holding period of the
securities. In determining the amount of gain or loss, the sales proceeds are
reduced by the premium paid for over-the-counter puts or increased by the
premium received for over-the-counter calls.

Certain of the Growth Fund's, the Growth and Income Fund's, the Government
Fund's and the Municipal Bond Fund's transactions in options, futures contracts,
and options on futures contracts, particularly its hedging transactions, may
constitute "straddles" which are defined in the Code as offsetting positions
with respect to personal property. A straddle in which at least one (but not
all) of the positions are Section 1256 contracts is a "mixed straddle" under the
Code if certain conditions are met.

The Code generally provides with respect to straddles (i) "loss deferral"
rules which may postpone recognition for tax purposes of losses from certain
closing purchase transactions or other dispositions of a position in the
straddle to the extent of unrealized gains in the offsetting position, (ii)
"wash sale" rules which may postpone recognition for tax purposes of losses
where a position is sold and a new offsetting position is acquired within a
prescribed period and (iii) "short sale" rules which may terminate the holding
period of securities owned by the Fund when offsetting positions are established
and which may convert certain losses from short-term to long-term.

The Code provides that certain elections may be made for mixed straddles
that can alter the character of the capital gain or loss recognized upon
disposition of positions which form part of a straddle. Certain other elections
are also provided in the Code. No determination has been reached to make any of
these elections.

The Municipal Bond Fund may acquire an option to "put" specified portfolio
securities to banks or municipal bond dealers from whom the securities are
purchased. See "Stand-By Commitments," in the Prospectus. The Fund has been
advised by its legal counsel that it will be treated for federal income tax
purposes as the owner of the Municipal Securities acquired subject to the put;
and the interest on the Municipal Securities will be tax-exempt to the Fund.
Counsel has pointed out that although the Internal Revenue Service has issued a
favorable published ruling on a similar but not identical situation, it could
reach a different conclusion from that of counsel. Counsel has also advised the
Fund that the Internal Revenue

31
<PAGE> 60

Service presently will not ordinarily issue private letter rulings regarding the
ownership of securities subject to stand-by commitments.

The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury Regulations promulgated thereunder. The Code and these Treasury
Regulations are subject to change by legislative or administrative action either
prospectively or retroactively.

OTHER INFORMATION

PRIOR PERFORMANCE INFORMATION

The Growth Fund's, the Growth and Income Fund's and the Government Fund's
average annual total return (computed in the manner described in the Prospectus)
for the one-year, five-year, and seven-year and six-month period ended October
31, 1994 was -6.63%, -8.03, and -11.81%; 8.39%, 7.50%, and 5.18%; and 7.73%,
6.99%, and 6.09%, respectively. The Municipal Bond Fund's average annual total
return computed in the manner described in the Prospectus for approximately the
one-year, five-year, and six-year and three-months ended October 31, 1994 was
-7.96%, 5.71% and 6.39%. These results are based on historical earnings and
asset value fluctuations and are not intended to indicate future performance.
Such information should be considered in light of the Fund's investment
objectives and policies as well as the risks incurred in the Fund's investment
practices.

The Government Fund's and the Municipal Bond Fund's annualized current
yield for the 30-day period ending October 31, 1994 was 5.87% and 4.99%,
respectively. The Municipal Bond Fund's tax equivalent yield for the 30-day
period ending October 31, 1994 was 7.79%. The Fund's yield is not fixed and will
fluctuate in response to prevailing interest rates and the market value of
portfolio securities, and as a function of the type of securities owned by the
Fund, portfolio maturity and the Fund's expenses.

The Money Market Fund's annualized current yield, on a subsidized basis,
for the seven-day period ending October 31, 1994 was 3.85%. The Fund's compound
effective yield for the same period was 3.93%. On a non-subsidized basis, the
annualized current yield for the same period was 3.57% with a compound effective
yield of 3.63%.

To increase the Fund's yield the Adviser, for an indefinite period has
agreed to absorb a certain amount of the future ordinary business expenses of
the Money Market Fund. The Adviser may stop absorbing these expenses at any time
without prior notice.

The yield of the Fund is its net income expressed in annualized terms. The
SEC requires by rule that a yield quotation set forth in an advertisement for a
"money market" fund be computed by a standardized method based on a historical
seven calendar day period. The standardized yield is computed by determining the
net change (exclusive of realized gains and losses and unrealized appreciation
and depreciation) in the value of a hypothetical pre-existing account having a
balance of one share at the beginning of the period, dividing the net change in
account value by the value of the account at the beginning of the base period to
obtain the base period return, and multiplying the base period return by 365/7.
The determination of net change in account value reflects the value of
additional shares purchased with dividends from the original share, dividends
declared on both the original share and such additional shares, and all fees
that are charged to all shareholder accounts, in proportion to the length of the
base period and the Fund's average account size. The Fund may also calculate its
effective yield by compounding the unannualized base period return (calculated
as described above) by adding 1 to the base period return, raising the sum to a
power equal to 365 divided by 7, and subtracting 1.

The yield quoted at any time represents the amount being earned on a
current basis for the indicated period and is a function of the types of
instruments in the Fund, their quality and length of maturity, and the Fund's
operating expenses. The length of maturity for the Fund is the average dollar
weighted maturity of the Fund. This means that the Fund has an average maturity
of a stated number of days for all of its issues. The calculation is weighted by
the relative value of the investment.

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The yield fluctuates daily as the income earned on the investments of the
Fund fluctuates. Accordingly, there is no assurance that the yield quoted on any
given occasion will remain in effect for any period of time. It should also be
emphasized that the Fund is an open-end investment company and that there is no
guarantee that the net asset value will remain constant. A shareholder's
investment in the Fund is not insured. Investors comparing results of the Fund
with investment results and yields from other sources such as banks or savings
and loan associations should understand this distinction.

Other funds of the money market type as well as banks and savings and loan
associations may calculate their yield on a different basis, and the yield
quoted by the Fund could vary upwards or downwards if another method of
calculation or base period were used.

The Funds may illustrate in advertising materials the use of a Payroll
Deduction Plan as a convenient way for business owners to help their employees
set up either IRA or voluntary mutual fund accounts. The Funds may illustrate in
advertising materials retirement planning through employee contributions and/or
salary reductions. Such advertising material will illustrate that employees may
have the opportunity to save for retirement and reduce taxes by electing to
defer a portion of their salary into a special mutual fund IRA account. The
Funds may illustrate in advertising materials that Uniform Gift to Minors Act
accounts may be used as a vehicle for saving for a child's financial future.
Such illustrations will include statements to the effect that upon reaching the
age of majority, such custodial accounts become the child's property.

SHAREHOLDER SERVICES

UNIFORM GIFTS TO MINORS ACT. The Trust recognizes the importance to a child
of establishing a savings and investment plan early in life for education and
other purposes when the child becomes older. The advantages of regular
investment with interest or earnings compounding over a number of years are
great. In addition, taxes on these earnings are assessed against the income of
the child rather than the donor, usually at a lower bracket.

Investors wishing to establish a UGMA account should call the Trust for an
application. Individuals desiring to open an account under UGMA are also advised
to consult with a tax adviser before establishing the account.

INDIVIDUAL RETIREMENT ACCOUNT. Any individual who has compensation or
earned income from employment or self-employment and who is under age 70 1/2 may
establish an IRA. The limitation on the maximum annual contribution to an IRA is
the lesser of 100% of compensation or $2,000. An IRA may also be established for
a spouse who has no compensation (or who elects to be treated as having no
compensation), and the limitation on the maximum annual contributions to the two
IRAs is the lesser of 100% of compensation or $2,250.

Under the Tax Reform Act of 1986, whether contributions to an IRA are
deductible for federal income tax purposes depends on whether an individual (or
his/her spouse) is a participant in an employer-sponsored plan and on the
adjusted gross income of the individual.

In the case of an individual who is a participant in an employer-sponsored
plan, no deduction is available for IRA contributions if his adjusted gross
income reaches certain levels ($35,000 for a single individual, $50,000 for
married individuals filing jointly and $10,000 for married individuals filing
separately) and the deduction is phased out ratably if his adjusted gross income
falls within certain ranges ($25,000 - $35,000 for a single individual,
$40,000 - $50,000 for married individuals filing jointly and $0 - $10,000 for
married individuals filing separately). IRA contributions, up to the annual
limit, remain fully deductible for all single individuals with less than $25,000
of annual adjusted gross income and all married individuals with less than
$40,000 of annual adjusted gross income. Individuals who are disqualified from
making deductible IRA contributions can make non-deductible contributions to
their IRAs, subject to the same limitation on maximum annual contribution
discussed above.

In addition, any individual, regardless of age, may establish a rollover
IRA to receive an eligible rollover distribution from an employer-sponsored
plan.

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<PAGE> 62

SIMPLIFIED EMPLOYEE PENSION PLAN (SEP) AND SALARY REDUCTION SIMPLIFIED
EMPLOYEE PENSION PLAN (SARSEP). A SEP/SARSEP is a means for an employer to
provide retirement contributions to IRAs for all employees, without the
complicated reporting and record keeping involved in a qualified plan. Employees
covered by a SEP/SARSEP can use the same IRA to receive their own allowable IRA
contribution.

SECTION 403(B)(7) PLAN. Employees of certain exempt organizations and
schools can have a portion of their compensation set aside, and income taxes
attributable to such portion deferred, in a Section 403(b)(7) plan. Teachers,
school administrators, ministers, employees of hospitals, libraries, community
chests, funds, foundations, and many others may be eligible. The employer must
be an organization described in Section 501(c)(3) of the Internal Revenue Code
and must be exempt from tax under Section 501(a) of the Code. In addition, any
employee of most public educational institutions is eligible if his employer is
a state or a political subdivision of a state, or any agency or instrumentality
of either. The employee is not taxed on the amount set aside or the earnings
thereon until the funds are withdrawn, normally at retirement.

CUSTODY OF ASSETS

All securities owned by the Trust and all cash, including proceeds from the
sale of shares of the Trust and of securities in the Trust's investment
portfolio, are held by State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02101, as Custodian.

SHAREHOLDER REPORTS

Semiannual statements are furnished to shareholders, and annually such
statements are audited by the independent accountants whose selection is
ratified annually by shareholders or the Trustees.

INDEPENDENT AUDITORS

Ernst & Young LLP, 1221 McKinney, Suite 2400, Houston, Texas 77010, the
independent auditors for the Trust, perform annual examinations of the Trust's
financial statements.

SHAREHOLDER AND TRUSTEE RESPONSIBILITY

Under the laws of certain states, including Massachusetts, where the Trust
was organized, and Texas, where the Trust's principal office is located,
shareholders of a Massachusetts business trust may, under certain circumstances,
be held personally liable as partners for the obligations of the Trust. However,
the risk of a shareholder incurring any financial loss on account of shareholder
liability is limited to circumstances in which the Trust itself would be unable
to meet its obligations. The Declaration of Trust contains an express disclaimer
of shareholder liability for acts or obligations of the Trust and provides that
notice of the disclaimer may be given in each agreement, obligation, or
instrument which is entered into or executed by the Trust or Trustees. The
Declaration of Trust provides for indemnification out of Trust property to any
shareholder held personally liable for the obligations of the Trust and also
provides for the Trust to reimburse such shareholder for all legal and other
expenses reasonably incurred in connection with any such claim or liability.

Under the Declaration of Trust, the Trustees or Officers are not liable for
actions or failure to act; however, they are not protected from liability by
reason of their willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of their office. The Trust will
provide indemnification to its Trustees and Officers as authorized by its
By-Laws and by the 1940 Act and the rules and regulations thereunder.

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<PAGE> 63

FINANCIAL STATEMENTS

Financial Statements including Investment Portfolio, Statement of Net
Assets, Statement of Operations, Statement of Changes in Net Assets, Notes to
Financial Statements, Financial Highlights and Report of Independent Auditors on
such financial statements, are hereby incorporated by reference to the Fund's
Annual Report previously filed with the SEC on or about December 29, 1994.

DETERMINATION OF NET ASSET VALUE, REDEMPTION PRICE AND OFFERING PRICE PER
SHARE -- October 31, 1994.

<TABLE>
<S> <C>
GROWTH FUND
Net Asset Value and redemption price per share
(Net assets divided by shares outstanding)............................... $15.31
Offering price per share (100/91.5 of per share net asset value)........... $16.73

GROWTH AND INCOME FUND
Net Asset Value and redemption price per share
(Net assets divided by shares outstanding)............................... $15.77
Offering price per share (100/91.5 of per share net asset value............ $17.23

GOVERNMENT FUND
Net Asset Value and redemption price per share
(Net assets divided by shares outstanding)............................... $ 9.99
Offering price per share (100/93.25 of per share
(Net asset value)........................................................ $10.71

MUNICIPAL BOND FUND
Net Asset Value and redemption price per share
(Net assets divided by shares outstanding)............................... $12.89
Offering price per share (100/95.25 of per share
(Net asset value)........................................................ $13.53

MONEY MARKET FUND
Net Asset Value, redemption price and offering price per share
(Net assets divided by shares outstanding)............................... $ 1.00
</TABLE>

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APPENDIX 1
(Commercial Paper, Bond and Other Short- and Long-Term Ratings)

Description of the highest commercial paper, bond and other short- and
long-term rating categories assigned by Standard & Poor's Corporation ("S&P"),
Moody's Investors Service ("Moody's"), Fitch Investors Service, Inc. ("Fitch"),
Duff and Phelps, Inc. ("Duff") and IBCA Limited and IBCA Inc. ("IBCA");

COMMERCIAL PAPER AND SHORT-TERM RATINGS

The designation A-1 by S&P indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+)
designation. Capacity for timely payment on issues with an A-2 designation is
strong. However, the relative degree of safety is not as high as for issues
designated A-1.

The rating Prime-1 (P-1) is the highest commercial paper rating assigned by
Moody's. Issuers of P-1 paper must have a superior capacity for repayment of
short-term promissory obligations and ordinarily will established industries,
high rates of return of funds employed, conservative well established
industries, high rates of return of funds employed, conservative capitalization
structures with moderate reliance on debt and ample asset protection, broad
margins in earnings coverage of fixed financial charges and high internal cash
generation, and well established access to a range of financial markets and
assured sources of alternate liquidity. Issues rated Prime-2 (P-2) have a strong
capacity for repayment of short-term promissory obligations. This ordinarily
will be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.

The rating Fitch-1 (Highest Grade) is the highest commercial paper rating
assigned by Fitch. Paper rated Fitch-1 is regarded as having the strongest
degree of assurance for timely payment. The rating Fitch-2 (Very Good Grade) is
the second highest commercial paper rating assigned by Fitch which reflects an
assurance of timely payment only slightly less in degree than the strongest
issues.

The rating Duff-1 is the highest commercial paper rating assigned by Duff,
Paper rated Duff-1 is regarded as having very high certainty of timely payment
with excellent liquidity factors which are supported by ample asset protection.
Risk factors are minor. Paper rated Duff-2 is regarded as having good certainty
of timely payment, good access to capital markets and sound liquidity factors
and company fundamentals. Risk factors small.

The designation A1 by IBCA indicates that the obligation is supported by a
very strong capacity for timely repayment. Those obligations rated A1+ are
supported by the highest capacity for timely repayment. The designation A2 by
IBCA indicates that the obligation is supported by a strong capacity for timely
repayment, although such capacity may be susceptible to adverse changes in
business, economic, or financial conditions.

BOND AND LONG-TERM RATINGS

Bonds rated AAA are considered by S&P to be the highest grade obligations
and possess an extremely strong capacity to pay principal and interest. Bonds
rated AA by S&P are judged by S&P to have a very strong capacity to pay
principal and interest and, in the majority of instances, differ only in small
degrees from issues rated AAA.

Bonds which are rated Aaa by Moody's are judged to be of the best quality.
Bonds are rated Aa by Moody's are judged by Moody's to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than Aaa bonds because margins of
protection may not be as large or fluctuations of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger. Moody's applies numerical modifiers 1, 2
and 3 in the Aa rating category. The modifier 1 indicates a ranking for the
security in

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the higher end of this rating category, the modifier 2 indicates a mid-range
ranking, and the modifier 3 indicates a ranking in the lower end of the rating
category.

Bonds rated AAA by Fitch are judged by Fitch to be strictly high grade,
broadly marketable, suitable for investment by trustees and fiduciary
institutions and liable to but slight market fluctuation other than through
changes in the money rate. The prime feature of an AAA bond is a showing of
earnings several times or many times interest requirements, with such stability
of applicable earnings that safety is beyond reasonable question whatever
changes occur in conditions. Bonds rated AA by Fitch are judged by Fitch to be
of safety virtually beyond question and are readily salable, whose merits are
not unlike those of the AAA class, but whose margin of safety is less strikingly
broad. The issue may be the obligation of a small company, strongly secured but
influenced as to rating by the lesser financial power of the enterprise and more
local type of market.

Bonds rated Duff-1 are judged by Duff to be of the highest credit quality
with negligible risk factors; only slightly more than U.S. Treasury debt. Bonds
rated Duff-2, 3 and 4 are judged by Duff to be of high credit quality with
strong protection factors. Risk is modest but may vary slightly from time to
time because of economic conditions.

Obligations rated AAA by IBCA have the lowest expectation of investment
risk. Capacity for timely repayment of principal and interest is substantial,
such that adverse changes in business, economic or financial conditions are
unlikely to increase investment risk significantly. Obligations rated AA have a
very low expectation of investment risk. Capacity for timely repayment of
principal and interest is substantial. Adverse changes in business, economic or
financial conditions may increase investment risk albeit not very significantly.

IBCA also assigns a rating to certain international and U.S. banks. An IBCA
bank rating represents IBCA's current assessment of the strength of the bank and
whether such bank would receive support should it experience difficulties. In
its assessment of a bank, IBCA uses a dual rating system comprised of Legal
Rating and Individual Ratings. In addition, IBCA assigns banks Long- and
Short-Term Ratings as used in the corporate ratings discussed above. Legal
Ratings, which range in gradation from 1 through 5, address the question of
whether the bank would receive support by central banks or shareholders if it
experienced difficulties, and such ratings are considered by IBCA to be a prime
factor in its assessment of credit risk. Individual Ratings, which range in
gradations from A through E, represent IBCA's assessment of a bank's economic
merits and address the question of how the bank would be viewed if it were
entirely independent and could not rely on support from state authorities or its
owners.

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APPENDIX 2

MUNICIPAL BOND RATINGS

DESCRIPTIONS OF MOODY'S INVESTORS SERVICE ("MOODY'S") MUNICIPAL BOND RATINGS

Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.

Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.

A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.

Baa -- Bonds which are rated Baa are considered as medium grade
obligations; i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.

Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.

B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.

CONDITIONAL RATING: Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.

RATING REFINEMENTS: Moody's may apply numerical modifiers, 1, 2 and 3 in
each generic rating classification from Aa through B in its municipal bond
rating system. The modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a midrange ranking;
and a modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.

SHORT-TERM NOTES: The four ratings of Moody's for short-term notes are MIG
1, MIG 2, MIG 3 and MIG 4; MIG 1 denotes "best quality, enjoying strong
protection from established cash flows"; MIG 2 denotes "high quality" with
"ample margins of protection"; MIG 3 notes are of "favorable quality . . . but
lacking the undeniable strength of the preceding grades"; MIG 4 notes are of
"adequate quality, carrying specific risk but having protection . . . and not
distinctly or predominantly speculative."

Beginning on February 5, 1985, Moody's started new rating categories for
variable rate demand obligations ("VRDO's"). VRDO's receive two ratings. The
first rating, depending on the maturity of the VRDO, is assigned either a bond
or MIG rating which represents an evaluation of the risk associated with
scheduled principal and interest payments. The second rating, designated as
"VMIG," represents an

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<PAGE> 67

evaluation of the degree of risk associated with the demand feature. The new
VRDO's demand feature ratings and symbols are:

VMIG 1: strong protection by established cash flows, superior liquidity
support, demonstrated access to the market for refinancing.

VMIG 2: ample margins of protection, high quality.

VMIG 3: favorable quality, liquidity and cash flow protection may be
narrow, market access for refinancing may be less well
established.

VMIG 4: adequate quality, not predominantly speculative but there is
risk.

DESCRIPTIONS OF MOODY'S COMMERCIAL PAPER RATINGS

Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers.
The first two are described below:

Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations.

Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations.

DESCRIPTION OF STANDARD & POOR'S CORPORATION'S ("S&P") MUNICIPAL DEBT RATINGS

A S&P's municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.

The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.

The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources S&P considers reliable. S&P does not perform
an audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended or withdrawn as a
result of changes in, or unavailability of, such information, or for other
reasons.

The ratings are based, in varying degrees, on the following considerations:

I. Likelihood of default -- capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;

II. Nature of and provisions of the obligation;

III. Protection afforded by, and relative position of the obligation in
the event of bankruptcy, reorganization or other arrangement under
the laws of bankruptcy and other laws affecting creditor's rights.

AAA Debt rated "AAA" has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.

AA Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small
degree.

A Debt rated "A" has a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher-rated categories.

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<PAGE> 68

BBB Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt in
higher-rated categories.

BB,B Debt rated "BB" and "B" is regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB"
indicates the lowest degree of speculation. While such debt will likely
have some quality and protective characteristics, these are outweighed
by large uncertainties or major risk exposures to adverse conditions.

Plus (+) or Minus (-): The ratings from "AA" to "BB" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.

PROVISIONAL RATINGS: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the bonds being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise his own judgment with respect to such likelihood and
risk.

NR Indicates that no rating has been requested, that there is insufficient
information on which to base a rating or that S&P does not rate a
particular type of obligation as a matter of policy.

A S&P Commercial Paper Rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days. The
highest category is "A" which is further defined with the designation of 1, 2
and 3 to indicate the relative degree of safety. The first two categories are
described below:

A Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment.

A-1 This designation indicates that the degree of safety regarding
timely payment is very strong.

A-2 Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as
overwhelming as for issues designated "A-1".

The Commercial Paper Rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to S&P by the
issuer and obtained by S&P from other sources it considers reliable. The ratings
may be changed, suspended, or withdrawn as a result of changes in or
unavailability of, such information.

Commencing on July 27, 1984, S&P instituted a new rating category with
respect to certain municipal note issues with a maturity of less than three
years. The new note ratings and symbols are:

SP-1 A very strong, or strong, capacity to pay principal and interest.
Issues that possess overwhelming safety characteristics will be
given a "+" designation.

SP-2 A satisfactory capacity to pay principal and interest.

SP-3 A speculative capacity to pay principal and interest.

S&P may continue to rate note issues with a maturity greater than three
years in accordance with the same rating scale currently employed for municipal
bond ratings.

S&P assigns dual ratings to all long-term debt issues that have a demand or
put feature. The first rating addresses the likelihood of repayment of principal
and interest as due, and the second rating addresses the demand feature alone.
Long-term debt rating symbols are used for the long-term maturity and commercial
paper rating symbols are used for the put option (for example, AAA/A-1+). For
demand notes, S&P's note rating symbols are used with the commercial paper
symbols (for example, SP-1+/a-1+).

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<PAGE> 69

Rating criteria described in the Prospectus are applied on the basis of the
highest rating applicable to the Municipal Security. This applies to split rated
securities (i.e., different ratings by Moody's and S&P) and dual rated
securities as described above.

Subsequent to its purchase by the Fund, an issue of Municipal Bonds or a
Temporary Investment may cease to be rated or its rating may be reduced, causing
more than 20% of the Fund's assets invested in Municipal Bonds to be invested in
low or non-rated bonds. This would not require the elimination of such
obligation from the Fund's portfolio, but the Adviser will consider such an
event in its determination of whether the Fund should continue to hold such
obligation in its portfolio. To the extent that the ratings accorded by S&P or
Moody's for Municipal Bonds or Temporary Investment may change as a result of
changes in such organizations, or changes in their rating systems, the Fund will
attempt to use comparable ratings as standards for its investments in Municipal
Bonds or Temporary Investments in accordance with the investment policies
contained herein.