<PAGE>
As filed with the Securities and Exchange Commission on December 5, 1997
----------
Registration No. 33-13990/811-5148
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
POST-EFFECTIVE AMENDMENT NO. 45
--
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 45
PEGASUS FUNDS
(Exact Name of Registrant as Specified in Charter)
c/o NBD Bank
900 Tower Drive
P.O. Box 7058
Troy, Michigan 48007-7058
(Address of Principal Executive Offices)
Registrant's Telephone Number:
(313) 259-0729
W. Bruce McConnel, III
DRINKER BIDDLE & REATH LLP
1345 Chestnut Street
Philadelphia, Pennsylvania 19107-3496
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[x] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Title of Securities Being Registered. Shares of beneficial interest.
<PAGE>
CROSS REFERENCE SHEET
---------------------
Class A, Class B and Class I Shares of the:
Managed Assets Conservative Fund, Managed Assets Balanced Fund, Managed
Assets Growth Fund, Equity Income Fund, Growth Fund, Mid-Cap Opportunity Fund,
Small-Cap Opportunity Fund, Intrinsic Value Fund, Growth and Value Fund, Equity
Index Fund, Multi Sector Index Fund, International Equity Fund, Intermediate
Bond Fund, Bond Fund, Short Bond Fund, Multi Sector Bond Fund, International
Bond Fund, High Yield Bond Fund, Municipal Bond Fund, Intermediate Municipal
Bond Fund and Michigan Municipal Bond Fund, respectively.
Form N-1A Part A Item Prospectus Caption
- --------------------- ------------------
1. Cover Page............................................ Cover page
2. Synopsis.............................................. Highlights;
Expense Table;
Background
3. Financial Highlights.................................. Financial
Highlights;
Performance
Information
4. General Description of
Registrant............................................ Cover Page;
Description of the
Funds; General
Information;
Supplemental
Information
5. Management of Registrant.............................. Management of the
Funds
5A. Management's Discussion............................. Inapplicable
6. Capital Stock and Other
Securities.......................................... How to Buy Shares;
How to Redeem
Shares; Dividends
and Distributions;
Taxes; Management
of the Funds;
General
Information
7. Purchase of Securities
Being Offered......................................... How to Buy Shares;
Services;
Management of the
Funds;
Distribution and
Shareholder
Services Plans
8. Redemption or Repurchase.............................. How to Redeem
Shares;
9. Pending Legal Proceedings............................. Inapplicable
<PAGE>
CROSS REFERENCE SHEET
---------------------
Class A, Class B and Class I Shares of the:
Managed Assets Conservative Fund, Managed Assets Balanced Fund, Managed
Assets Growth Fund, Equity Income Fund, Growth Fund, Mid-Cap Opportunity Fund,
Small-Cap Opportunity Fund, Intrinsic Value Fund, Growth and Value Fund, Equity
Index Fund, Market Expansion Index Fund, International Equity Fund, Intermediate
Bond Fund, Bond Fund, Short Bond Fund, Multi Sector Bond Fund, International
Bond Fund, High Yield Bond Fund, Municipal Bond Fund, Intermediate Municipal
Bond Fund and Michigan Municipal Bond Fund, respectively.
Statement of Additional
Form N-1A Part B Item Information Caption
- --------------------- -----------------------
10. Cover Page.................................... Cover Page
11. Table of Contents............................. Table of Contents
12. General Information and History............... The Trust; Description
of Shares
13. Investment Objectives and Policies............ Investment Objectives,
Policies and Risk
Factors
14. Management of Registrant...................... Management
15. Control Persons and Principal................. Description of Shares
Holders of Securities
16. Investment Advisory and Other Services........ Management
17. Brokerage Allocation and other Practices...... Investment Objectives,
Policies and Risk
Factors
18. Capital Stock and Other Securities............ Additional Purchase
and Redemption
Information;
Description of Shares
19. Purchase, Redemption and Pricing.............. Additional Purchase
of Securities Being Offered and Redemption
Additional Purchase and Redemption Information Information
20. Tax Status.................................... Additional Information
Concerning Taxes
21. Underwriters.................................. Management
22. Calculation of Performance Data............... Additional Information
on Performance
23. Financial Statements.......................... Independent Public
Accountants; Financial
Statements
<PAGE>
Prospectus PEGASUS FUNDS
, 1997 P.O. BOX 5142
WESTBOROUGH,
MASSACHUSETTS 01581
24 HOUR YIELD AND
PERFORMANCE
INFORMATION
PURCHASE AND
REDEMPTION ORDERS:
(800) 688-3350
Pegasus Funds (the "Trust") is offering in this Prospectus Class A shares,
Class B shares and Class I shares in the following twenty-two investment
portfolios (the "Funds"), divided into four general fund types: Asset
Allocation; Equity; Bond; and Municipal Bond:
ASSET ALLOCATION FUNDS BOND FUNDS
The Managed Assets Conservative Fund The Intermediate Bond Fund
The Managed Assets Balanced Fund The Bond Fund
The Managed Assets Growth Fund The Short Bond Fund
EQUITY FUNDS The Multi Sector Bond Fund (formerly
the Income Fund)
The Equity Income Fund The International Bond Fund
The Growth Fund The High Yield Bond Fund
The Mid-Cap Opportunity Fund MUNICIPAL BOND FUNDS
The Small-Cap Opportunity Fund The Municipal Bond Fund
The Intrinsic Value Fund The Short Municipal Bond Fund
The Growth and Value Fund The Intermediate Municipal Bond Fund
The Equity Index Fund The Michigan Municipal Bond Fund
The Market Expansion Fund
The International Equity Fund
This Prospectus sets forth concisely information that a prospective investor
should consider before investing. Investors should read this Prospectus and
retain it for future reference. Additional information about the Trust,
contained in a Statement of Additional Information, has been filed with the
Securities and Exchange Commission (the "SEC") and is available upon request
and without charge by writing to the Trust at the above address. The Statement
of Additional Information bears the same date as this Prospectus and is
incorporated by reference into this Prospectus in its entirety.
Investors should recognize that the share price, yield and investment return
of each Fund fluctuate and are not guaranteed.
THE HIGH YIELD BOND FUND'S PORTFOLIO CONSISTS PRIMARILY OF LOWER-RATED
CORPORATE DEBT OBLIGATIONS, WHICH ARE COMMONLY REFERRED TO AS "JUNK BONDS."
THESE LOWER-RATED BONDS MAY BE MORE SUSCEPTIBLE TO REAL OR PERCEIVED ADVERSE
ECONOMIC CONDITIONS THAN INVESTMENT GRADE BONDS. THESE LOWER-RATED BONDS ARE
REGARDED AS PREDOMINANTLY SPECULATIVE WITH REGARD TO EACH ISSUER'S CONTINUING
ABILITY TO MAKE INTEREST AND PRINCIPAL PAYMENTS (I.E., THE BONDS ARE SUBJECT TO
THE RISK OF DEFAULT). IN ADDITION, THE SECONDARY TRADING MARKET FOR LOWER-RATED
BONDS MAY BE LESS LIQUID THAN THE MARKET FOR INVESTMENT GRADE BONDS. PURCHASERS
SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN INVESTMENT IN THE HIGH
YIELD BOND FUND. SEE THE SECTIONS OF THIS PROSPECTUS ENTITLED "RISK FACTORS --
LOWER-RATED SECURITIES" AND "SUPPLEMENTAL INFORMATION." THE HIGH YIELD BOND
FUND'S SUB-ADVISER WILL ENDEAVOR TO LIMIT THESE RISKS THROUGH DIVERSIFYING THE
PORTFOLIO AND THROUGH CAREFUL CREDIT ANALYSIS OF INDIVIDUAL ISSUERS.
SHARES OF THE TRUST ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED OR OTHERWISE SUPPORTED BY, FIRST CHICAGO NBD CORPORATION OR ITS
AFFILIATES, AND ARE NOT FEDERALLY INSURED OR GUARANTEED BY THE U.S. GOVERNMENT,
FEDERAL DEPOSIT INSURANCE CORPORATION, OR ANY GOVERNMENTAL AGENCY. INVESTMENT
IN THE TRUST INVOLVES RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<PAGE>
Table of Contents
3 Highlights
4 Fund Expenses
12 Financial Highlights
31 Description of the Funds
39 How to Buy Shares
44 Shareholder Services
45 How to Redeem Shares
48 Management of the Trust
51 Distribution and Shareholder Services Plans
52 Dividends and Distributions
52 Taxes
53 Performance Information
55 General Information
A-1 Supplemental Information
B-1 Debt Ratings
<PAGE>
Highlights
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus.
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
Each Fund's investment objective is set forth on pages 11 and 12 of this
Prospectus. Each Asset Allocation Fund will invest substantially all of its
assets (other than securities it holds as of the date of this Prospectus and
certain other direct investments) in Class I shares in each of the Funds
described in this Prospectus, other than the Market Expansion Index Fund and
Municipal Bond Funds, and in Class I shares in the Pegasus Money Market Fund, a
diversified portfolio of the Trust also described in this Prospectus whose
shares are offered by a separate Prospectus (the "Money Market Fund")
(collectively, the "Underlying Funds").
INVESTMENT ADVISER
First Chicago NBD Investment Management Company ("FCNIMCO") is the investment
adviser to each of the Funds (the "Investment Adviser"). Each Fund has agreed
to pay the Investment Adviser an annual fee as set forth under "Management of
the Funds." Federated Investment Counseling ("Federated" or the "Sub-Adviser")
serves as sub-adviser to the High Yield Bond Fund. The Sub-Adviser's fee is
paid by FCNIMCO and not by the High Yield Bond Fund.
DESCRIPTION OF CLASSES
Each Fund offers Class A shares, Class B shares and Class I shares. Each share
represents an identical pro rata interest in a Fund's investment portfolio.
Class A shares are sold at net asset value per share plus an initial sales
charge imposed at the time of purchase. The initial sales charge may be reduced
or waived for certain purchases. Class A shares of each Fund are subject to a
shareholder servicing fee.
Class B shares are sold at net asset value per share with no initial sales
charge at the time of purchase; as a result, the entire purchase price is
immediately invested in the Fund. Class B shares may be subject to a contingent
deferred sales charge ("CDSC") and are subject to a distribution fee and
shareholder servicing fee.
Class I shares are sold at net asset value with no sales charge to qualified
trust, custody and/or agency account clients of The First National Bank of
Chicago ("FNBC"), NBD Bank ("NBD"), American National Bank and Trust Company
("ANB") or their affiliates, qualified retirement, profit sharing, 401(k) or
other employee benefit plans or other programs, broker-dealers, registered
investment advisers and other financial institutions which have entered into an
agreement with a "mutual fund supermarket" or similar program, and the Asset
Allocation Funds.
See "How to Buy Shares" on page 39 of this Prospectus.
HOW TO BUY SHARES
Class A and Class B shares may be purchased through a number of institutions
including the Investment Adviser, NBD, FNBC, ANB and their affiliates,
including First Chicago NBD Investment Services, Inc. ("FCNIS"), a registered
broker-dealer, BISYS Fund Services Limited Partnership d/b/a BISYS Fund
Services ("Distributor" or "BISYS"), which serves the Trust as its distributor,
and certain banks, securities dealers and other industry professionals such as
investment advisers, accountants and estate planning firms (collectively,
"Service Agents").
The minimum initial investment is $1,000. All subsequent investments must be
at least $100.
Investors purchasing Class I shares through their Fiduciary Accounts (as
defined under "How to Buy Shares") at the Investment Adviser, NBD, FNBC, ANB or
their affiliates should contact such entity directly for appropriate
instructions, as well as for information about conditions pertaining to the
account and any related fees. Class I shares may be purchased for a Fiduciary
Account or Eligible Retirement Plan (as defined under "How to Buy Shares") only
by a custodian, trustee, investment manager or other entity authorized to act
on behalf of such Account or Plan.
See "How to Buy Shares" on page 39 of this Prospectus.
SHAREHOLDER SERVICES
The Funds offer shareholders certain services and privileges including:
Exchange Privilege, Letter of Intent and Automatic Investment Plan. Certain
services and privileges may not be available through all Service Agents.
See "Shareholder Services" on page 44 of this Prospectus.
HOW TO REDEEM SHARES
Generally, investors should contact their representatives at the Investment
Adviser, NBD, FNBC, ANB or appropriate Service Agent or financial institution
for redemption instructions. Investors who are not clients of the Investment
Adviser, NBD, FNBC, ANB or a Service Agent or financial institution may redeem
Fund shares by written request to First Data Investor Services Group, Inc. (the
"Transfer Agent").
See "How to Redeem Shares" on page 45 of this Prospectus.
Pegasus Funds 3
<PAGE>
Fund Expenses
The purpose of the following tables is to assist investors in understanding the
various costs and expenses that an investor in a Fund will bear, the payment of
which will reduce an investor's return on an annual basis.
Expense Table
<TABLE>
<CAPTION>
CLASS A CLASS B
- ------------------------------------------------------------------------------------------------------------------------
EQUITY INDEX, BOND, EQUITY INDEX,
MARKET EXPANSION INTERNATIONAL MARKET EXPANSION
INDEX+, MULTI BOND, HIGH INDEX+, MULTI
SECTOR BOND, YIELD BOND, SECTOR BOND,
INTERMEDIATE MUNICIPAL INTERMEDIATE
SHORT BOND BOND AND BOND AND SHORT BOND BOND AND
AND SHORT INTERMEDIATE MICHIGAN ALL AND SHORT INTERMEDIATE ALL
SHAREHOLDER MUNICIPAL MUNICIPAL MUNICIPAL OTHER MUNICIPAL MUNICIPAL OTHER
TRANSACTION EXPENSES BOND FUNDS BOND FUNDS BOND FUNDS FUNDS BOND FUNDS BOND FUNDS FUNDS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) 1.00% 3.00% 4.50% 5.00% None None None
- -----------------------------------------------------------------------------------------------------------------------------
Transaction Fee Imposed on Purchases+ None None+ None None None None+ None
- -----------------------------------------------------------------------------------------------------------------------------
Sales Charge on Reinvested Dividends None None None None None None None
- -----------------------------------------------------------------------------------------------------------------------------
Maximum Deferred Sales Charge Imposed On
Redemptions (as a percentage of the
amount subject to charge) None* None* None* None* 1.00% 3.00% 5.00%
- -----------------------------------------------------------------------------------------------------------------------------
Redemption Fees None None None None None None None
- -----------------------------------------------------------------------------------------------------------------------------
Exchange Fees None None None None None None None
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS I
- --------------------------------------------------
SHAREHOLDER ALL
TRANSACTION EXPENSES FUNDS+
- --------------------------------------------------
<S> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) None
- --------------------------------------------------
Transaction Fee Imposed on Purchases+ None+
- --------------------------------------------------
Sales Charge on Reinvested Dividends None
- --------------------------------------------------
Maximum Deferred Sales Charge Imposed On
Redemptions (as a percentage of the
amount subject to charge) None
- --------------------------------------------------
Redemption Fees None
- --------------------------------------------------
Exchange Fees None
- --------------------------------------------------
</TABLE>
* A contingent deferred sales charge of up to 1.00% may be assessed on certain
redemptions of Class A shares purchased without an initial sales charge as
part of an investment of $1 million or more.
+ A transaction fee only applies to the Market Expansion Index Fund. To prevent
the Market Expansion Index Fund from being adversely affected by the
transaction costs associated with share purchases, the Fund will sell shares
at a price equal to the net asset value of the shares plus a transaction fee
equal to 0.50% of such value. Such fees are not sales charges, but are
retained by the Fund for the benefit of all shareholders. This fee will not
apply to in-kind contributions, reinvested dividends or capital gain
contributions; however, it will apply to exchanges. Furthermore, a sales
charge will also be imposed on purchases of Class A shares. See "Transaction
Fee Imposed on Share Purchases" below.
4 Pegasus Funds
<PAGE>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average daily net assets)
Class A Shares
<TABLE>
<CAPTION>
MANAGEMENT 12B- TOTAL
FEES AFTER 1 OTHER OPERATING
WAIVERS FEES EXPENSES(1) EXPENSES(1)
- -------------------------------------------------------------------------------
ASSET ALLOCATION FUNDS:
<S> <C> <C> <C> <C>
Managed Assets Conservative
Fund 0.64%(2)(3) None 0.61%(2)(3) 1.25%(2)(3)
Managed Assets Balanced Fund 0.54%(2)(3) None 0.71%(2)(3) 1.25%(2)(3)
Managed Assets Growth Fund 0.19%(2)(3) None 1.06%(2)(3) 1.25%(2)(3)
- -------------------------------------------------------------------------------
EQUITY FUNDS:
Equity Income Fund 0.50% None 0.45% 0.95%
Growth Fund 0.60% None 0.45% 1.05%
Mid-Cap Opportunity Fund 0.60% None 0.51% 1.11%
Small-Cap Opportunity Fund 0.70% None 0.47% 1.17%
Intrinsic Value Fund 0.60% None 0.47% 1.07%
Growth and Value Fund 0.59%(3) None 0.51%(3) 1.10%(3)
Equity Index Fund 0.10% None 0.52% 0.57%
Market Expansion Index Fund 0.20%(3) None 0.52%(3) 0.72%(3)
International Equity Fund 0.80% None 0.54% 1.34%
- -------------------------------------------------------------------------------
BOND FUNDS:
Intermediate Bond Fund 0.40% None 0.50% 0.90%
Bond Fund 0.40% None 0.47% 0.87%
Short Bond Fund 0.33%(3) None 0.49%(3) 0.82%(3)
Multi Sector Bond Fund 0.40% None 0.47% 0.87%
International Bond Fund 0.50%(3) None 0.65%(3) 1.15%(3)
High Yield Bond Fund 0.25%(3) None 0.97%(3) 1.22%(3)
- -------------------------------------------------------------------------------
MUNICIPAL BOND FUNDS:
Municipal Bond Fund 0.40% None 0.45% 0.85%
Short Municipal Bond Fund 0.35%(3) None 0.52%(3) 0.87%(3)
Intermediate Municipal Bond
Fund 0.40% None 0.44% 0.84%
Michigan Municipal Bond Fund 0.34%(3) None 0.57%(3) 0.91%(3)
</TABLE>
- --------------------------------------------------------------------------------
(1) Other Expenses and Total Operating Expenses: for each Fund have been
restated to reflect current expenses; and for the Asset Allocation Funds
include expenses (including management fees) borne indirectly by them in
connection with their investments in the Underlying Funds.
(2) Management Fees After Waivers, Other Expenses and Total Operating Expenses
of the Asset Allocation Funds have been calculated based upon certain
assumptions, including assumptions about the allocation of each Asset
Allocation Fund's assets among the Underlying Funds. Management Fees After
Waivers and Other Expenses of the Asset Allocation Funds will differ from
the amounts shown depending upon the actual allocation of an Asset
Allocation Fund's assets among the Underlying Funds.
(3) Absent fee waivers and/or expense reimbursements, Total Operating Expenses
applicable to Class A shares of the Managed Assets Conservative, Managed
Assets Balanced, Managed Assets Growth, Growth and Value, Market Expansion
Index, Short Bond, International Bond, High Yield Bond, Short Municipal
Bond and Michigan Municipal Bond Funds would have been 1.26%, 1.36%, 1.71%,
1.11%, 0.77%, 0.84%, 1.35%, 1.67%, 0.92% and 0.97%, respectively.
Pegasus Funds 5
<PAGE>
EXAMPLE
Based upon the assumptions in the foregoing chart an investor would pay the
following expenses on a $1,000 investment, assuming (1) 5% annual return and
(2) redemption at the end of each period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSET ALLOCATION FUNDS:
Managed Assets Conservative Fund $62 $88 $116 $194
Managed Assets Balanced Fund $62 $88 $116 $194
Managed Assets Growth Fund $62 $88 $116 $194
- --------------------------------------------------------------------------------------
EQUITY FUNDS:
Equity Income Fund $59 $79 $100 $161
Growth Fund $60 $82 $105 $172
Mid-Cap Opportunity Fund $61 $84 $108 $179
Small-Cap Opportunity Fund $61 $85 $111 $186
Intrinsic Value Fund $60 $82 $106 $175
Growth and Value Fund $61 $83 $108 $178
Equity Index Fund $36 $49 $ 64 $105
Market Expansion Index Fund $50 $68 N/A N/A
International Equity Fund $63 $91 $120 $204
- --------------------------------------------------------------------------------------
BOND FUNDS:
Intermediate Bond Fund $39 $58 $ 79 $138
Bond Fund $54 $72 $ 91 $148
Short Bond Fund $18 $36 $ 55 $111
Multi Sector Bond Fund $39 $57 $ 77 $134
International Bond Fund $56 $80 $106 $179
High Yield Bond Fund $57 $82 $109 $187
- --------------------------------------------------------------------------------------
MUNICIPAL BOND FUNDS:
Municipal Bond Fund $53 $71 $ 90 $145
Short Municipal Bond Fund $19 $38 N/A N/A
Intermediate Municipal Bond Fund $38 $56 $ 75 $131
Michigan Municipal Bond Fund $54 $73 $ 93 $152
</TABLE>
- --------------------------------------------------------------------------------
6 Pegasus Funds
<PAGE>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average daily net assets)
Class B Shares
<TABLE>
<CAPTION>
MANAGEMENT TOTAL
FEES 12B-1 OTHER OPERATING
AFTER WAIVERS FEES EXPENSES(1) EXPENSES(1)
- --------------------------------------------------------------------------------
ASSET ALLOCATION FUNDS:
<S> <C> <C> <C> <C>
Managed Assets Conservative
Fund 0.64%(2)(3) 0.75% 0.61%(2)(3) 2.00%(2)(3)
Managed Assets Balanced
Fund 0.54%(2)(3) 0.75% 0.71%(2)(3) 2.00%(2)(3)
Managed Assets Growth Fund 0.19%(2)(3) 0.75% 1.06%(2)(3) 2.00%(2)(3)
- --------------------------------------------------------------------------------
EQUITY FUNDS:
Equity Income Fund 0.50% 0.75% 0.45% 1.70%
Growth Fund 0.60% 0.75% 0.45% 1.80%
Mid-Cap Opportunity Fund 0.60% 0.75% 0.51% 1.86%
Small-Cap Opportunity Fund 0.70% 0.75% 0.47% 1.92%
Intrinsic Value Fund 0.60% 0.75% 0.47% 1.82%
Growth and Value Fund 0.59%(3) 0.75% 0.52%(3) 1.85%(3)
Equity Index Fund 0.10% 0.75% 0.47% 1.37%
Market Expansion Index Fund 0.20%(3) 0.75% 0.52%(3) 1.47%(3)
International Equity Fund 0.80% 0.75% 0.54% 2.09%
- --------------------------------------------------------------------------------
BOND FUNDS:
Intermediate Bond Fund 0.40% 0.75% 0.50% 1.65%
Bond Fund 0.40% 0.75% 0.47% 1.62%
Short Bond Fund 0.33%(3) 0.75% 0.49%(3) 1.57%(3)
Multi Sector Bond Fund 0.40% 0.75% 0.47% 1.62%
International Bond Fund 0.50%(3) 0.75% 0.65%(3) 1.90%(3)
High Yield Bond Fund 0.25%(3) 0.75% 0.97%(3) 1.97%(3)
- --------------------------------------------------------------------------------
MUNICIPAL BOND FUNDS:
Municipal Bond Fund 0.40% 0.75% 0.45% 1.60%
Short Municipal Bond Fund 0.35%(3) 0.75% 0.52%(3) 1.62%(3)
Intermediate Municipal Bond
Fund 0.40% 0.75% 0.44% 1.59%
Michigan Municipal Bond
Fund 0.34%(3) 0.75% 0.57%(3) 1.66%(3)
</TABLE>
- --------------------------------------------------------------------------------
(1) Other Expenses and Total Operating Expenses for each Fund have been
restated to reflect current expenses; and for the Asset Allocation Funds
include expenses (including management fees) borne indirectly by them in
connection with their investments in the Underlying Funds.
(2) Management Fees After Waivers, Other Expenses and Total Operating Expenses
of the Asset Allocation Funds have been calculated based upon certain
assumptions, including assumptions about the allocation of each Asset
Allocation Fund's assets among the Underlying Funds. Management Fees After
Waivers and Other Expenses of the Asset Allocation Funds will differ from
the amounts shown depending upon the actual allocation of an Asset
Allocation Fund's assets among the Underlying Funds.
(3) Absent fee waivers and/or expense reimbursements, Total Operating Expenses
applicable to Class B shares of the Managed Assets Conservative, Managed
Assets-Balanced, Managed Assets Growth, Growth and Value, Market Expansion
Index, Short Bond, International Bond, High Yield Bond, Short Municipal
Bond and Michigan Municipal Bond Funds would have been 2.01%, 2.11%, 2.46%,
1.86%, 1.52%, 1.59%, 2.10%, 2.42%, 1.67% and 1.72%, respectively.
Pegasus Funds 7
<PAGE>
EXAMPLE
Based upon the assumptions in the foregoing chart, an investor would pay the
following expenses on a $1,000 investment, assuming (1) 5% annual return and
(2) redemption at the end of each period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------------------------
ASSET ALLOCATION FUNDS:
<S> <C> <C> <C> <C>
Managed Assets Conservative Fund $71/$21* $ 93/63* $129/$109* $206+
Managed Assets Balanced Fund $71/$21* $ 93/63* $129/$109* $206+
Managed Assets Growth Fund $71/$21* $ 93/63* $129/$109* $206+
- ------------------------------------------------------------------------------
EQUITY FUNDS:
Equity Income Fund $67/$17* $84/$54* $113/$ 93* $173+
Growth Fund $68/$18* $87/$57* $118/$ 98* $184+
Mid-Cap Opportunity Fund $69/$19* $89/$59* $121/$101* $190+
Small-Cap Opportunity Fund $70/$20* $91/$61* $125/$105* $197+
Intrinsic Value Fund $69/$19* $87/$57* $119/$ 99* $186+
Growth and Value Fund $69/$19* $89/$59* $121/$101* $189+
Equity Index Fund $44/$14* $64/$44* $ 85/$ 75* $126+
Market Expansion Index Fund $50/$15* $67/$47* N/A N/A
International Equity Fund $71/$21* $96/$66* $133/$113* $215+
- ------------------------------------------------------------------------------
BOND FUNDS:
Intermediate Bond Fund $47/$17* $72/$52* $100/$ 90* $158+
Bond Fund $67/$17* $81/$51* $109/$ 89* $163+
Short Bond Fund $26/$16* $ 42+ $ 61+ $116+
Multi Sector Bond Fund $47/$17* $71/$51* $ 99/$ 89* $155+
International Bond Fund $69/$19* $88/$58* $120/$100* $195+
High Yield Bond Fund $70/$20* $90/$60* $124/$104* $202+
- ------------------------------------------------------------------------------
MUNICIPAL BOND FUNDS:
Municipal Bond Fund $66/$16* $81/$51* $108/$ 88* $161+
Short Municipal Bond Fund $26/$17* $ 43+ N/A N/A
Intermediate Municipal Bond Fund $46/$16* $71/$51* $ 97/$ 87* $151+
Michigan Municipal Bond Fund $67/$17* $83/$53* $111/$ 91* $168+
</TABLE>
- --------------------------------------------------------------------------------
* Assuming no redemption of Class B shares.
+ Assumes conversion to Class A shares.
8 Pegasus Funds
<PAGE>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average daily net assets)
Class I Shares
<TABLE>
<CAPTION>
MANAGEMENT 12B- TOTAL
FEES 1 OTHER OPERATING
AFTER WAIVERS FEES EXPENSES(1) EXPENSES(1)
- --------------------------------------------------------------------------------
ASSET ALLOCATION FUNDS:
<S> <C> <C> <C> <C>
Managed Assets Conservative
Fund 0.64%(2)(3) None 0.36%(2)(3) 1.00%(2)(3)
Managed Assets Balanced Fund 0.54%(2)(3) None 0.46%(2)(3) 1.00%(2)(3)
Managed Assets Growth Fund 0.19%(2)(3) None 0.81%(2)(3) 1.00%(2)(3)
- --------------------------------------------------------------------------------
EQUITY FUNDS:
Equity Income Fund 0.50% None 0.20% 0.70%
Growth Fund 0.60% None 0.20% 0.80%
Mid-Cap Opportunity Fund 0.60% None 0.26% 0.86%
Small-Cap Opportunity Fund 0.70% None 0.22% 0.92%
Intrinsic Value Fund 0.60% None 0.22% 0.82%
Growth and Value Fund 0.59%(3) None 0.26%(3) 0.85%(3)
Equity Index Fund 0.10% None 0.27% 0.37%
Market Expansion Index Fund 0.20%(3) None 0.27%(3) 0.47%(3)
International Equity Fund 0.80% None 0.29% 1.09%
- --------------------------------------------------------------------------------
BOND FUNDS:
Intermediate Bond Fund 0.40% None 0.25% 0.65%
Bond Fund 0.40% None 0.22% 0.62%
Short Bond Fund 0.33%(3) None 0.24%(3) 0.57%(3)
Multi Sector Bond Fund 0.40% None 0.22% 0.62%
International Bond Fund 0.50%(3) None 0.40%(3) 0.90%(3)
High Yield Bond Fund 0.25%(3) None 0.72%(3) 0.97%(3)
- --------------------------------------------------------------------------------
MUNICIPAL BOND FUNDS:
Municipal Bond Fund 0.40% None 0.20% 0.60%
Short Municipal Bond Fund 0.35%(3) None 0.27%(3) 0.62%(3)
Intermediate Municipal Bond
Fund 0.40% None 0.19% 0.59%
Michigan Municipal Bond Fund 0.34%(3) None 0.32%(3) 0.66%(3)
</TABLE>
- --------------------------------------------------------------------------------
(1) Other Expenses and Total Operating Expenses for each Fund have been
restated to reflect current expenses; and for the Asset Allocation Funds
include expenses (including management fees) borne indirectly by them in
connection with their investments in the Underlying Funds.
(2) Management Fees After Waivers, Other Expenses and Total Operating Expenses
of the Asset Allocation Funds have been calculated based upon certain
assumptions, including assumptions about the allocation of each Asset
Allocation Fund's assets among the Underlying Funds. Management Fees After
Waivers and Other Expenses of the Asset Allocation Funds will differ from
the amounts shown depending upon the actual allocation of an Asset
Allocation Fund's assets among the Underlying Funds.
(3) Absent fee waivers and/or expense reimbursements, Total Operating Expenses
applicable to Class I shares of the Managed Assets Conservative, Managed
Assets Balanced, Managed Assets Growth, Growth and Value, Market Expansion
Index, Short Bond, International Bond, High Yield Bond, Short Municipal
Bond and Michigan Municipal Bond Funds would have been 1.01%, 1.11%, 1.46%,
0.86%, 0.52%, 0.59%, 1.10%, 1.42%, 0.67% and 0.72%, respectively.
Pegasus Funds 9
<PAGE>
EXAMPLE
Based upon the assumptions in the foregoing chart, an investor would pay the
following expenses on a $1,000 investment, assuming (1) 5% annual return and
(2) redemption at the end of each period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSET ALLOCATION FUNDS:
Managed Assets Conservative Fund $10 $ 32 $55 $123
Managed Assets Balanced Fund $10 $ 32 $55 $123
Managed Assets Growth Fund $10 $ 32 $55 $123
- --------------------------------------------------------------------------------------
EQUITY FUNDS:
Equity Income Fund $ 7 $ 22 $39 $ 87
Growth Fund $ 8 $ 25 $44 $ 98
Mid-Cap Opportunity Fund $ 9 $ 27 $47 $105
Small-Cap Opportunity Fund $ 9 $ 29 $51 $114
Intrinsic Value Fund $ 8 $ 26 $45 $100
Growth and Value Fund $ 9 $ 27 $47 $105
Equity Index Fund $ 4 $ 12 $21 $ 47
Market Expansion Index Fund $10 $ 20 N/A N/A
International Equity Fund $11 $ 36 $62 $137
- --------------------------------------------------------------------------------------
BOND FUNDS:
Intermediate Bond Fund $ 7 $ 21 $36 $ 81
Bond Fund $ 6 $ 20 $34 $ 76
Short Bond Fund $ 6 $ 18 $32 $ 72
Multi Sector Bond Fund $ 6 $ 20 $35 $ 78
International Bond Fund $ 9 $ 29 $50 $111
High Yield Bond $10 $ 31 $54 $119
- --------------------------------------------------------------------------------------
MUNICIPAL BOND FUNDS:
Municipal Bond Fund $ 6 $ 19 $34 $ 75
Short Municipal Bond Fund $ 6 $ 20 N/A N/A
Intermediate Municipal Bond Fund $ 6 $ 19 $33 $ 74
Michigan Municipal Bond Fund $ 7 $ 21 $37 $ 82
</TABLE>
- --------------------------------------------------------------------------------
THE AMOUNTS LISTED IN THE EXAMPLES SHOULD NOT BE CONSIDERED AS REPRESENTATIVE
OF FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
INDICATED. THE MANAGED ASSETS GROWTH FUND, HIGH YIELD BOND FUND, SHORT
MUNICIPAL BOND FUND AND MARKET EXPANSION INDEX FUND ARE NEW AND THE ABOVE
FIGURES REGARDING THESE FUNDS ARE BASED ON ADJUSTMENTS AND/OR EXPENSES EXPECTED
TO BE INCURRED DURING THE FUNDS' CURRENT FISCAL YEAR. MOREOVER, WHILE EACH
EXAMPLE ASSUMES A 5% ANNUAL RETURN, A FUND'S ACTUAL PERFORMANCE MAY RESULT IN
AN ACTUAL RETURN GREATER OR LESS THAN 5%.
Long-term investors in Class B shares of a Fund could pay more in 12b-1 fees
than the economic equivalent of paying a front-end sales charge. Investors in
the Asset Allocation Funds should recognize that they may invest directly in
the Underlying Funds and that by investing in Underlying Funds through the
Asset Allocation Funds, an investor may pay more than he or she would otherwise
have paid by directly investing in the Underlying Funds. The Investment
Adviser, NBD, FNBC, ANB and their affiliates and certain Service Agents and
financial institutions may charge their clients fees which are not reflected in
the foregoing tables in connection with an investment in the Funds.
10 Pegasus Funds
<PAGE>
Pegasus Funds
ASSET ALLOCATION FUNDS
These Funds offer investors a convenient means of investing in shares of the
Underlying Funds in order to achieve a target asset allocation in the Equity,
Debt and Cash Equivalent market sectors.
The MANAGED ASSETS CONSERVATIVE FUND seeks to provide long-term total return;
capital appreciation is a secondary consideration.
The MANAGED ASSETS BALANCED FUND seeks to achieve long-term total return
through a combination of capital appreciation and current income.
The MANAGED ASSETS GROWTH FUND seeks to achieve long-term total return;
current income is a secondary consideration.
EQUITY FUNDS
These Funds will invest principally in common stocks, preferred stocks and
convertible securities, including those in the form of depository receipts, as
well as warrants to purchase such securities (collectively, "Equity
Securities"):
The EQUITY INCOME FUND seeks to provide income; capital appreciation and
growth of earnings are secondary, but nonetheless important, goals. In seeking
to achieve its objective, this Fund will invest primarily in income-producing
Equity Securities of domestic issuers.
The GROWTH FUND seeks long-term capital appreciation. In seeking to achieve
its objective, this Fund will invest primarily in Equity Securities of domestic
issuers believed by the Investment Adviser to have above-average growth
characteristics.
The MID-CAP OPPORTUNITY FUND seeks to achieve long-term capital appreciation.
In seeking to achieve its objective, this Fund will invest primarily in Equity
Securities of companies with intermediate market capitalizations.
The SMALL-CAP OPPORTUNITY FUND seeks long-term capital appreciation. In
seeking to achieve its objective, this Fund will invest primarily in Equity
Securities of companies with small capitalizations.
The INTRINSIC VALUE FUND seeks to provide long-term capital appreciation. In
seeking to achieve its objective, this Fund will invest primarily in Equity
Securities believed by the Investment Adviser to represent a value or potential
worth which is not fully recognized by prevailing market prices.
The GROWTH AND VALUE FUND seeks to achieve long-term capital growth, with
income a secondary consideration. In seeking to achieve its objective, this
Fund will invest primarily in Equity Securities of larger companies that are
attractively priced relative to their growth potential.
The EQUITY INDEX FUND seeks to provide an investment return which
substantially duplicates the price and yield performance of domestically traded
common stock in the aggregate, as represented by the Standard & Poor's 500
Composite Stock Price Index (the "S&P 500 Index").
The MARKET EXPANSION INDEX FUND seeks to provide an investment return which
substantially duplicates the price and yield performance of domestically traded
common stocks in the small and mid capitalization equity markets, as
represented by a market capitalization weighted combination of the Standard &
Poor's SmallCap 600 Index ("S&P SmallCap Index") and the Standard & Poor's
MidCap 400 Index ("S&P MidCap Index").
The INTERNATIONAL EQUITY FUND seeks to achieve long-term capital appreciation.
In seeking to achieve its objective, this Fund will invest primarily in Equity
Securities of foreign issuers.
BOND FUNDS
These Funds will invest principally in a broad range of debt securities ("Debt
Securities"). Debt Securities in which the Bond Funds normally invest include:
(i) obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities; (ii) corporate, bank and commercial obligations; (iii)
securities issued or guaranteed by foreign governments, their agencies or
instrumentalities; (iv) securities issued by supranational banks; (v) mortgage
backed securities; (vi) securities representing interests in pools of assets;
and (vii) variable-rate bonds, zero coupon bonds, debentures, and various types
of demand instruments. Obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities may include mortgage backed securities, as
well as "stripped securities" (both interest-only and principal-only) and
custodial receipts for Treasury securities:
The INTERMEDIATE BOND FUND seeks to maximize total rate of return while
providing relative stability of principal by investing predominantly in
intermediate-term Debt Securities. While the Fund may purchase securities with
maturities or average lives of up to 15 years, during normal market conditions,
its average portfolio maturity is expected to be between 3 and 6 years.
The BOND FUND seeks to maximize total rate of return by investing
predominantly in intermediate and long-term Debt Securities. During normal
market conditions, the Fund's average weighted portfolio maturity is expected
to be between 6 and 12 years.
The SHORT BOND FUND seeks to maximize total rate of return while providing
relative stability of principal. While the Fund may purchase Debt Securities
with maturities or average lives of up to 10 years, during normal market
conditions, its average weighted portfolio maturity will be limited to a
maximum of 3 years.
The MULTI SECTOR BOND FUND seeks to provide as high a level of current income
as is consistent with relative stability of principal. In seeking to achieve
its objective, this Fund will invest primarily in a portfolio of U.S. dollar
denominated investment grade Debt Securities of
Pegasus Funds 11
<PAGE>
domestic and foreign issuers which, under normal market conditions, will have a
dollar-weighted average maturity expected to range between 3 and 10 years.
The INTERNATIONAL BOND FUND seeks both long-term capital appreciation and
current income. In seeking to achieve its objective, the Fund will invest
primarily in investment grade Debt Securities of foreign issuers.
The HIGH YIELD BOND FUND seeks high current income. In seeking to achieve its
objective, the Fund will invest primarily in a diversified portfolio of fixed
income securities which, under normal market conditions, are expected to be
lower-rated corporate debt obligations or unrated obligations of comparable
quality.
MUNICIPAL BOND FUNDS
These Funds will invest principally in obligations issued by or on behalf of
states, territories and possessions of the United States and the District of
Columbia and their respective political subdivisions, agencies (including
multi-state agencies), instrumentalities and authorities, the interest from
which is, in the opinion of bond counsel for the issuers, exempt from regular
federal income tax ("Municipal Obligations"):
The MUNICIPAL BOND FUND seeks to provide as high a level of current income
exempt from federal income tax as is consistent with relative stability of
principal. In seeking to achieve its objective, this Fund will invest primarily
in a portfolio of investment grade Municipal Obligations without regard to
maturity.
The SHORT MUNICIPAL BOND FUND seeks to provide as high a level of current
income exempt from federal income tax as is consistent with relative stability
of principal. In seeking to achieve its objective, this Fund will invest
primarily in a portfolio of investment grade Municipal Obligations which, under
normal market conditions, will have a dollar-weighted average maturity
generally between one and three years.
The INTERMEDIATE MUNICIPAL BOND FUND seeks to provide as high a level of
current income exempt from federal income tax as is consistent with relative
stability of principal. In seeking to achieve its objective, this Fund will
invest primarily in a portfolio of investment grade Municipal Obligations
which, under normal conditions, will have a dollar-weighted average maturity
expected to range between 3 and 10 years.
The MICHIGAN MUNICIPAL BOND FUND seeks to provide as high a level of current
income exempt from federal, and to the extent possible, from State of Michigan
income taxes as is consistent with relative stability of principal. In seeking
to achieve its objective, this Fund will invest primarily in a portfolio of
investment grade debt obligations issued by the State of Michigan, its
political subdivisions, municipalities, corporations and authorities, and
certain territories and possessions of the United States; the interest on which
is, in the opinion of bond counsel to the issuers, exempt from federal and
State of Michigan income taxes ("Michigan Municipal Obligations") without
regard to maturity.
Background
Shares of each of the Funds have been classified into three separate classes of
shares--Class A shares, Class B shares and Class I shares. Each share
represents an equal proportionate interest in the related Fund.
Financial Highlights
The tables below provide supplementary information to the Funds' financial
statements, which are incorporated by reference into their Statement of
Additional Information and set forth certain information concerning the
historic investment results of Fund shares. They present a per share analysis
of how each Fund's net asset value has changed during the periods presented.
The tables for the fiscal periods ended December 31, 1995 and prior with
respect to the Managed Assets Conservative, Equity Income, Growth, Small-Cap
Opportunity, Multi Sector Bond , International Bond, Municipal Bond and
Intermediate Municipal Bond Funds have been derived from the financial
statements which have been audited by Ernst & Young LLP, such Funds' prior
independent auditors, whose report dated February 23, 1996 expressed an
unqualified opinion on such financial statements. The tables for all Funds for
the fiscal year ended December 31, 1996, and for periods prior to December 31,
1995 with respect to the Managed Assets Balanced, Mid-Cap Opportunity,
Intrinsic Value, Growth and Value, Equity Index, International Equity,
Intermediate Bond, Bond, Short Bond and Michigan Municipal Bond Funds, have
been derived from such Funds' financial statements which have been audited by
Arthur Andersen LLP, the Trust's independent auditors, whose report thereon is
incorporated by reference into the Statement of Additional Information along
with the financial statements. The financial data included in these tables
should be read in conjunction with the financial statements and related notes
incorporated by reference into the Statement of Additional Information. The
information for the Funds for the period ended June 30, 1997 is unaudited and
has been derived from the financial statements and notes thereto incorporated
by reference into the Statement of Additional Information. Further information
about the performance of the Funds is available in the annual and semi-annual
reports to shareholders. The Statement of Additional Information and the annual
report to shareholders may be obtained from the Trust free of charge by calling
(800) 688-3350.
12 Pegasus Funds
<PAGE>
[ Intentionally Left Blank ]
Pegasus Funds 13
<PAGE>
PEGASUS FUNDS
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
NET DISTRIBUTIONS DISTRIBUTIONS
NET ASSET REALIZED DISTRIBUTIONS IN EXCESS IN EXCESS
VALUE NET AND UNREALIZED FROM NET OF NET DISTRIBUTIONS OF TAX
BEGINNING INVESTMENT GAINS (LOSSES) INVESTMENT INVESTMENT FROM REALIZED REALIZED RETURN OF
OF PERIOD INCOME ON INVESTMENTS INCOME INCOME GAINS GAINS CAPITAL
--------- ---------- -------------- ------------- ------------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MANAGED ASSETS CONSERVATIVE FUND
CLASS A SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $15.34 0.31 0.72 (0.32) -- -- -- --
YEAR ENDED
1996 $14.54 0.56 0.89 (0.56) -- (0.09) -- --
1995 $12.13 0.64 2.48 (0.68) -- (0.03) -- --
1994 $13.11 0.73 (0.98) (0.72) -- (0.01) -- --
1993 $12.68 0.72 0.61 (0.72) -- (0.18) -- --
1992 $12.56 0.79 0.26 (0.77) -- (0.16) -- --
1991 $10.79 0.83 1.77 (0.83) -- -- -- --
1990 $11.54 0.86 (0.54) (0.88) -- (0.19) -- --
1989 $10.66 0.88 1.10 (0.89) -- (0.21) -- --
1988 $ 9.73 0.78 0.92 (0.74) -- (0.03) -- --
1987 $10.75 0.70 (0.85) (0.77) -- (0.10) -- --
CLASS B SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $15.36 0.25 0.72 (0.27) -- -- -- --
YEAR ENDED
1996 $14.56 0.44 0.89 (0.44) -- (0.09) -- --
1995(1) $12.42 0.45 2.17 (0.45) -- (0.03) -- --
1994(2) $13.05 0.51 (0.91) (0.54) -- (0.01) -- --
CLASS I SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $15.38 0.32 0.74 (0.33) -- -- -- --
YEAR ENDED
1996 $14.57 0.60 0.89 (0.59) -- (0.09) -- --
1995(4) $12.42 0.57 2.18 (0.57) -- (0.03) -- --
- -------------------------------------------------------------------------------------------------------------------------------
MANAGED ASSETS BALANCED FUND
CLASS A SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $11.63 0.16 0.85 (0.17) -- -- -- --
YEAR ENDED
1996 $11.24 0.35 1.06 (0.34) -- (0.68) -- --
1995 $ 9.53 0.35 1.83 (0.35) -- (0.12) -- --
1994 $10.00 0.28 (0.48) (0.27) -- -- -- --
CLASS B SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $12.81 0.13 0.94 (0.13) -- -- -- --
YEAR ENDED
1996(5) $12.16 0.08 0.81 (0.07) -- (0.17) -- --
CLASS I SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $11.59 0.17 0.88 (0.18) -- -- -- --
YEAR ENDED
1996 $11.24 0.39 1.02 (0.38) -- (0.68) -- --
1995 $ 9.53 0.35 1.83 (0.35) -- (0.12) -- --
1994 $10.00 0.28 (0.48) (0.27) -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
MANAGED ASSETS GROWTH FUND
CLASS A SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $10.08 0.09 1.02 (0.10) -- -- -- --
YEAR ENDED
1996(6) $10.00 -- 0.08 -- -- -- -- --
CLASS B SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $ 9.99 0.07 0.97 (0.09) -- -- -- --
YEAR ENDED
1996(6) $10.00 -- (0.01) -- -- -- -- --
CLASS I SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $10.13 0.14 0.97 (0.11) -- -- -- --
YEAR ENDED
1996(6) $10.00 -- 0.13 -- -- -- -- --
<CAPTION>
TOTAL
DISTRIBUTIONS
-------------
<S> <C>
MANAGED ASSETS CONSERVATIVE FUND
CLASS A SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.32)
YEAR ENDED
1996 (0.65)
1995 (0.71)
1994 (0.73)
1993 (0.90)
1992 (0.93)
1991 (0.83)
1990 (1.07)
1989 (1.10)
1988 (0.77)
1987 (0.87)
CLASS B SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.27)
YEAR ENDED
1996 (0.53)
1995(1) (0.48)
1994(2) (0.55)
CLASS I SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.33)
YEAR ENDED
1996 (0.68)
1995(4) (0.60)
- -------------------------------------------------------------------------------------------------------------------------------
MANAGED ASSETS BALANCED FUND
CLASS A SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.17)
YEAR ENDED
1996 (1.02)
1995 (0.47)
1994 (0.27)
CLASS B SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.13)
YEAR ENDED
1996(5) (0.24)
CLASS I SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.18)
YEAR ENDED
1996 (1.06)
1995 (0.47)
1994 (0.27)
- -------------------------------------------------------------------------------------------------------------------------------
MANAGED ASSETS GROWTH FUND
CLASS A SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.10)
YEAR ENDED
1996(6) --
CLASS B SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.09)
YEAR ENDED
1996(6) --
CLASS I SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.11)
YEAR ENDED
1996(6) --
</TABLE>
- --------------------------------------------------------------------------------
See page 30 for Notes to Financial Highlights.
14 Pegasus Funds
<PAGE>
- --------------------------------------------------------------------------------
PEGASUS FUNDS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATIO
RATIO OF OF NET
EXPENSES INVESTMENT
RATIO TO AVERAGE INCOME
NET NET OF NET NET ASSETS TO AVERAGE
CONVERSION ASSET ASSETS RATIO OF INVESTMENT (EXCLUDING NET ASSETS
TO VALUE END OF EXPENSES INCOME FEE WAIVERS (EXCLUDING FEE PORTFOLIO AVERAGE
CLASS A END OF TOTAL PERIOD TO AVERAGE TO AVERAGE AND WAIVERS AND TURNOVER COMMISSION
SHARES PERIOD RETURN(A) (000) NET ASSETS NET ASSETS REIMBURSEMENTS) REIMBURSEMENTS) RATE RATE
- ---------- ------ --------- ------ ---------- ---------- --------------- --------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-- $16.05 13.64%+ $ 78,001 1.22%+ 4.07%+ 1.30%+ 3.99%+ 26.41% $0.06
-- $15.34 10.11% $ 69,301 1.18% 3.64% 1.33% 3.49% 63.41% $0.05
-- $14.54 26.40% $ 51,997 1.17% 4.88% 1.54% 4.51% 8.23% --
-- $12.13 (1.92)% $ 44,367 0.63% 5.77% 1.67% 4.73% 28.69% --
-- $13.11 10.70% $ 51,586 0.39% 5.54% 1.65% 4.28% 16.40% --
-- $12.68 8.68% $ 34,262 0.02% 6.24% 1.88% 4.38% 22.14% --
-- $12.56 24.87% $ 14,038 -- 7.04% 2.16% 4.88% 26.02% --
-- $10.79 2.94% $ 8,950 -- 7.71% 2.58% 5.13% 29.97% --
-- $11.54 19.08% $ 7,407 -- 7.74% 2.96% 4.78% 49.46% --
-- $10.66 17.78% $ 5,890 -- 7.38% 2.62% 4.76% 15.71% --
-- $ 9.73 (1.73)% $ 4,989 -- 6.61% 2.69% 3.92% 23.99% --
-- $16.07 12.90%+ $ 8,409 1.97%+ 3.32%+ 2.05%+ 3.24%+ 26.41% $0.06
-- $15.36 9.26% $ 5,736 1.93% 2.89% 2.07% 2.75% 63.41% $0.05
-- $14.56 21.42%++ $ 2,175 1.92%+ 3.89%+ 2.12%+ 3.70%+ 8.23%++ --
(12.10)(3) -- (3.13)%++ -- 1.21%+ 4.10%+ 2.17%+ 3.14%+ 28.69%++ --
-- $16.11 13.92%+ $ 5,420 0.97%+ 4.32%+ 1.05%+ 4.24%+ 26.41% $0.06
-- $15.38 10.43% $ 1,501 0.93% 3.89% 1.19% 3.63% 63.41% $0.05
-- $14.57 22.55%++ $ 1,294 0.77%+ 5.12%+ 1.22%+ 4.66%+ 8.23%++ --
- -------------------------------------------------------------------------------------------------------------------
-- $12.47 17.40%+ $ 88,010 1.22%+ 3.06%+ 1.28%+ 3.00%+ 41.66% $0.05
-- $11.63 12.99% $ 26,775 1.09% 3.13% 1.16% 3.06% 50.50% $0.07
-- $11.24 23.18% $ 9,986 0.91% 3.40% 1.09% 3.22% 31.76% --
-- $ 9.53 (1.95)% $ 8,168 0.85% 3.41% 1.56% 2.70% 37.49% --
-- $13.75 16.78%+ $ 4,097 1.96%+ 2.31%+ 2.02%+ 2.25%+ 41.66% $0.05
-- $12.81 7.30%++ $ 1,890 1.96%+ 1.35%+ 2.03%+ 1.28%+ 50.50% $0.07+
-- $12.46 18.08%+ $142,097 0.97%+ 3.31%+ 1.03%+ 3.25%+ 41.66% $0.05
-- $11.59 13.04% $101,596 0.94% 3.28% 1.01% 3.21% 50.05% $0.07
-- $11.24 23.18% $ 83,638 0.91% 3.40% 1.09% 3.22% 31.76% --
-- $ 9.53 (1.95)% $ 45,999 0.85% 3.41% 1.56% 2.70% 37.49% --
- -------------------------------------------------------------------------------------------------------------------
-- $11.09 22.06%+ $ 1,680 1.21%+ 2.20%+ 2.48%+ 0.93%+ 10.88% --
-- $10.08 0.80%++ $ 75 1.20%+ (0.45)%+ (3.50)%+ (2.75)%+ 0.00% --
-- $10.94 20.88%+ $ 2,064 1.96%+ 1.45%+ 3.09%+ 0.46%+ 10.88% --
-- $ 9.99 (0.10)%++ $ 17 1.95%+ (1.20)%+ (4.25)%+ (3.50)%+ 0.00% --
-- $11.13 22.00%+ $ 727 0.96%+ 2.45%+ 2.93%+ 0.67%+ 10.88% --
-- $10.13 1.30%++ $ 594 0.95%+ 0.20%+ (3.25)%+ (2.50)%+ 0.00% --
</TABLE>
Pegasus Funds 15
<PAGE>
PEGASUS FUNDS
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
NET DISTRIBUTIONS DISTRIBUTIONS
NET ASSET REALIZED DISTRIBUTIONS IN EXCESS IN EXCESS
VALUE NET AND UNREALIZED FROM NET OF NET DISTRIBUTIONS OF TAX
BEGINNING INVESTMENT GAINS (LOSSES) INVESTMENT INVESTMENT FROM REALIZED REALIZED RETURN OF
OF PERIOD INCOME ON INVESTMENTS INCOME INCOME GAINS GAINS CAPITAL
--------- ---------- -------------- ------------- ------------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EQUITY INCOME FUND
CLASS A SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $13.29 0.22 1.13 (0.22) -- -- -- --
YEAR ENDED
1996 $12.22 0.39 1.90 (0.38) -- (0.84) -- --
1995(7) $10.00 0.36 2.57 (0.36) (0.01) (0.34) -- --
CLASS B SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $13.28 0.19 1.11 (0.19) -- -- -- --
YEAR ENDED
1996 $12.22 0.30 1.88 (0.28) -- (0.84) -- --
1995(7) $10.00 0.29 2.56 (0.29) -- (0.34) -- --
CLASS I SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $13.25 0.23 1.14 (0.24) -- -- -- --
YEAR ENDED
1996 $12.21 0.45 1.87 (0.44) -- (0.84) -- --
1995(7) $10.00 0.42 2.55 (0.42) -- (0.34) -- --
- -------------------------------------------------------------------------------------------------------------------------------
GROWTH FUND
CLASS A SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $12.64 0.00 2.04 -- -- -- -- --
YEAR ENDED
1996 $11.97 0.05 1.04 (0.06) -- (0.36) -- --
1995(7) $10.00 0.11 2.86 (0.11) -- (0.89) -- --
CLASS B SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $12.56 (0.04) 2.03 -- -- -- -- --
YEAR ENDED
1996 $11.95 (0.02) 0.99 -- -- (0.36) -- --
1995(7) $10.00 0.06 2.84 (0.06) -- (0.89) -- --
CLASS I SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $12.63 0.02 2.06 (0.02) -- -- -- --
YEAR ENDED
1996 $11.97 0.09 1.02 (0.09) -- (0.36) -- --
1995(7) $10.00 0.15 2.86 (0.15) -- (0.89) -- --
- -------------------------------------------------------------------------------------------------------------------------------
MID-CAP OPPORTUNITY FUND
CLASS A SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $17.61 (0.01) 2.48 -- -- -- -- --
YEAR ENDED
1996 $15.15 0.02 3.74 (0.02) -- (1.28) -- --
1995 $13.34 0.06 2.57 (0.06) -- (0.76) -- --
1994 $14.49 0.07 (0.54) (0.07) -- (0.49) (0.02) (0.10)
1993 $12.37 0.10 2.87 (0.10) -- (0.75) -- --
1992(8) $10.95 0.08 1.88 (0.08) -- (0.46) -- --
CLASS B SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $ 9.57 (0.01) 1.32 -- -- -- -- --
YEAR ENDED
1996(9) $10.00 -- 0.79 (0.01) -- (1.21) -- --
CLASS I SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $17.61 0.01 2.48 (0.01) -- -- -- --
YEAR ENDED
1996 $15.15 0.04 3.74 (0.04) -- (1.28) -- --
1995 $13.34 0.06 2.57 (0.06) -- (0.76) -- --
1994 $14.49 0.07 (0.54) (0.07) -- (0.49) (0.02) (0.10)
1993 $12.37 0.10 2.87 (0.10) -- (0.75) -- --
1992 $10.40 0.11 2.43 (0.11) -- (0.46) -- --
1991(10) $10.00 0.09 0.43 (0.09) -- (0.03) -- --
<CAPTION>
TOTAL
DISTRIBUTIONS
-------------
<S> <C>
EQUITY INCOME FUND
CLASS A SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.22)
YEAR ENDED
1996 (1.22)
1995(7) (0.71)
CLASS B SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.17)
YEAR ENDED
1996 (1.12)
1995(7) (0.63)
CLASS I SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.24)
YEAR ENDED
1996 (1.28)
1995(7) (0.76)
- -------------------------------------------------------------------------------------------------------------------------------
GROWTH FUND
CLASS A SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) --
YEAR ENDED
1996 (0.42)
1995(7) (1.00)
CLASS B SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) --
YEAR ENDED
1996 (0.36)
1995(7) (0.95)
CLASS I SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.02)
YEAR ENDED
1996 (0.45)
1995(7) (1.04)
- -------------------------------------------------------------------------------------------------------------------------------
MID-CAP OPPORTUNITY FUND
CLASS A SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) --
YEAR ENDED
1996 (1.30)
1995 (0.82)
1994 (0.68)
1993 (0.85)
1992(8) (0.54)
CLASS B SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) --
YEAR ENDED
1996(9) (1.22)
CLASS I SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.01)
YEAR ENDED
1996 (1.32)
1995 (0.82)
1994 (0.68)
1993 (0.85)
1992 (0.57)
1991(10) (0.12)
</TABLE>
- --------------------------------------------------------------------------------
See page 30 for Notes to Financial Highlights.
16 Pegasus Funds
<PAGE>
PEGASUS FUNDS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATIO
RATIO OF OF NET
EXPENSES INVESTMENT
RATIO TO AVERAGE INCOME
NET NET OF NET NET ASSETS TO AVERAGE
CONVERSION ASSET ASSETS RATIO OF INVESTMENT (EXCLUDING NET ASSETS
TO VALUE END OF EXPENSES INCOME FEE WAIVERS (EXCLUDING FEE PORTFOLIO AVERAGE
CLASS A END OF TOTAL PERIOD TO AVERAGE TO AVERAGE AND WAIVERS AND TURNOVER COMMISSION
SHARES PERIOD RETURN(A) (000) NET ASSETS NET ASSETS REIMBURSEMENTS) REIMBURSEMENTS) RATE RATE
- ---------- ------ --------- ------ ---------- ---------- --------------- --------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-- $14.42 20.46%+ $ 11,714 0.95%+ 3.18%+ -- -- 19.11% $0.05
-- $13.29 19.29% $ 12,936 0.91% 3.29% 0.95% 3.25% 61.41% $0.04
-- $12.22 29.78%++ $ 2,873 1.11%+ 3.33%+ 1.44%+ 2.99%+ 44.07%++ --
-- $14.41 19.74%+ $ 2,181 1.70%+ 2.43%+ -- -- 19.11%+ $0.05
-- $13.28 18.28% $ 1,885 1.66% 2.54% 1.81% 2.39% 61.41% $0.04
-- $12.22 28.97%++ $ 593 1.90%+ 2.65%+ 2.65%+ 1.90%+ 44.07%++ --
-- $14.38 20.82%+ $301,609 0.70%+ 3.43%+ -- -- 19.11% $0.05
-- $13.25 19.58% $314,649 0.66% 3.54% 0.74% 3.46% 61.41% $0.04
-- $12.21 30.27%++ $283,927 0.65%+ 4.08%+ 0.77%+ 3.96%+ 44.07%++ --
- -----------------------------------------------------------------------------------------------------------------
-- $14.68 32.38% $ 36,843 1.04%+ 0.04%+ -- -- 9.00% $0.05
-- $12.64 20.10% $ 23,273 1.04% 0.43% 1.07% 0.40% 61.95% $0.02
-- $11.97 29.98%++ $ 4,329 1.21%+ 0.86%+ 1.39%+ 0.68%+ 106.02%++ --
-- $14.55 $ 1,176 1.79%+ (0.71)%+ -- -- 9.80% $0.05
-- $12.56 19.04% $ 1,094 1.79% (0.32)% 1.89% (0.42)% 61.95% $0.02
-- $11.95 29.15%++ $ 268 2.04%+ 0.02%+ 2.60%+ (0.54)%+ 106.02%++ --
-- $14.68 32.72%+ $576,226 0.79%+ 0.29%+ -- -- 9.00% $0.05
-- $12.63 20.36% $533,406 0.79% 0.68% 0.85% 0.62% 61.95% $0.02
-- $11.97 30.38%++ $293,944 0.80%+ 1.46%+ 0.92%+ 1.34%+ 106.02%++ --
- -----------------------------------------------------------------------------------------------------------------
-- $20.08 28.10%+ $125,492 1.07%+ (0.09)%+ -- -- 16.95% $0.04
-- $17.61 24.91% $ 91,516 0.93% 0.12% -- -- 34.87% $0.04
-- $15.15 19.88% $ 71,858 0.89% 0.37% -- -- 53.55% --
-- $13.34 (3.27)% $ 64,326 0.90% 0.53% -- -- 37.51% --
-- $14.49 24.01% $ 53,977 0.86% 0.71% -- -- 33.99% --
-- $12.37 27.93% $ 5,111 0.85%+ 1.05%+ -- -- 34.44%+ --
-- $10.88 27.30%+ $ 1,524 1.82%+ (0.84)%+ -- -- 16.95% $0.04
-- $ 9.57 7.94%++ $ 154 1.81%+ (0.59)%+ -- -- 34.87% $0.04
-- $20.09 28.46%+ $765,704 0.82% 0.17%+ -- -- 16.95% $0.04
-- $17.61 25.03% $677,608 0.81% 0.24% -- -- 34.87% $0.04
-- $15.15 19.88% $579,094 0.89% 0.37% -- -- 53.55% --
-- $13.34 (3.27)% $460,673 0.90% 0.53% -- -- 37.51% --
-- $14.49 24.01% $311,688 0.86% 0.71% -- -- 33.99% --
-- $12.37 24.56% $161,312 0.84% 1.09% -- -- 34.44% --
-- $10.40 8.92%+ $108,046 0.84%+ 1.56%+ -- -- 2.92% --
</TABLE>
- --------------------------------------------------------------------------------
Pegasus Funds 17
<PAGE>
PEGASUS FUNDS
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
NET DISTRIBUTIONS DISTRIBUTIONS
NET ASSET REALIZED DISTRIBUTIONS IN EXCESS IN EXCESS
VALUE NET AND UNREALIZED FROM NET OF NET DISTRIBUTIONS OF TAX
BEGINNING INVESTMENT GAINS (LOSSES) INVESTMENT INVESTMENT FROM REALIZED REALIZED RETURN OF
OF PERIOD INCOME ON INVESTMENTS INCOME INCOME GAINS GAINS CAPITAL
--------- ---------- -------------- ------------- ------------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SMALL-CAP OPPORTUNITY FUND
CLASS A SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $13.70 (0.04) 2.11 -- -- -- -- --
YEAR ENDED
1996 $12.20 (0.02) 3.02 -- -- (1.50) -- --
1995(7) $10.00 0.02 2.45 (0.02) -- (0.25) -- --
CLASS B SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $13.58 (0.06) 2.04 -- -- -- -- --
YEAR ENDED
1996 $12.12 (0.04) 3.00 -- -- (1.50) -- --
1995(7) $10.00 (0.03) 2.40 -- -- (0.25) -- --
CLASS I SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $13.80 (0.03) 2.13 -- -- -- -- --
YEAR ENDED
1996 $12.19 (0.01) 3.13 -- (0.01) (1.50) -- --
1995(7) $10.00 0.06 2.44 (0.06) -- (0.25) -- --
- -------------------------------------------------------------------------------------------------------------------------------
INTRINSIC VALUE FUND
CLASS A SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $13.70 0.11 1.72 (0.72) -- -- -- --
YEAR ENDED
1996 $11.89 0.28 2.50 (0.28) -- (0.69) -- --
1995 $10.48 0.29 2.24 (0.30) -- (0.82) -- --
1994 $11.05 0.31 (0.38) (0.30) -- (0.20) -- --
1993 $10.40 0.29 1.23 (0.28) -- (0.59) -- --
1992(8) $10.70 0.22 0.33 (0.21) -- (0.64) -- --
CLASS B SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $10.18 0.08 1.26 (0.11) -- -- -- --
YEAR ENDED
1996(9) $10.00 0.04 0.79 (0.06) -- (0.59) -- --
CLASS I SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $13.71 0.14 1.71 (0.14) -- -- -- --
YEAR ENDED
1996 $11.89 0.29 2.51 (0.29) -- (0.69) -- --
1995 $10.48 0.29 2.24 (0.30) -- (0.82) -- --
1994 $11.05 0.31 (0.38) (0.30) -- (0.20) -- --
1993 $10.40 0.29 1.23 (0.28) -- (0.59) -- --
1992 $ 9.89 0.29 1.14 (0.28) -- (0.64) -- --
1991(10) $10.00 0.17 (0.02) (0.17) -- (0.09) -- --
<CAPTION>
TOTAL
DISTRIBUTIONS
-------------
<S> <C>
SMALL-CAP OPPORTUNITY FUND
CLASS A SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) 0.00
YEAR ENDED
1996 (1.50)
1995(7) (0.27)
CLASS B SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) 0.00
YEAR ENDED
1996 (1.50)
1995(7) (0.25)
CLASS I SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) 0.00
YEAR ENDED
1996 (1.51)
1995(7) (0.31)
- -------------------------------------------------------------------------------------------------------------------------------
INTRINSIC VALUE FUND
CLASS A SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.12)
YEAR ENDED
1996 (0.97)
1995 (1.12)
1994 (0.50)
1993 (0.87)
1992(8) (0.85)
CLASS B SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.11)
YEAR ENDED
1996(9) (0.65)
CLASS I SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.14)
YEAR ENDED
1996 (0.98)
1995 (1.12)
1994 (0.50)
1993 (0.87)
1992 (0.92)
1991(10) (0.26)
</TABLE>
- --------------------------------------------------------------------------------
See page 30 for Notes to Financial Highlights.
18 Pegasus Funds
<PAGE>
PEGASUS FUNDS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATIO
RATIO OF OF NET
EXPENSES INVESTMENT
RATIO TO AVERAGE INCOME
NET NET OF NET NET ASSETS TO AVERAGE
CONVERSION ASSET ASSETS RATIO OF INVESTMENT (EXCLUDING NET ASSETS
TO VALUE END OF EXPENSES INCOME FEE WAIVERS (EXCLUDING FEE PORTFOLIO AVERAGE
CLASS A END OF TOTAL PERIOD TO AVERAGE TO AVERAGE AND WAIVERS AND TURNOVER COMMISSION
SHARES PERIOD RETURN(A) (000) NET ASSETS NET ASSETS REIMBURSEMENTS) REIMBURSEMENTS) RATE RATE
- ---------- ------ --------- ------ ---------- ---------- --------------- --------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-- $15.77 30.18%+ $ 9,564 1.19%+ (0.65)%+ -- -- 30.95% $0.05
-- $13.70 24.59% $ 6,697 1.13% (0.29)% 1.24% (0.40)% 93.82% $0.05
-- $12.20 24.80%++ $ 672 1.25%+ 0.19%+ 2.56%+ (1.12)%+ 38.89%++ --
-- $15.56 29.22%+ $ 462 1.94%+ (1.40)%+ -- -- 30.95% $0.05
-- $13.58 24.42% $ 110 1.88% (1.04)% 3.04% (2.20)% 93.82% $0.05
-- $12.12 23.76%++ $ 15 2.00%+ (0.51)% 9.52%+ (8.04)%+ 38.89%++ --
-- $15.90 30.50%+ $166,248 0.94%+ (0.40)%+ -- -- 30.95% $0.05
-- $13.80 25.63% $125,840 0.88% (0.04)% 1.02% (0.18)% 93.82% $0.05
-- $12.19 25.08%++ $ 92,926 0.85%+ 0.59%+ 1.09%+ 0.36%+ 38.89%++ --
- -----------------------------------------------------------------------------------------------------------------
-- $15.41 26.92%+ $ 44,499 1.02%+ 1.75%+ -- -- 21.73% $0.05
-- $13.70 23.79% $ 22,370 0.94% 2.16% -- -- 34.24% $0.04
-- $11.89 24.38% $ 17,858 0.91% 2.49% -- -- 45.55% --
-- $10.48 (0.60)% $ 15,730 0.91% 2.92% -- -- 58.62% --
-- $11.05 14.71% $ 14,098 0.86% 2.67% -- -- 63.90% --
-- $10.40 6.82% $ 4,729 0.85%+ 3.12%+ -- -- 48.52%+ --
-- $11.41 26.36%+ $ 1,365 1.81%+ 1.00%+ -- -- 21.73% $0.05
-- $10.18 8.31%++ $ 182 1.81%+ 0.25%+ -- -- 34.24%+ $0.04
-- $15.42 27.04%+ $450,063 0.81%+ 2.00%+ -- -- 21.73% $0.05
-- $13.71 23.99% $357,360 0.83% 2.27% -- -- 34.24% $0.04
-- $11.89 24.38% $238,027 0.91% 2.49% -- -- 45.55% --
-- $10.48 (0.60)% $204,298 0.91% 2.92% -- -- 58.62% --
-- $11.05 14.71% $178,457 0.86% 2.67% -- -- 63.90% --
-- $10.40 14.56% $102,532 0.84% 2.78% -- -- 48.52% --
-- $ 9.89 2.70%+ $ 77,450 0.84%+ 3.03%+ -- -- 1.80% --
</TABLE>
- --------------------------------------------------------------------------------
Pegasus Funds 19
<PAGE>
PEGASUS FUNDS
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
NET DISTRIBUTIONS DISTRIBUTIONS
NET ASSET REALIZED DISTRIBUTIONS IN EXCESS IN EXCESS
VALUE NET AND UNREALIZED FROM NET OF NET DISTRIBUTIONS OF TAX
BEGINNING INVESTMENT GAINS (LOSSES) INVESTMENT INVESTMENT FROM REALIZED REALIZED RETURN OF
OF PERIOD INCOME ON INVESTMENTS INCOME INCOME GAINS GAINS CAPITAL
--------- ---------- -------------- ------------- ------------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GROWTH AND VALUE FUND
CLASS A SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $14.12 0.05 2.30 (0.07) -- -- -- --
YEAR ENDED
1996 $13.16 0.16 2.37 (0.16) -- (1.41) -- --
1995 $10.67 0.21 2.76 (0.22) -- (0.26) -- --
1994 $11.16 0.23 (0.17) (0.21) -- (0.30) (0.01) (0.03)
1993 $10.51 0.20 1.24 (0.20) -- (0.59) -- --
1992(8) $10.16 0.17 0.45 (0.17) -- (0.10) -- --
CLASS B SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $ 9.32 0.05 1.45 (0.05) -- -- -- --
YEAR ENDED
1996(9) $10.00 0.01 0.62 (0.03) -- (1.28) -- --
CLASS I SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $14.12 0.08 2.30 (0.09) -- -- -- --
YEAR ENDED
1996 $13.16 0.18 2.36 (0.17) -- (1.41) -- --
1995 $10.67 0.21 2.76 (0.22) -- (0.26) -- --
1994 $11.16 0.23 (0.17) (0.21) -- (0.30) (0.01) (0.03)
1993 $10.51 0.20 1.24 (0.20) -- (0.59) -- --
1992 $ 9.86 0.22 0.75 (0.22) -- (0.10) -- --
1991(10) $10.00 0.14 (0.14) (0.14) -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
EQUITY INDEX FUND
CLASS A SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $16.75 0.13 3.25 (0.14) -- -- -- --
YEAR ENDED
1996 $14.15 0.30 2.85 (0.29) -- (0.26) -- --
1995 $10.65 0.30 3.65 (0.31) -- (0.14) -- --
1994 $11.15 0.31 (0.20) (0.30) -- (0.23) (0.08) --
1993 $10.52 0.28 0.75 (0.27) -- (0.13) -- --
1992(11) $10.00 0.12 0.52 (0.12) -- -- -- --
CLASS B SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $10.50 0.09 1.98 (0.13) -- -- -- --
YEAR ENDED
1996(9) $10.00 0.05 0.76 (0.06) -- (0.25) -- --
CLASS I SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $16.75 0.15 3.24 (0.15) -- -- -- --
YEAR ENDED
1996 $14.15 0.31 2.85 (0.30) -- (0.26) -- --
1995 $10.65 0.30 3.65 (0.31) -- (0.14) -- --
1994 $11.15 0.31 (0.20) (0.30) -- (0.23) (0.08) --
1993 $10.52 0.28 0.75 (0.27) -- (0.13) -- --
1992(11) $10.00 0.12 0.52 (0.12) -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL EQUITY FUND
CLASS A SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $11.77 0.02 1.15 (0.06) -- -- -- --
YEAR ENDED
1996 $11.05 0.10 0.72 (0.10) -- -- -- --
1995 $10.01 0.10 1.05 (0.11) -- -- -- --
CLASS B SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $11.08 (0.02) 1.80 (0.03) -- -- -- --
YEAR ENDED
1996(5) $10.84 0.04 0.24 (0.04) -- -- -- --
CLASS I SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $11.79 0.04 1.15 (0.08) -- -- -- --
YEAR ENDED
1996 $11.05 0.11 0.74 (0.11) -- -- -- --
1995 $10.01 0.10 1.05 (0.11) -- -- -- --
1994(12) $10.00 0.01 -- -- -- -- -- --
<CAPTION>
TOTAL
DISTRIBUTIONS
-------------
<S> <C>
GROWTH AND VALUE FUND
CLASS A SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.07)
YEAR ENDED
1996 (1.57)
1995 (0.48)
1994 (0.55)
1993 (0.79)
1992(8) (0.27)
CLASS B SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.05)
YEAR ENDED
1996(9) (1.31)
CLASS I SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.09)
YEAR ENDED
1996 (1.58)
1995 (0.48)
1994 (0.55)
1993 (0.79)
1992 (0.32)
1991(10) (0.14)
- -------------------------------------------------------------------------------------------------------------------------------
EQUITY INDEX FUND
CLASS A SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.14)
YEAR ENDED
1996 (0.55)
1995 (0.45)
1994 (0.61)
1993 (0.40)
1992(11) (0.12)
CLASS B SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.13)
YEAR ENDED
1996(9) (0.31)
CLASS I SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.15)
YEAR ENDED
1996 (0.56)
1995 (0.45)
1994 (0.61)
1993 (0.40)
1992(11) (0.12)
- -------------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL EQUITY FUND
CLASS A SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.06)
YEAR ENDED
1996 (0.10)
1995 (0.11)
CLASS B SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.03)
YEAR ENDED
1996(5) (0.04)
CLASS I SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.08)
YEAR ENDED
1996 (0.11)
1995 (0.11)
1994(12) --
</TABLE>
- --------------------------------------------------------------------------------
See page 30 for Notes to Financial Highlights.
20 Pegasus Funds
<PAGE>
PEGASUS FUNDS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATIO
RATIO OF OF NET
EXPENSES INVESTMENT
RATIO TO AVERAGE INCOME
NET NET OF NET NET ASSETS TO AVERAGE
CONVERSION ASSET ASSETS RATIO OF INVESTMENT (EXCLUDING NET ASSETS
TO VALUE END OF EXPENSES INCOME FEE WAIVERS (EXCLUDING FEE PORTFOLIO AVERAGE
CLASS A END OF TOTAL PERIOD TO AVERAGE TO AVERAGE AND WAIVERS AND TURNOVER COMMISSION
SHARES PERIOD RETURN(A) (000) NET ASSETS NET ASSETS REIMBURSEMENTS) REIMBURSEMENTS) RATE RATE
- ---------- ------ --------- ------ ---------- ---------- --------------- --------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-- $16.40 33.38%+ $ 97,438 1.07%+ 0.79%+ -- -- 15.20%+ $0.04
-- $14.12 19.24% $ 59,027 0.91% 1.17% -- -- 43.21% $0.04
-- $13.16 28.04% $ 49,872 0.84% 1.73% -- -- 26.80% --
-- $10.67 0.55% $ 42,274 0.84% 2.07% -- -- 28.04% --
-- $11.16 13.79% $ 29,467 0.83% 1.84% -- -- 42.31% --
-- $10.51 8.19% $ 4,338 0.83%+ 2.49%+ -- -- 16.28%+ --
-- $10.77 32.58%+ $ 2,030 1.82%+ 0.04%+ -- -- 15.20%+ $0.04
-- $ 9.32 6.10%++ $ 183 1.80%+ 0.25%+ -- -- 43.21%+ $0.04
-- $16.41 33.74%+ $866,102 0.82%+ 1.04%+ -- -- 15.20% $0.04
-- $14.12 19.35% $733,632 0.80% 1.28% -- -- 43.21% $0.04
-- $13.16 28.04% $687,295 0.84% 1.73% -- -- 26.80% --
-- $10.67 0.55% $529,097 0.84% 2.07% -- -- 28.04% --
-- $11.16 13.79% $400,168 0.83% 1.84% -- -- 42.31% --
-- $10.51 9.87% $283,007 0.83% 2.20% -- -- 16.28% --
-- $ 9.86 0.17%+ $238,086 0.85%+ 2.65%+ -- -- 0.94% --
- ------------------------------------------------------------------------------------------------------------------
-- $19.99 40.44%+ $ 70,272 0.55%+ 1.33%+ -- -- 7.45% $0.03
-- $16.75 22.49% $ 35,336 0.37% 1.89% -- -- 12.25% $0.03
-- $14.15 37.35% $ 4,007 0.15% 2.39% -- -- 10.66% --
-- $10.65 1.02% $ 1,197 0.17% 2.71% -- -- 24.15% --
-- $11.15 9.77% $ 960 0.20% 2.59% -- -- 16.01% --
-- $10.52 13.61%+ $ 151 0.22%+ 2.71%+ -- -- 0.50%++ --
-- $12.44 39.52%+ $ 814 1.30%+ 0.58%+ -- -- 7.45% $0.03
-- $10.50 8.09%++ $ 113 1.29%+ 0.57%+ -- -- 12.25%+ $0.03
-- $19.99 40.64%+ $681,619 0.30%+ 1.58%+ -- -- 7.45% $0.03
-- $16.75 22.58% $834,368 0.21% 2.05% -- -- 12.25% $0.03
-- $14.15 37.35% $524,195 0.15% 2.39% -- -- 10.66% --
-- $10.65 1.02% $339,611 0.17% 2.71% -- -- 24.15% --
-- $11.15 9.77% $324,369 0.20% 2.59% -- -- 16.01% --
-- $10.52 13.61%+ $241,907 0.22%+ 2.71%+ -- -- 0.50%++ --
- ------------------------------------------------------------------------------------------------------------------
-- $12.88 19.92%+ $ 19,053 1.37%+ 1.51%+ -- -- 8.40% $0.07
-- $11.77 7.50% $ 10,836 1.23% 0.88% 1.23% 0.88% 6.37% $0.07
-- $11.05 11.47% $ 988 1.16% 1.43% 1.24% 1.35% 2.09% --
-- $12.11 19.16%+ $ 1,413 2.12%+ 0.75%+ -- -- 8.40%+ $0.07
-- $11.08 2.62%++ $ 1,131 2.05%+ 0.75%+ 2.05%+ 0.75%+ 6.37%+ $0.07
-- $12.80 20.24%+ $461,229 1.12%+ 1.69%+ -- -- 8.40% $0.07
-- $11.79 7.79% $389,997 1.10% 1.01% 1.10% 1.01% 6.37% $0.07
-- $11.05 11.47% $106,300 1.16% 1.43% 1.24% 1.35% 2.09% --
-- $10.01 1.26%+ $ 36,545 1.15%+ 1.18%+ 1.92%+ 0.41%+ 0.30%++ --
</TABLE>
- --------------------------------------------------------------------------------
Pegasus Funds 21
<PAGE>
PEGASUS FUNDS
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
NET DISTRIBUTIONS DISTRIBUTIONS
NET ASSET REALIZED DISTRIBUTIONS IN EXCESS IN EXCESS
VALUE NET AND UNREALIZED FROM NET OF NET DISTRIBUTIONS OF TAX
BEGINNING INVESTMENT GAINS (LOSSES) INVESTMENT INVESTMENT FROM REALIZED REALIZED RETURN OF
OF PERIOD INCOME ON INVESTMENTS INCOME INCOME GAINS GAINS CAPITAL
--------- ---------- -------------- ------------- ------------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTERMEDIATE BOND FUND
CLASS A SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $10.29 0.32 (0.01) (0.32) -- -- -- --
YEAR ENDED
1996 $10.37 0.64 (0.07) (0.65) -- -- -- --
1995 $ 9.21 0.59 1.16 (0.59) -- -- -- --
1994 $10.41 0.56 (1.20) (0.55) -- (0.01) -- --
1993 $10.28 0.59 0.26 (0.59) -- (0.13) -- --
1992(8) $10.32 0.49 0.13 (0.49) -- (0.17) -- --
CLASS B SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $10.20 0.26 0.01 (0.28) -- -- -- --
YEAR ENDED
1996(9) $10.00 0.15 0.20 (0.15) -- -- -- --
CLASS I SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $10.29 0.33 0.00 (0.33) -- -- -- --
YEAR ENDED
1996 $10.37 0.64 (0.07) (0.65) -- -- -- --
1995 $ 9.21 0.59 1.16 (0.59) -- -- -- --
1994 $10.41 0.56 (1.20) (0.55) -- (0.01) -- --
1993 $10.28 0.59 0.26 (0.59) -- (0.13) -- --
1992 $10.55 0.71 (0.10) (0.71) -- (0.17) -- --
1991(10) $10.00 0.40 0.57 (0.40) -- (0.02) -- --
- -------------------------------------------------------------------------------------------------------------------------------
BOND FUND
CLASS A SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $10.27 0.32 (0.02) (0.32) -- -- -- --
YEAR ENDED
1996 $10.45 0.67 (0.18) (0.67) -- -- -- --
1995 $ 9.01 0.63 1.45 (0.64) -- -- -- --
1994 $10.32 0.61 (1.31) (0.59) -- (0.02) -- --
1993 $10.25 0.76 0.38 (0.76) -- (0.31) -- --
1992(8) $10.23 0.56 0.15 (0.56) -- (0.13) -- --
CLASS B SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $10.27 0.28 -- (0.29) -- -- -- --
YEAR ENDED
1996(5) $10.00 0.21 0.27 (0.21) -- -- -- --
CLASS I SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $10.27 0.33 -- (0.34) -- -- -- --
YEAR ENDED
1996 $10.45 0.68 (0.18) (0.68) -- -- -- --
1995 $ 9.01 0.63 1.45 (0.64) -- -- -- --
1994 $10.32 0.61 (1.31) (0.59) -- (0.02) -- --
1993 $10.25 0.76 0.38 (0.76) -- (0.31) -- --
1992 $10.55 0.83 (0.17) (0.83) -- (0.13) -- --
1991(10) $10.00 0.51 0.57 (0.51) -- (0.02) -- --
<CAPTION>
TOTAL
DISTRIBUTIONS
-------------
<S> <C>
INTERMEDIATE BOND FUND
CLASS A SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.32)
YEAR ENDED
1996 (0.65)
1995 (0.59)
1994 (0.56)
1993 (0.72)
1992(8) (0.66)
CLASS B SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.28)
YEAR ENDED
1996(9) (0.15)
CLASS I SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.33)
YEAR ENDED
1996 (0.65)
1995 (0.59)
1994 (0.56)
1993 (0.72)
1992 (0.88)
1991(10) (0.42)
- -------------------------------------------------------------------------------------------------------------------------------
BOND FUND
CLASS A SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.32)
YEAR ENDED
1996 (0.67)
1995 (0.64)
1994 (0.61)
1993 (1.07)
1992(8) (0.69)
CLASS B SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.29)
YEAR ENDED
1996(5) (0.21)
CLASS I SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.34)
YEAR ENDED
1996 (0.68)
1995 (0.64)
1994 (0.61)
1993 (1.07)
1992 (0.96)
1991(10) (0.53)
</TABLE>
- --------------------------------------------------------------------------------
See page 30 for Notes to Financial Highlights.
22 Pegasus Funds
<PAGE>
PEGASUS FUNDS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATIO
RATIO OF OF NET
EXPENSES INVESTMENT
RATIO TO AVERAGE INCOME
NET NET OF NET NET ASSETS TO AVERAGE
CONVERSION ASSET ASSETS RATIO OF INVESTMENT (EXCLUDING NET ASSETS
TO VALUE END OF EXPENSES INCOME FEE WAIVERS (EXCLUDING FEE PORTFOLIO AVERAGE
CLASS A END OF TOTAL PERIOD TO AVERAGE TO AVERAGE AND WAIVERS AND TURNOVER COMMISSION
SHARES PERIOD RETURN(A) (000) NET ASSETS NET ASSETS REIMBURSEMENTS) REIMBURSEMENTS) RATE RATE
- ---------- ------ --------- ------ ---------- ---------- --------------- --------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-- $10.28 6.12%+ $ 21,759 0.85% 6.26% -- -- 9.24% --
-- $10.29 5.65% $ 18,324 0.79% 6.17% -- -- 31.62% --
-- $10.37 19.48% $ 11,654 0.73% 5.98% -- -- 36.47% --
-- $ 9.21 (6.31)% $ 11,983 0.74% 5.73% -- -- 54.60% --
-- $10.41 8.41% $ 16,491 0.74% 5.44% -- -- 92.80% --
-- $10.28 11.17%+ $ 4,509 0.75%+ 7.04%+ -- -- 56.30%+ --
-- $10.20 5.46%+ $ 228 1.60%+ 5.57%+ -- -- 9.24% --
-- $10.20 3.50%++ $ 122 1.60%+ 1.52%+ -- -- 31.62% --
-- $10.29 6.46%+ $441,856 0.60%+ 6.51%+ -- -- 9.24% --
-- $10.29 5.78% $395,105 0.67% 6.29% -- -- 31.62% --
-- $10.37 19.48% $393,656 0.73% 5.98% -- -- 36.47% --
-- $ 9.21 (6.31)% $381,036 0.74% 5.73% -- -- 54.60% --
-- $10.41 8.41% $413,299 0.74% 5.44% -- -- 92.80% --
-- $10.28 6.00% $215,923 0.74% 6.91% -- -- 56.30% --
-- $10.55 16.62%+ $130,367 0.75%+ 6.59%+ -- -- 7.38% --
- -----------------------------------------------------------------------------------------------------------------
-- $10.25 6.12%+ $ 68,509 0.85%+ 6.35%+ -- -- 5.27% --
-- $10.27 4.98% $ 46,977 0.78% 6.59% -- -- 24.92% --
-- $10.45 23.75% $ 31,714 0.74% 6.39% -- -- 41.91% --
-- $ 9.01 (6.99)% $ 32,053 0.74% 6.36% -- -- 75.67% --
-- $10.32 11.39% $ 45,410 0.73% 7.20% -- -- 111.52% --
-- $10.25 9.59%+ $ 9,392 0.74%+ 8.12%+ -- -- 90.45%+ --
-- $10.26 5.48%+ $ 1,131 1.60%+ 5.60%+ -- -- 5.27% --
-- $10.27 4.81%++ $ 280 1.59%+ 3.01%+ -- -- 24.92%+ --
-- $10.26 6.44%+ $968,910 0.60%+ 6.60%+ -- -- 5.27% --
-- $10.27 5.08% $757,627 0.66% 6.71% -- -- 24.92% --
-- $10.45 23.75% $485,851 0.74% 6.39% -- -- 41.91% --
-- $ 9.01 (6.99)% $395,116 0.74% 6.36% -- -- 75.67% --
-- $10.32 11.39% $455,786 0.73% 7.20% -- -- 111.52% --
-- $10.25 6.56% $312,366 0.73% 8.08% -- -- 90.45% --
-- $10.55 18.45%+ $237,673 0.75%+ 8.44%+ -- -- 8.19% --
</TABLE>
- --------------------------------------------------------------------------------
Pegasus Funds 23
<PAGE>
- --------------------------------------------------------------------------------
See page 30 for Notes to Financial Highlights.
PEGASUS FUNDS
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
NET DISTRIBUTIONS DISTRIBUTIONS
NET ASSET REALIZED DISTRIBUTIONS IN EXCESS IN EXCESS
VALUE NET AND UNREALIZED FROM NET OF NET DISTRIBUTIONS OF TAX
BEGINNING INVESTMENT GAINS (LOSSES) INVESTMENT INVESTMENT FROM REALIZED REALIZED RETURN OF
OF PERIOD INCOME ON INVESTMENTS INCOME INCOME GAINS GAINS CAPITAL
--------- ---------- -------------- ------------- ------------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SHORT BOND FUND
CLASS A SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $10.11 0.26 -- (0.27) -- -- -- --
YEAR ENDED
1996 $10.23 0.55 (0.10) (0.55) -- (0.02) -- --
1995 $ 9.84 0.58 0.39 (0.58) -- -- -- --
1994(13) $10.00 0.17 (0.16) (0.17) -- -- -- --
CLASS B SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $10.02 0.22 0.00 (0.23) -- -- -- --
YEAR ENDED
1996(9) $10.00 0.12 0.04 (0.12) -- (0.02) -- --
CLASS I SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $10.11 0.28 (0.01) (0.28) -- -- -- --
YEAR ENDED
1996 $10.23 0.55 (0.10) (0.55) -- (0.02) -- --
1995 $ 9.84 0.58 0.39 (0.58) -- -- -- --
1994(13) $10.00 0.17 (0.16) (0.17) -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
MULTI SECTOR BOND FUND
CLASS A SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $ 7.84 0.23 (0.05) (0.22) -- -- -- --
YEAR ENDED
1996 $ 8.18 0.41 (0.25) (0.40) -- (0.10) -- --
1995(14) $ 7.68 0.44 0.72 (0.44) -- (0.22) -- --
1995 $ 8.25 0.52 (0.57) (0.52) -- -- -- --
1994(15) $ 8.36 0.47 (0.09) (0.47) -- (0.02) -- --
CLASS B SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $ 7.85 0.20 (0.05) (0.20) -- -- -- --
YEAR ENDED
1996 $ 8.18 0.45 (0.23) (0.45) -- (0.10) -- --
1995(16) $ 8.13 0.24 0.27 (0.24) -- (0.22) -- --
1994(2) $ 8.16 0.40 (0.55) (0.40) -- -- -- --
CLASS I SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $ 7.85 0.25 (0.03) (0.23) -- -- -- --
YEAR ENDED
1996 $ 8.18 0.46 (0.24) (0.45) -- (0.10) -- --
1995(14) $ 7.68 0.47 0.72 (0.47) -- (0.22) -- --
1995 $ 8.25 0.52 (0.57) (0.52) -- -- -- --
1994(15) $ 8.36 0.47 (0.09) (0.47) -- (0.02) -- --
- -------------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL BOND FUND
CLASS A SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $10.79 0.19 (0.58) (0.22) -- -- -- --
YEAR ENDED
1996 $10.75 0.54 0.04 (0.54) -- -- -- --
1995(7) $10.00 0.98 1.10 (0.98) (0.01) (0.34) -- --
CLASS B SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $10.87 0.16 (0.58) (0.19) -- -- -- --
YEAR ENDED
1996 $10.81 0.47 0.06 (0.47) -- -- -- --
1995(7) $10.00 0.91 1.16 (0.91) (0.01) (0.34) -- --
CLASS I SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $10.85 0.25 (0.62) (0.23) -- -- -- --
YEAR ENDED
1996 $10.81 0.59 0.04 (0.59) -- -- -- --
1995(7) $10.00 1.02 1.16 (1.02) (0.01) (0.34) -- --
<CAPTION>
TOTAL
DISTRIBUTIONS
-------------
<S> <C>
SHORT BOND FUND
CLASS A SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.27)
YEAR ENDED
1996 (0.57)
1995 (0.58)
1994(13) (0.17)
CLASS B SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.23)
YEAR ENDED
1996(9) (0.14)
CLASS I SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.28)
YEAR ENDED
1996 (0.57)
1995 (0.58)
1994(13) (0.17)
- -------------------------------------------------------------------------------------------------------------------------------
MULTI SECTOR BOND FUND
CLASS A SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.22)
YEAR ENDED
1996 (0.50)
1995(14) (0.66)
1995 (0.52)
1994(15) (0.49)
CLASS B SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.22)
YEAR ENDED
1996 (0.55)
1995(16) (0.46)
1994(2) (0.40)
CLASS I SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.23)
YEAR ENDED
1996 (0.55)
1995(14) (0.69)
1995 (0.52)
1994(15) (0.49)
- -------------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL BOND FUND
CLASS A SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.22)
YEAR ENDED
1996 (0.54)
1995(7) (1.33)
CLASS B SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.19)
YEAR ENDED
1996 (0.47)
1995(7) (1.26)
CLASS I SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.23)
YEAR ENDED
1996 (0.59)
1995(7) (1.37)
</TABLE>
24 Pegasus Funds
<PAGE>
PEGASUS FUNDS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATIO
RATIO OF OF NET
EXPENSES INVESTMENT
RATIO TO AVERAGE INCOME
NET NET OF NET NET ASSETS TO AVERAGE
CONVERSION ASSET ASSETS RATIO OF INVESTMENT (EXCLUDING NET ASSETS
TO VALUE END OF EXPENSES INCOME FEE WAIVERS (EXCLUDING FEE PORTFOLIO AVERAGE
CLASS A END OF TOTAL PERIOD TO AVERAGE TO AVERAGE AND WAIVERS AND TURNOVER COMMISSION
SHARES PERIOD RETURN(A) (000) NET ASSETS NET ASSETS REIMBURSEMENTS) REIMBURSEMENTS) RATE RATE
- ---------- ------ --------- ------ ---------- ---------- --------------- --------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-- $10.10 5.22%+ $ 1,475 0.82%+ 5.36%+ -- -- 36.43% --
-- $10.11 4.45% $ 1,033 0.80% 5.35% 0.82% 5.33% 109.58% --
-- $10.23 10.07% $ 766 0.75% 5.74% 0.81% 5.68% 30.94% --
-- $ 9.84 0.21%+ $ 308 0.75%+ 5.92%+ 0.93%+ 5.74%+ 10.20%++ --
-- $10.01 4.54%+ $ 69 1.57%+ 4.61%+ -- -- 36.43% --
-- $10.02 2.04%++ $ 56 1.57%+ 1.47%+ 1.59%+ 1.45%+ 109.58%+ --
-- $10.10 5.50%+ $193,121 0.57%+ 5.61%+ -- -- 36.43% --
-- $10.11 4.56% $171,427 0.70% 5.45% 0.72% 5.43% 109.58% --
-- $10.23 10.07% $162,571 0.75% 5.74% 0.81% 5.68% 30.94% --
-- $ 9.84 0.21%+ $ 63,931 0.75%+ 5.92%+ 0.93%+ 5.74%+ 10.20%++ --
- ------------------------------------------------------------------------------------------------------------------
-- $ 7.80 4.68%+ $ 7.75 0.8%+ 5.92%+ -- -- 28.34% --
-- $ 7.84 2.75% $ 8,798 0.84% 5.75% 0.90% 5.69% 103.93% --
-- $ 8.18 15.55%++ $ 6,095 0.94%+ 5.72%+ 1.15%+ 5.51%+ 173.26%++ --
-- $ 7.68 (0.45)% $ 69 0.04% 6.70% 2.78% 3.96% 71.65% --
-- $ 8.25 5.16%+ $ 65 -- 5.96%+ 3.67%+ 2.29%+ 26.54%++ --
-- $ 7.80 3.88%+ $ 409 1.62%+ 5.17%+ -- -- 28.34% --
-- $ 7.85 2.09% $ 502 1.58% 5.01% 1.67% 4.92% 103.93% --
-- $ 8.18 6.41%++ $ 259 1.60%+ 5.00%+ 1.78%+ 4.83%+ 173.26%++ --
(7.61)(3) -- (1.82)%++ -- 0.00% 6.48%+ 2.58%+ 3.90%+ 71.65%++ --
-- $ 7.81 4.94%+ $434,589 0.62%+ 6.17%+ -- -- 28.34% --
-- $ 7.85 3.14% $187,112 0.57% 6.02% 0.66% 5.93% 103.93% --
-- $ 8.18 15.90%++ $191,930 0.55%+ 6.34%+ 0.67%+ 6.22%+ 173.26%++ --
-- $ 7.68 (0.48)% $ 7,101 0.04% 6.70% 2.78% 3.96% 71.65% --
-- $ 8.25 5.16%++ $ 5,128 0.00% 6.21%+ 2.64%+ 3.57%+ 26.54%++ --
- ------------------------------------------------------------------------------------------------------------------
-- $10.18 (7.22)%+ $ 4,081 1.11%+ 4.71%+ 1.26%+ 4.48%+ 2.34% --
-- $10.79 5.62% $ 2,006 1.15% 4.74% 1.94% 3.95% 97.82% --
-- $10.75 21.10%++ $ 487 1.33%+ 4.91%+ 3.65%+ 2.59%+ 48.03%++ --
-- $10.26 (7.70)%+ $ 72 1.83%+ 4.17%+ 2.61%+ 3.94%+ 2.34% --
-- $10.87 5.01% $ 46 1.90% 3.99% 4.08% 1.81% 97.82% --
-- $10.81 20.90%++ $ 4 2.03%+ 4.39%+ 8.69%+ (2.28)%+ 48.03%++ --
-- $10.24 (7.00)%+ $ 76,651 0.86%+ 4.94%+ 1.01%+ 4.71%+ 2.34% --
-- $10.85 5.99% $ 53,845 0.90% 4.99% 1.40% 4.49% 35.42% --
-- $10.81 22.13%++ $ 14,504 0.95%+ 5.71%+ 1.93%+ 4.73%+ 48.03%++ --
</TABLE>
- --------------------------------------------------------------------------------
Pegasus Funds 25
<PAGE>
PEGASUS FUNDS
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
NET DISTRIBUTIONS DISTRIBUTIONS
NET ASSET REALIZED DISTRIBUTIONS IN EXCESS IN EXCESS
VALUE NET AND UNREALIZED FROM NET OF NET DISTRIBUTIONS OF TAX
BEGINNING INVESTMENT GAINS (LOSSES) INVESTMENT INVESTMENT FROM REALIZED REALIZED RETURN OF
OF PERIOD INCOME ON INVESTMENTS INCOME INCOME GAINS GAINS CAPITAL
--------- ---------- -------------- ------------- ------------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MUNICIPAL BOND FUND
CLASS A SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $12.36 0.29 0.08 0.29 -- -- -- --
YEAR ENDED
1996 $12.64 0.59 (0.18) (0.58) (0.01) (0.10) -- --
1995(17) $12.06 0.48 0.82 (0.48) (0.24) -- -- --
1995 $12.13 0.60 (0.07) (0.60) -- -- -- --
1994 $13.25 0.63 (0.15) (0.63) (0.96) (0.01) -- --
1993 $12.49 0.70 1.01 (0.70) (0.25) -- -- --
1992 $12.10 0.76 0.47 (0.76) (0.08) -- -- --
1991 $11.77 0.81 0.33 (0.81) -- -- -- --
1990 $11.82 0.81 0.28 (0.81) (0.33) -- -- --
1989(18) $11.94 0.89 (0.12) (0.89) -- -- -- --
CLASS B SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $12.36 0.23 0.08 (0.25) -- -- -- --
YEAR ENDED
1996 $12.65 0.52 (0.21) (0.49) -- (0.01) (0.10) --
1995(19) $12.17 0.34 0.72 (0.34) -- (0.24) -- --
1994(20) $12.14 0.41 (0.70) (0.41) -- -- -- --
1994(21) $12.37 0.03 (0.23) (0.03) -- -- -- --
CLASS I SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $12.36 0.30 0.07 (0.30) -- -- -- --
YEAR ENDED
1996 $12.63 0.65 (0.20) (0.61) -- (0.01) (0.10) --
1995(17) $12.06 0.52 0.81 (0.52) -- (0.24) -- --
1995(22) $12.06 0.05 -- (0.05) -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
INTERMEDIATE MUNICIPAL BOND FUND
CLASS A SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $12.10 0.27 (0.01) (0.27) -- -- -- --
YEAR ENDED
1996 $12.25 0.53 (0.09) (0.51) -- (0.08) -- --
1995(17) $11.79 0.44 0.56 (0.44) -- (0.10) -- --
1995 $12.18 0.55 (0.36) (0.55) -- (0.03) -- --
1994 $12.79 0.61 0.01 (0.61) -- (0.62) -- --
1993 $12.25 0.64 0.68 (0.64) -- (0.14) -- --
1992 $11.95 0.76 0.37 (0.76) -- (0.07) -- --
1991 $11.65 0.80 0.31 (0.80) -- (0.01) -- --
1990 $11.43 0.78 0.22 (0.78) -- -- -- --
1989(18) $11.46 0.79 (0.03) (0.79) -- -- -- --
CLASS B SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $12.10 0.22 -- (0.23) -- -- -- --
YEAR ENDED
1996 $12.25 0.44 (0.09) (0.42) -- (0.08) -- --
1995(17) $11.80 0.37 0.55 (0.37) -- (0.10) -- --
1995(23) $11.57 0.04 0.23 (0.04) -- -- -- --
1994(20) $12.18 0.37 (0.72) (0.37) -- (0.03) -- --
1994(21) $12.32 0.03 (0.14) (0.03) -- -- -- --
CLASS I SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $12.11 0.28 (0.01) (0.29) -- -- -- --
YEAR ENDED
1996 $12.25 0.56 (0.08) (0.54) -- (0.08) -- --
1995(17) $11.80 0.47 0.55 (0.47) -- (0.10) -- --
1995(22) $11.57 0.04 0.23 (0.04) -- -- -- --
<CAPTION>
TOTAL
DISTRIBUTIONS
-------------
<S> <C>
MUNICIPAL BOND FUND
CLASS A SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.29)
YEAR ENDED
1996 (0.69)
1995(17) (0.72)
1995 (0.60)
1994 (1.60)
1993 (0.95)
1992 (0.84)
1991 (0.81)
1990 (1.14)
1989(18) (0.89)
CLASS B SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.25)
YEAR ENDED
1996 (0.60)
1995(19) (0.58)
1994(20) (0.41)
1994(21) (0.03)
CLASS I SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.30)
YEAR ENDED
1996 (0.72)
1995(17) (0.76)
1995(22) (0.05)
- -------------------------------------------------------------------------------------------------------------------------------
INTERMEDIATE MUNICIPAL BOND FUND
CLASS A SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.27)
YEAR ENDED
1996 (0.59)
1995(17) (0.54)
1995 (0.58)
1994 (1.23)
1993 (0.78)
1992 (0.83)
1991 (0.81)
1990 (0.78)
1989(18) (0.79)
CLASS B SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.23)
YEAR ENDED
1996 (0.50)
1995(17) (0.47)
1995(23) (0.04)
1994(20) (0.40)
1994(21) (0.03)
CLASS I SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.29)
YEAR ENDED
1996 (0.62)
1995(17) (0.57)
1995(22) (0.04)
</TABLE>
- --------------------------------------------------------------------------------
See page 30 for Notes to Financial Highlights.
26 Pegasus Funds
<PAGE>
PEGASUS FUNDS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATIO
RATIO OF OF NET
EXPENSES INVESTMENT
RATIO TO AVERAGE INCOME
NET NET OF NET NET ASSETS TO AVERAGE
CONVERSION ASSET ASSETS RATIO OF INVESTMENT (EXCLUDING NET ASSETS
TO VALUE END OF EXPENSES INCOME FEE WAIVERS (EXCLUDING FEE PORTFOLIO AVERAGE
CLASS A END OF TOTAL PERIOD TO AVERAGE TO AVERAGE AND WAIVERS AND TURNOVER COMMISSION
SHARES PERIOD RETURN(A) (000) NET ASSETS NET ASSETS REIMBURSEMENTS) REIMBURSEMENTS) RATE RATE
- ---------- ------ --------- ------ ---------- ---------- --------------- --------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-- $12.44 6.02%+ $ 30,818 0.85%+ 4.70% -- -- 23.62% --
-- $12.36 3.36% $ 29,352 0.83% 4.54% 0.89% 4.48% 64.51% --
-- $12.64 10.95%++ $ 7,426 0.89%+ 4.57%+ 1.04%+ 4.43%+ 69.31%++ --
-- $12.06 4.45% $ 6,840 1.98% 5.09% 3.89% 3.18% 60.78% --
-- $12.13 3.70% $ 9,234 0.00% 4.85% 1.44% 3.41% 175.06% --
-- $13.25 14.37% $ 11,290 0.00% 5.49% 1.59% 3.90% 88.53% --
-- $12.49 10.50% $ 6,591 0.00% 5.99% 2.75% 3.24% 66.28% --
-- $12.10 10.13% $ 2,244 0.00% 6.87% 2.75% 4.12% 32.40% --
-- $11.77 9.39% $ 1,192 0.00% 6.60% 2.75% 3.85% 85.07% --
-- $11.82 6.82%+ $ 673 0.00% 7.46%+ 2.25%+ 5.21%+ 36.19%++ --
-- $12.43 5.14%+ $ 830 1.60%+ 3.95%+ -- -- 23.62% --
-- $12.36 2.56% $ 672 1.58% 3.79% 1.70% 3.67% 64.51% --
-- $12.65 8.81%++ $ 238 1.66%+ 3.61%+ 2.04%+ 3.23%+ 69.31%++ --
(11.44)(3) -- (4.30)%++ -- 3.18%+ 4.51%+ 5.85%+ 1.84%+ 60.78%++ --
-- $12.14 (1.64)%++ $ 2 0.50%+ 4.10%+ 2.91%+ 1.69%+ 175.06%++ --
-- $12.43 6.12%+ $341,315 0.60%+ 4.95%+ -- -- 23.62% --
-- $12.36 3.76% $338,104 0.58% 4.79% 0.68% 4.69% 64.51% --
-- $12.63 11.20%++ $240,160 0.54%+ 4.95%+ 0.67%+ 4.81%+ 69.31%++ --
-- $12.06 0.39%++ $220,143 0.65%+ 5.45%+ 0.79%+ 5.31%+ 60.78%++ --
- --------------------------------------------------------------------------------------------------------------------
-- $12.11 4.70%+ $ 19,241 0.85%+ 4.49% -- -- 28.38% --
-- $12.10 3.69% $ 19,049 0.83% 4.37% 0.88% 4.32% 52.95% --
-- $12.25 8.58%++ $ 17,777 0.83%+ 4.30%+ 0.97%+ 4.16%+ 44.75%++ --
-- $11.79 1.64% $ 17,243 0.29% 4.73% 1.38% 3.64% 128.02% --
-- $12.18 4.94% $ 28,826 0.06% 4.78% 1.27% 3.57% 167.95% --
-- $12.79 11.26% $ 27,885 0.00% 5.16% 1.31% 3.85% 63.67% --
-- $12.25 9.78% $ 18,310 0.00% 6.15% 1.72% 4.43% 86.91% --
-- $11.95 9.94% $ 7,251 0.00% 6.76% 2.75% 4.01% 12.22% --
-- $11.65 9.00% $ 4,582 0.00% 6.62% 2.75% 3.87% 46.68% --
-- $11.43 6.82%+ $ 2,593 0.00% 6.83%+ 2.25%+ 4.58%+ 101.17%++ --
-- $12.10 3.82%+ $ 629 1.60%+ 3.74%+ -- -- 28.38% --
-- $12.10 2.90% $ 611 1.58% 3.62% 1.68% 3.52% 52.95% --
-- $12.25 7.75%++ $ 341 1.71%+ 3.36%+ 2.01%+ 3.06%+ 44.75%++ --
-- $11.80 2.30%++ $ 6 1.36%+ 3.72%+ 1.64%+ 3.44%+ 128.02%++ --
(11.43)(20) -- (2.98)%++ -- 0.76%+ 4.03%+ 2.00%+ 2.79%+ 128.02%++ --
-- $12.18 (0.93)%++ $ 12 0.75%+ 1.68%+ 3.00%+ (0.57)%+ 167.95%++ --
-- $12.12 4.90%+ $377,748 0.60%+ 4.74%+ -- -- 28.38% --
-- $12.11 4.05% $373,970 0.58% 4.62% 0.64% 4.56% 52.95% --
-- $12.25 8.76%++ $373,753 0.55%+ 4.78%+ 0.68%+ 4.65%+ 44.75%++ --
-- $11.80 2.37%++ $365,801 0.50%+ 4.79%+ 0.60%+ 4.69%+ 128.02%++ --
</TABLE>
- --------------------------------------------------------------------------------
Pegasus Funds 27
<PAGE>
PEGASUS FUNDS
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
NET DISTRIBUTIONS DISTRIBUTIONS
NET ASSET REALIZED DISTRIBUTIONS IN EXCESS IN EXCESS
VALUE NET AND UNREALIZED FROM NET OF NET DISTRIBUTIONS OF TAX
BEGINNING INVESTMENT GAINS (LOSSES) INVESTMENT INVESTMENT FROM REALIZED REALIZED RETURN OF
OF PERIOD INCOME ON INVESTMENTS INCOME INCOME GAINS GAINS CAPITAL
--------- ---------- -------------- ------------- ------------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MICHIGAN MUNICIPAL BOND FUND
CLASS A SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $10.48 0.24 0.09 (0.24) -- -- -- --
YEAR ENDED
1996 $10.60 0.48 (0.14) (0.46) -- -- -- --
1995 $ 9.54 0.48 1.06 (0.48) -- -- -- --
1994 $10.60 0.50 (1.06) (0.50) -- -- -- --
1993(24) $10.00 0.44 0.59 (0.43) -- -- -- --
CLASS B SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $10.18 0.20 0.07 (0.21) -- -- -- --
YEAR ENDED
1996(9) $10.00 0.07 0.17 (0.06) -- -- -- --
CLASS I SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) $10.48 0.25 0.08 (0.25) -- -- -- --
YEAR ENDED
1996 $10.60 0.49 (0.14) (0.47) -- -- -- --
1995 $ 9.54 0.48 1.06 (0.48) -- -- -- --
1994 $10.60 0.50 (1.06) (0.50) -- -- -- --
1993(24) $10.00 0.44 0.59 (0.43) -- -- -- --
<CAPTION>
TOTAL
DISTRIBUTIONS
-------------
<S> <C>
MICHIGAN MUNICIPAL BOND FUND
CLASS A SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.24)
YEAR ENDED
1996 (0.46)
1995 (0.48)
1994 (0.50)
1993(24) (0.43)
CLASS B SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.21)
YEAR ENDED
1996(9) (0.06)
CLASS I SHARES
SIX-MONTHS ENDED 6/30/97
(UNAUDITED) (0.25)
YEAR ENDED
1996 (0.47)
1995 (0.48)
1994 (0.50)
1993(24) (0.43)
</TABLE>
- --------------------------------------------------------------------------------
See page 30 for Notes to Financial Highlights.
28 Pegasus Funds
<PAGE>
PEGASUS FUNDS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATIO
RATIO OF OF NET
EXPENSES INVESTMENT
RATIO TO AVERAGE INCOME
NET NET OF NET NET ASSETS TO AVERAGE
CONVERSION ASSET ASSETS RATIO OF INVESTMENT (EXCLUDING NET ASSETS
TO VALUE END OF EXPENSES INCOME FEE WAIVERS (EXCLUDING FEE PORTFOLIO AVERAGE
CLASS A END OF TOTAL PERIOD TO AVERAGE TO AVERAGE AND WAIVERS AND TURNOVER COMMISSION
SHARES PERIOD RETURN(A) (000) NET ASSETS NET ASSETS REIMBURSEMENTS) REIMBURSEMENTS) RATE RATE
- ---------- ------ --------- ------ ---------- ---------- --------------- --------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-- $10.57 6.28%+ $17,508 0.95%+ 4.62% 0.96%+ 4.61%+ 27.40% --
-- $10.48 3.32% $18,575 0.88% 4.57% 0.96% 4.49% 24.49% --
-- $10.60 16.49% $21,034 0.79% 4.71% 1.04% 4.46% 26.97% --
-- $ 9.54 (5.42)% $21,106 0.53% 5.01% 1.05% 4.49% 25.93% --
-- $10.60 11.50%+ $26,342 0.19%+ 5.12%+ 1.21%+ 4.10%+ 41.70%++ --
-- $10.24 5.36%+ $ 247 1.70%+ 3.87%+ 1.71%+ 3.86%+ 27.40% --
-- $10.18 2.45%++ $ 110 1.69%+ 2.01%+ 1.77%+ 1.93%+ 24.49%+ --
-- $10.56 6.52%+ $49,218 0.70%+ 4.75%+ 0.71%+ 4.74%+ 27.40% --
-- $10.48 3.44% $41,909 0.77% 4.68% 0.85% 4.60% 24.49% --
-- $10.60 16.49% $32,419 0.79% 4.71% 1.04% 4.46% 26.97% --
-- $ 9.54 (5.42)% $24,157 0.53% 5.01% 1.05% 4.49% 25.93% --
-- $10.60 11.50%+ $15,772 0.19%+ 5.12%+ 1.21%+ 4.10%+ 41.70%++ --
</TABLE>
- --------------------------------------------------------------------------------
Pegasus Funds 29
<PAGE>
NOTES TO FINANCIAL HIGHLIGHTS
(1) For the period March 3, 1995 (re-offering date of Class B Shares) through
December 31, 1995.
(2) For the period February 8, 1994 (initial offering date of Class B Shares)
through December 2, 1994. On December 2, 1994, the Fund terminated its
offering of Class B Shares and such shares converted to Class A Shares.
(3) On December 2, 1994, the Fund terminated the offering of Class B Shares
under the then-current sales load schedule and such shares converted to
Class A Shares.
(4) For the period March 3, 1995 (initial offering date of Class I Shares)
through December 31, 1995.
(5) For the period August 24, 1996 (initial offering date of Class B Shares)
through December 31, 1996.
(6) For the period December 17, 1996 (commencement of operations) through
December 31, 1996.
(7) For the period January 27, 1995 (commencement of operations) through
December 31, 1995.
(8) For the period May 1, 1992 (initial offering date of Class A Shares)
through December 31, 1992.
(9) For the period September 23, 1996 (initial offering date of Class B
Shares) through December 31, 1996.
(10) For the period June 1, 1991 (commencement of operations) to December 31,
1991.
(11) For the period July 10, 1992 (inception) through December 31, 1992.
(12) For the period December 3, 1994 (commencement of operations) through
December 31, 1994.
(13) For the period September 17, 1994 (commencement of operations) through
December 31, 1994.
(14) For the period February 1, 1995 through December 31, 1995. Effective
February 1, 1995, the Fund changed its fiscal year end from January 31 to
December 31.
(15) For the period March 5, 1993 (commencement of operations) through January
31, 1994.
(16) For the period May 31, 1995 (re-offering date of Class B Shares) through
December 31, 1995. Effective February 1, 1995, the Fund changed its fiscal
year end from January 31 to December 31.
(17) For the period March 1, 1995 through December 31, 1995. Effective March 1,
1995, the Fund changed its fiscal year end from February 28 to December
31.
(18) For the period March 1, 1988 (commencement of operations) to February 28,
1989.
(19) For the period April 4, 1995 (re-offering date of Class B Shares) through
December 31, 1995. Effective March 1, 1995, the Fund changed its fiscal
year end from February 28 to December 31.
(20) For the period March 1, 1994 through December 2, 1994. On December 2,
1994, the Fund terminated its offering of Class B Shares and such shares
converted to Class A Shares.
(21) For the period February 8, 1994 (initial offering date of Class B Shares)
through February 28, 1994.
(22) For the period February 1, 1995 (initial offering date of Class I Shares)
to February 28, 1995.
(23) For the period January 30, 1995 (re-offering date of Class B Shares)
through February 28, 1995.
(24) For the period February 1, 1993 (commencement of operations) through
December 31, 1993.
(a) Total returns as presented do not include any applicable sales load or
redemption charges.
+ Annualized.
++ Not annualized.
30 Pegasus Funds
<PAGE>
Description of the Funds
GENERAL
The Trust is an open-end management investment company registered under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Trust
currently consists of thirty-one investment portfolios, each of which consists
of a separate pool of assets with separate investment objectives and policies.
This Prospectus, however, describes only twenty-two portfolios. Under the 1940
Act, each Fund is classified as a diversified investment portfolio (a
"Diversified Fund") except for the International Equity, International Bond,
Municipal Bond, Short Municipal Bond, Intermediate Municipal Bond and Michigan
Municipal Bond Funds, which are each classified as a non-diversified portfolio
(the "Non-Diversified Funds").
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of a Fund may not be changed without approval of the
holders of a majority (as defined in the 1940 Act) of the Fund's outstanding
voting securities. See "General Information." Except as noted below under
"Investment Limitations," a Fund's investment policies may be changed without a
vote of shareholders. There can be no assurance that a Fund will achieve its
objective. The following sections should be read in conjunction with "Risk
Factors" below and the description of investments in which the Funds may
invest, as set forth in "Supplemental Information." A description of ratings
("Debt Ratings") is contained below and in the Statement of Additional
Information.
ASSET ALLOCATION FUNDS
In order to achieve its investment objective, each Asset Allocation Fund will
typically invest in the Underlying Funds within a predetermined target asset
allocation range, as set forth below. The target asset allocation reflects the
extent to which each Asset Allocation Fund will invest in a particular market
segment, and the varying degrees of potential investment risk and reward
represented by the Fund's investments in those market segments and their
corresponding Underlying Funds. The Investment Adviser may alter the target
asset allocation and the target asset allocation ranges when it deems
appropriate. The assets of each Fund will be allocated among the Underlying
Funds in accordance with the Fund's investment objective, the target asset
allocation, the Investment Adviser's outlook for the economy, the financial
markets and the relative market valuations of the Underlying Funds. The Asset
Allocation Funds will generally limit their investments to the Underlying
Funds.
In order to meet liquidity needs or for temporary defensive purposes, each
Asset Allocation Fund may invest its assets in shares of the Money Market Fund
and directly in short-term obligations issued or guaranteed as to payment of
principal and interest by the U.S. Government, or its agencies or
instrumentalities ("U.S. Government Obligations"), "high quality" money market
instruments such as certificates of deposit, bankers' acceptances, time
deposits, repurchase agreements, reverse repurchase agreements, short-term
obligations issued by state and local governmental issuers which carry yields
that are competitive with those of other types of high quality money market
instruments, commercial paper, notes, other short-term obligations and variable
rate master demand notes of domestic and foreign issuers ("Cash Equivalent
Securities"). "High quality" money market instruments are money market
instruments which are rated at the time of purchase within the two highest
rating categories by Moody's Investors Service, Inc. ("Moody's"), Standard &
Poor's Ratings Group ("S&P"), Fitch Investors Service, L.P. ("Fitch") or Duff &
Phelps Credit Rating Co. ("Duff") (each a "Rating Agency") or which are unrated
at such time but are deemed by the Investment Adviser to be comparable in
quality to instruments that are so rated. Such investments may include
obligations of foreign banks and foreign branches of U.S. banks.
The Managed Assets Conservative Fund seeks to provide long-term total return
with capital appreciation as a secondary consideration. The Managed Assets
Balanced Fund seeks to achieve long-term total return through a combination of
capital appreciation and current income. The Managed Assets Growth Fund seeks
to achieve long-term total return with current income a secondary
consideration. The Managed Assets Conservative Fund is deemed to be more
"conservative" than the Managed Assets Balanced and Managed Assets Growth Funds
because it has a heavier weighting in Debt Securities and in Underlying Funds
which invest primarily in Debt Securities and a lighter weighting in Equity
Securities and in Underlying Funds which invest primarily in Equity Securities
relative to the other Asset Allocation Funds. In attempting to achieve its
asset allocation objective, except as set forth above, each Asset Allocation
Fund will invest in the equity, debt and cash equivalent market sectors within
the following ranges:
Pegasus Funds 31
<PAGE>
TARGET ASSET ALLOCATION
<TABLE>
<CAPTION>
ASSET
ALLOCATION
FUND EQUITY DEBT CASH EQUIVALENT
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Managed As-
sets Con-
servative
Fund 30%-50% 50%-70% 0%-20%
- ----------------------------------------------------------------------------------
Managed As-
sets Bal-
anced Fund 50%-70% 30%-50% 0%-20%
- ----------------------------------------------------------------------------------
Managed As-
sets Growth
Fund 70%-90% 10%-30% 0%-20%
- ----------------------------------------------------------------------------------
Underlying Equity Income Fund Intermediate Bond Fund Money Market Fund
Funds by Growth Fund Bond Fund
Category Mid-Cap Opportunity Fund Short Bond Fund
Small-Cap Opportunity Fund Multi Sector Bond Fund
Intrinsic Value Fund International Bond Fund
Growth and Value Fund High Yield Bond Fund
Equity Index Fund
International Equity Fund
</TABLE>
- --------------------------------------------------------------------------------
PEGASUS MONEY MARKET FUND
The Money Market Fund seeks to provide a high level of current income
consistent with the preservation of capital and liquidity. The Money Market
Fund also seeks to maintain a constant net asset value of $1.00 per share for
purchases and redemptions, but there can be no assurance that the Fund will be
able to do so.
The Money Market Fund may invest in the following high quality money market
instruments: (1) U.S. Government Obligations; (2) U.S. dollar denominated
obligations issued or guaranteed by the government of Canada, a Province of
Canada, or an instrumentality or political subdivision thereof; (3)
certificates of deposit, bankers' acceptances and time deposits of U.S. banks
or other U.S. financial institutions (including foreign branches of such banks
and institutions) having total assets in excess of $1 billion and which are
members of the Federal Reserve System or the Federal Deposit Insurance
Corporation ("FDIC"); (4) certificates of deposit, bankers' acceptances and
time deposits of foreign banks and U.S. branches of foreign banks having assets
in excess of the equivalent of $1 billion; (5) commercial paper, other short-
term obligations and variable and floating rate master demand notes, bonds,
debentures and notes; (6) repurchase agreements relating to the above
instruments; (7) reverse repurchase agreements; (8) guaranteed investment
contracts; (9) securities of other investment companies; (10) securities
lending; and (11) illiquid securities (limited to 10% of the Fund's net
assets). The Money Market Fund is subject to Rule 2a-7 of the 1940 Act, which
sets forth requirements of, among other things, diversification, average
maturity (including a requirement that dollar-weighted average portfolio
maturity may not exceed 90 days) and credit quality. See also the Statement of
Additional Information for more information on the Money Market Fund. You may
request a Money Market Fund prospectus by calling (800) 688-3350.
EQUITY FUNDS
The Equity Income, Growth, Mid-Cap Opportunity, Small-Cap Opportunity,
Intrinsic Value, Growth and Value, Equity Index and Market Expansion Index
Funds invest primarily in publicly traded common stocks of companies
incorporated in the United States, although each such Fund may also invest up
to 25% of its total assets in the Equity Securities of foreign issuers, either
directly or through Depository Receipts. The International Equity Fund invests
primarily in Equity Securities of foreign issuers, either directly or through
Depository Receipts and similar securities which may be sponsored or
unsponsored. In addition, each Equity Fund may: (1) invest in securities
convertible into common stock, such as certain bonds and preferred stocks; (2)
invest up to 5% of its net assets in other types of securities having common
stock characteristics (such as rights and warrants to purchase equity
securities); (3) invest up to 5% of its net assets in lower-rated convertible
securities; (4) enter into futures contracts and related options; (5) utilize
options and other derivative instruments such as equity index swaps; and (6)
lend its portfolio securities. The International Equity Fund also may invest in
foreign currency and options on foreign currency transactions. Under normal
market conditions, each Fund expects to invest at least 65% of the value of its
total assets in Equity Securities. Each Equity Fund may hold up to 35% of its
total assets in Cash Equivalents and Debt Securities rated investment grade or
higher at the time of purchase (i.e., no lower than Baa by Moody's or BBB by
S&P, Fitch or Duff), or unrated investments deemed by the Investment Adviser to
be comparable in quality at the time of purchase to instruments that are so
rated, and, in the case of the International Equity Fund, Debt Securities of
foreign issuers, foreign governments and agencies.
The EQUITY INCOME FUND will invest primarily in income-producing Equity
Securities of domestic issuers. The Investment Adviser will be particularly
alert to
32 Pegasus Funds
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companies which pay above-average dividends, yet offer opportunities for
capital appreciation and growth of earnings.
The GROWTH FUND will invest primarily in Equity Securities of domestic issuers
believed by the Investment Adviser to have above-average growth
characteristics. The Investment Adviser may consider some of the following
factors in making its investment decisions: the development of new or improved
products or services; a favorable outlook for growth in the industry; patterns
of increasing sales and earnings; the probability of increased operating
efficiencies; cyclical conditions; or other signs that the company is expected
to show greater than average earnings growth and capital appreciation.
The MID-CAP OPPORTUNITY FUND intends to invest under normal market conditions
at least 65% of the value of its total assets in Equity Securities of companies
with market capitalizations of $500 million to $3 billion. The Investment
Adviser believes that there are many companies in this size range that enjoy
enhanced growth prospects, operate in more stable market niches, and have
greater ability to respond to new business opportunities, all of which increase
their likelihood of attaining superior levels of profitability and investment
returns.
The SMALL-CAP OPPORTUNITY FUND intends to invest under normal market
conditions at least 65% of the value of its total assets in Equity Securities
of small domestic issuers with market capitalizations of $100 million to $1
billion. The Investment Adviser will consider some of the following factors in
making its investment decisions: high quality management; significant equity
ownership positions by management; a leading or dominant position in a major
product line; a sound financial position; and a relatively high rate of return
on invested capital. The Fund also may invest in companies that offer the
possibility of accelerating earnings growth because of management changes, new
products or structural changes in the industry or the economy.
The INTRINSIC VALUE FUND invests primarily in Equity Securities of companies
believed by the Investment Adviser to represent a value or potential worth
which is not fully recognized by prevailing market prices. In selecting
investments for the Fund, screening techniques are employed to isolate issues
believed to be attractively priced. The Investment Adviser then evaluates the
underlying earning power and dividend paying ability of these potential
investments. The Fund's holdings are usually characterized by lower
price/earnings, price/cash flow and price/book value ratios and by above
average current dividend yields relative to the equity market.
The GROWTH AND VALUE FUND invests primarily in Equity Securities of companies
believed by the Investment Adviser to represent a value or potential worth
which is not fully recognized by prevailing market prices. The Fund invests in
companies which the Investment Adviser believes have earnings growth
expectations that exceed those implied by the market's current valuation. In
addition, the Fund seeks to maintain a portfolio of companies whose earnings
will increase at a faster rate than those within the general equity market.
The EQUITY INDEX FUND uses the S&P 500 Index as a benchmark for comparison
because it represents roughly two-thirds of the market value of all publicly
traded common stocks in the United States, is well known to investors and is a
widely accepted measure of common stock investment returns. The S&P 500 Index
contains a representative sample of common stocks that trade on the New York
and American Stock Exchanges and also contains over-the-counter stocks that are
a part of the National Market System.
The MARKET EXPANSION INDEX FUND uses a combination of the S&P SmallCap and S&P
MidCap Indices as a benchmark for comparison. The two indexes are combined to
form the benchmark with each stock weighted according to its relative market
capitalization. The indices contain a representative sample of stocks of
medium-size and small U.S. companies (none of which is included in the S&P 500
Index) that trade on the New York and American Stock Exchanges and also contain
over-the-counter stocks that are part of the National Market System.
The Equity Index and Market Expansion Index Funds ("Index Funds") each seek to
achieve a 95% correlation coefficient between its performance and that of its
respective benchmark index or combined indices. Therefore, each Fund's price
changes and total return are expected to closely match movements in the
underlying index or combined indices.
The Index Funds will not be managed by using traditional economic, financial
or market analysis. Instead, each Fund utilizes a sampling methodology to
determine which stocks to purchase or sell in order to closely replicate the
performance of its respective index or combined indices. Stocks are selected
for a Fund based on both capitalization weighting in the index or combined
indices and industry representation. Larger market capitalization securities in
an index or the combined indices are added to a Fund according to their
relative weight. Smaller capitalization securities are then added to a Fund in
equal weights according to an analysis of the industry diversification of such
index or combined indices. Therefore, while all industry weights in a Fund are
essentially matched to those of the respective index or combined indices, not
necessarily all of the stocks of the index or combined indices are held in the
Fund. Each Fund may invest up to 25% of its assets in the securities of foreign
issuers through Depository Receipts. Pending investment and to meet anticipated
redemption requests, each Fund may hold
Pegasus Funds 33
<PAGE>
up to 5% of its total assets in Cash Equivalent Securities. In addition, up to
5% of each Fund's total assets may be invested in futures contracts and related
options in an effort to maintain exposure to price movements in the respective
index or combined indices pending investment of funds or while maintaining
liquidity to meet potential shareholder redemptions.
Deviations from the performance of the respective index or combined indices
("tracking error") may result from shareholder purchases and redemptions of
shares of a Fund that occur daily, as well as from the expenses borne by a
Fund, cash reserves held by a Fund and purchases and sales of securities made
by a Fund to conform its holdings more closely with those represented in the
respective index or the combined indices. In addition, tracking error may occur
due to changes made in an index and the manner in which an index is calculated.
In the event the performance of a Fund is not comparable to the performance of
its respective index or combined indices, the Board of Trustees will examine
the reasons for the deviation and the availability of corrective measures. If
substantial deviation in a Fund's performance were to continue for extended
periods, it is expected that the Board of Trustees would consider possible
changes to a Fund's investment objective.
The INTERNATIONAL EQUITY FUND will invest primarily in Equity Securities of
foreign issuers located in but not limited to the United Kingdom and European
continent, Japan, other Far East areas and Latin America. The Fund may also
invest in other regions seeking to capitalize on investment opportunities in
other parts of the world, including developing countries.
The Investment Adviser's investment approach to managing the International
Equity Fund's assets emphasizes active country selection involving global
economic and political assessments together with valuation analysis of selected
countries' securities markets. In situations where an investment's
attractiveness outweighs prospects for currency weakness, the Investment
Adviser may take suitable hedging measures. An index approach is typically used
at the stock selection level.
The Investment Adviser employs quantitative techniques in conjunction with its
judgment and experience to determine the foreign equity markets that the Fund
will be invested in and the percentage of total assets the Fund will hold by
country. Securities of a country are selected using a quantitatively-oriented
sampling technique intending to generally replicate the performance of an
individual country's stock market index. The Morgan Stanley Capital
International Country Indexes have, for some time, been the accepted benchmarks
in the U.S. for international equity fund country comparisons. The Fund may
also invest in individual Equity Securities which the Investment Adviser
believes offer opportunities for capital appreciation.
The International Equity Fund's assets will be invested at all times in the
securities of issuers located in at least three different foreign countries.
Investments in a particular country may exceed 25% of the Fund's total assets,
thus making its performance more dependent upon the political and economic
circumstances of a particular country than a more widely diversified portfolio.
BOND FUNDS
Each of the Bond Funds will invest at least 65% of the value of its total
assets under normal market conditions in Debt Securities. When the Investment
Adviser believes it advisable for temporary defensive purposes, to maintain
liquidity, or in anticipation of otherwise investing cash positions, each Bond
Fund may invest in Cash Equivalent Securities. Most obligations acquired by the
Funds with the exception of the International Bond Fund will be issued by
companies or governmental entities located within the United States. Each Bond
Fund, other than the International Bond Fund and High Yield Bond Fund, may
invest up to 15% of its total assets in dollar denominated debt obligations
(including Cash Equivalent Securities) of foreign issuers. The International
Bond Fund may invest 100% of its total assets in investments in foreign
issuers. The High Yield Bond Fund may invest 100% of its total assets in dollar
denominated debt obligations (including Cash Equivalent Securities) of foreign
issuers. In addition, each Bond Fund may lend its portfolio securities,
purchase preferred securities, purchase convertible securities and restricted
securities, and engage in futures and options transactions and other derivative
instruments, such as interest rate swaps and forward contracts.
Other than the International Bond Fund and High Yield Bond Fund, the Debt
Securities in which each Bond Fund may invest will be rated investment grade at
the time of purchase, or if unrated, will be deemed by the Investment Adviser
to be comparable in quality at the time of purchase to instruments that are so
rated. By so restricting its investments, a Fund's ability to maximize total
rate of return will be limited. Under normal market conditions, at least 65% of
the value of the International Bond Fund's total assets will consist of Debt
Securities rated A or better by a Rating Agency; and the remainder of its
assets may be invested in Debt Securities rated no lower than B by a Rating
Agency. Under normal market conditions, the High Yield Bond Fund will invest
primarily in Debt Securities which are rated BBB or lower by a Rating Agency.
There is no minimal acceptable rating for a security to be purchased or held in
the High Yield Bond Fund's portfolio and the Fund may, from time to time,
purchase or hold securities in the lowest rating category or hold securities
34 Pegasus Funds
<PAGE>
in default. The International Bond Fund and High Yield Bond Fund may also
invest in Debt Securities which, while not rated, are determined by the
Investment Adviser or, in the case of the High Yield Bond Fund, the Sub-
Adviser, to be of comparable quality to those rated securities in which the
Funds may invest. See "Risk Factors--Lower-Rated Securities."
The INTERMEDIATE BOND FUND invests in a portfolio of U.S. dollar denominated
Debt Securities of domestic and foreign issuers which, under normal market
conditions, will have maturities or average lives of up to 15 years. The Fund's
average weighted portfolio maturity is expected to be between 3 and 6 years.
The BOND FUND invests in a portfolio of U.S. dollar denominated Debt
Securities of domestic and foreign issuers. The Fund's average weighted
portfolio maturity is expected to be between 6 and 12 years.
The SHORT BOND FUND invests in a portfolio of U.S. dollar denominated Debt
Securities of domestic and foreign issuers which, under normal market
conditions, will have maturities or average lives of up to 10 years. The Fund's
average weighted portfolio maturity will be limited to a maximum of 3 years.
The MULTI SECTOR BOND FUND invests in a portfolio of U.S. dollar denominated
Debt Securities of domestic and foreign issuers which, under normal market
conditions, will have a dollar-weighted average maturity expected to range
between 3 and 10 years.
The INTERNATIONAL BOND FUND will invest in Debt Securities of issuers located
throughout the world, except the United States. The Fund also may invest in
convertible preferred stocks, hold foreign currency, and purchase debt
securities or hold currencies in combination with forward currency exchange
contracts. The Fund will be alert to opportunities to profit from fluctuations
in currency exchange rates. The Fund will be particularly alert to favorable
arbitrage opportunities (such as those resulting from favorable interest rate
differentials) arising from the relative yields of the various types of
securities in which the Fund may invest and market conditions generally. The
Fund may invest without restriction in companies in, or governments of,
developing countries. See "Risk Factors--Foreign Securities" below.
The HIGH YIELD BOND FUND invests in a portfolio of U.S. dollar denominated
Debt Securities of domestic and foreign issuers which, under normal market
conditions, are expected to be lower-rated corporate debt obligations or
unrated obligations of comparable quality. Lower-rated or unrated bonds are
commonly referred to as "junk bonds" and are regarded as predominantly
speculative. Certain fixed rate obligations in which the Fund invests may
involve equity characteristics. The Fund may, for example, invest in unit
offerings that combine fixed rate securities and common stock or common stock
equivalents such as warrants, rights, and options. The Fund may invest up to
10% of its total assets in Equity Securities (whether the equity securities are
purchased in a unit offering or not); however, preferred and convertible
securities are not subject to this limitation. The Fund may invest up to 10% of
its total assets in foreign securities which are not publicly traded in the
United States.
MUNICIPAL BOND FUNDS
It is a fundamental policy of each of the Municipal Bond Funds to invest
(except when maintaining a temporary defensive position) at least 80% of the
value of its net assets in Municipal Obligations. From time to time, a
Municipal Bond Fund may invest in an amount not to exceed 20% of the value of
its net assets, or without limitation for temporary defensive purposes, in
taxable Cash Equivalent Securities. Dividends paid by a Municipal Bond Fund
that are attributable to income earned by it from these securities will be
taxable to investors. See "Dividends, Distributions and Taxes."
Municipal Obligations in which the Municipal Bond Funds invest will be rated
at least Baa, MIG-2/VMIG-2 or Prime 2 (P-2) by Moody's, BBB, SP-2 or A-2 by
S&P, BBB or F-2 by Fitch or BBB or Duff-2 by Duff or, if unrated, determined by
the Investment Adviser to be comparable in quality to instruments that are so
rated. The Municipal Bond Funds also may lend their portfolio securities, and
engage in futures and options transactions and other derivative instruments
transactions, such as interest rate swaps.
The MUNICIPAL BOND FUND invests in a portfolio of investment grade Municipal
Obligations without regard to maturity.
The SHORT MUNICIPAL BOND FUND invests in a portfolio of investment grade
Municipal Obligations which, under normal market conditions, will have a
dollar-weighted average maturity generally between one and three years.
The INTERMEDIATE MUNICIPAL BOND FUND invests in a portfolio of investment
grade Municipal Obligations which, under normal market conditions, will have a
dollar-weighted average maturity expected to range between 3 and 10 years.
The MICHIGAN MUNICIPAL BOND FUND invests at least 65% of its total assets
under normal market conditions in investment grade Michigan Municipal
Obligations and the remainder may be invested in securities that are not
Michigan Municipal Obligations and therefore may be subject to Michigan income
taxes. See "Taxes." The Fund will invest in Michigan Municipal Obligations and
other securities without regard to maturity. To the extent that acceptable
Michigan Municipal Obligations are at any time unavailable for investment by
the Fund, the Fund will invest primarily in other Municipal Obligations the
interest on which is, in the opinion of bond counsel, exempt from federal, but
not Michigan income taxes.
Pegasus Funds 35
<PAGE>
INVESTMENT LIMITATIONS
Each Fund and the Money Market Fund are subject to a number of investment
limitations. Except as noted, the following investment limitations are matters
of fundamental policy and may not be changed with respect to a particular Fund
or the Money Market Fund without the affirmative vote of the holders of a
majority of the outstanding shares of the Fund or the Money Market Fund. Other
investment limitations that cannot be changed without a vote of shareholders
are contained in the Statement of Additional Information under "Investment
Objectives, Policies and Risk Factors."
Each of the Funds and the Money Market Fund may not:
1. Purchase any securities which would cause 25% or more of the value of its
total assets at the time of purchase to be invested in the securities of one or
more issuers conducting their principal business activities in the same
industry, provided that (a) there is no limitation with respect to obligations
issued or guaranteed by the U.S. Government, any state, territory or possession
of the United States, the District of Columbia or any of their authorities,
agencies, instrumentalities or political subdivisions, domestic bank
obligations for the Money Market Fund, and repurchase agreements secured by
such instruments, (b) wholly-owned finance companies will be considered to be
in the industries of their parents if their activities are primarily related to
financing the activities of the parents, (c) utilities will be divided
according to their services, for example, gas, gas transmission, electric and
gas, electric and telephone will each be considered a separate industry, and
(d) personal credit and business credit businesses will be considered separate
industries.
2. Make loans, except that it may purchase and hold debt instruments and enter
into repurchase agreements in accordance with its investment objective and
policies and may lend portfolio securities in an amount not exceeding one-third
of its total assets.
3. Borrow money, issue senior securities or mortgage, pledge or hypothecate
its assets except to the extent permitted under the 1940 Act.
The Diversified Funds and the Money Market Fund may not purchase securities of
any one issuer (other than securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities) if, immediately after such
purchase, more than 5% of the value of its total assets would be invested in
the securities of such issuer, or more than 10% of the issuer's outstanding
voting securities would be owned by it, except that up to 25% of the value of
its total assets may be invested without regard to these limitations.
Each Asset Allocation Fund will look through to its pro rata portion of the
Underlying Funds' portfolio investments to determine consistency with its
fundamental policies on diversification and concentration.
Generally, if a percentage limitation is satisfied at the time of investment,
a later increase or decrease in such percentage resulting from a change in the
value of a Fund's portfolio securities will not constitute a violation of such
limitation for purposes of the 1940 Act.
RISK FACTORS
GENERAL
Before selecting a Fund in which to invest, the investor should assess the
risks associated with the types of investments made by the Fund. Investors
should consider a Fund as a supplement to an overall investment program and
should invest only if they are willing to accept the risks involved. The
following should be read in conjunction with "Supplemental Information"
beginning on page A-1 of this Prospectus and the Statement of Additional
Information.
EQUITY SECURITIES
(Asset Allocation, Equity and High Yield Bond Funds only) Securities of smaller
companies may be subject to more abrupt or erratic market movements than
larger, more established companies because they typically are traded in lower
volume and their issuers typically are subject to a greater degree to changes
in earnings and prospects.
DEBT SECURITIES
(All Funds and the Money Market Fund) Investors should be aware that even
though interest-bearing securities are investments which promise a stable
stream of income, the prices of such securities generally are inversely
affected by changes in interest rates and, therefore, are subject to the risk
of market price fluctuations. The values of Debt Securities also may be
affected by changes in the credit rating or financial condition of the issuing
entities. Many corporate debt obligations, including many lower-rated Debt
Securities, permit the issuers to call the security and thereby redeem their
obligations earlier than the stated maturity dates. Issuers are more likely to
call Debt Securities during periods of declining interest rates. In these
cases, a Fund would likely be required to reinvest the proceeds at lower
interest rates, thus reducing income to the Fund.
MUNICIPAL OBLIGATIONS
(Asset Allocation, Bond and the Municipal Bond Funds only) Investors should be
aware that when a Fund's assets are concentrated in obligations payable from
revenues of similar projects or issued by issuers located in the same state, or
in industrial development bonds, the Fund will be subject to the particular
risks relating to such securities (including legal and economic
36 Pegasus Funds
<PAGE>
conditions) to a greater extent than if its assets were not so concentrated.
Payment on Municipal Obligations held by the Funds relating to certain
projects may be secured by mortgages or deeds of trust. In the event of a
default, enforcement of a mortgage or deed of trust will be subject to
statutory enforcement procedures and limitations on obtaining deficiency
judgments. Moreover, collection of proceeds from a foreclosure may be delayed
and the amount of the proceeds received may not be enough to pay the principal
or accrued interest on the defaulted Municipal Obligations.
LOWER-RATED SECURITIES
(Asset Allocation, Equity, International Bond and High Yield Bond Funds only)
Investors should carefully consider the relative risks of investing in the
higher yielding (and, therefore, higher risk) debt securities rated below
investment grade by Moody's, S&P, Fitch or Duff (commonly known as junk bonds).
Each Equity Fund is permitted to invest up to 5% of its net assets in lower-
rated convertible securities. The International Bond Fund may invest up to 35%
of its net assets in debt securities rated as low as B by Moody's, S&P, Fitch
and Duff and unrated debt securities deemed by the Investment Adviser to be
comparable in quality at the time of purchase to instruments that are so rated.
The High Yield Bond Fund will invest primarily in debt securities rated Baa or
lower by Moody's or BBB or lower by S&P, Fitch or Duff and unrated securities
deemed by the Sub-Adviser to be comparable in quality at the time of purchase
to instruments that are so rated. There is no minimal acceptable rating for a
security to be purchased or held by the High Yield Bond Fund, and the Fund may,
from time to time, purchase or hold securities rated in the lowest rating
category or securities in default.
Lower-rated securities will usually offer higher yields than investment grade
securities. However, there is more risk associated with these investments
because of reduced creditworthiness and increased risk of default. The market
values of certain lower-rated debt securities tend to reflect specific
developments with respect to the issuer to a greater extent than do higher
rated securities, which react primarily to fluctuations in the general level of
interest rates, and tend to be more sensitive to economic conditions than are
higher rated securities. Issuers of such debt securities often are highly
leveraged and may not have available to them more traditional methods of
financing.
Securities rated below investment grade generally are subject to certain risks
with respect to the issuing entity and to greater market fluctuations than
certain lower yielding, higher rated Debt Securities. Securities rated below
BBB by S&P, Fitch or Duff or Baa by Moody's are regarded as predominantly
speculative; their future cannot be considered as well assured and often the
protection of interest and principal payments may be very moderate and may face
major ongoing uncertainties or exposure to adverse business, financial or
economic conditions which could lead to inadequate capacity to meet timely
interest and principal payments. Factors adversely affecting the market price
and yield of lower-rated debt securities, including a Fund's ability to sell
such securities in a market that may be less liquid than the market for higher
rated securities, will adversely affect the Fund's net asset value. In
addition, the retail secondary market for these securities may be less liquid
than that for higher rated securities; adverse conditions could make it
difficult at times for a Fund to sell certain securities or could result in
lower prices than those used in calculating its net asset value.
The Investment Adviser or Sub-Adviser will continually evaluate lower-rated
securities and the ability of their issuers to pay interest and principal. A
Fund's ability to achieve its investment objective may be more dependent on the
Investment Adviser's and Sub-Adviser's credit analysis than might be the case
for a fund that invested in higher rated securities. See "Supplemental
Information--Risks Related to Lower-rated Securities," "Debt Ratings" and the
Appendix in the Statement of Additional Information for a general description
of securities ratings.
FOREIGN SECURITIES
(Asset Allocation, Equity and Bond Funds and the Money Market Fund) Foreign
securities markets, especially those of developing countries, generally are not
as developed or efficient as those in the United States. Investment in
securities of foreign issuers, whether made directly or indirectly, involves
inherent risks, such as political or economic instability of the issuer or the
country of issue, the difficulty of predicting international trade patterns,
changes in exchange rates of foreign currencies, the possibility of adverse
changes in investment or exchange control regulations. In addition, foreign
securities may be less liquid and more volatile than securities of comparable
U.S. issuers.
Developing countries have economic structures that are generally less diverse
and mature, and political systems that are less stable, than those of developed
countries. The markets of developing countries may be more volatile than the
markets of more mature economies.
FOREIGN CURRENCY AND FOREIGN COMMODITY TRANSACTIONS
(Asset Allocation, International Equity, International Bond and High Yield Bond
Funds only) Currency exchange rates may fluctuate significantly over short
periods of time. They generally are determined by the forces of supply and
demand in the foreign exchange
Pegasus Funds 37
<PAGE>
markets and the relative merits of investments in different countries, actual
or perceived changes in interest rates and other complex factors, as seen from
an international perspective. Currency exchange rates also can be affected
unpredictably by intervention by U.S. or foreign governments or central banks,
or the failure to intervene, or by currency controls or political developments
in the United States or abroad.
The foreign currency market offers less protection against defaults in the
forward trading of currencies than is available when trading currencies on an
exchange. Since a forward currency contract is not guaranteed by an exchange or
clearinghouse, a default on the contract would deprive a fund of unrealized
profits or force it to cover its commitments for purchase or resale, if any, at
the current market price.
Unlike trading on domestic commodity exchanges, trading on foreign commodity
exchanges is not regulated by the Commodity Futures Trading Commission (the
"CFTC") and may be subject to greater risks than trading on domestic exchanges.
For example, some foreign exchanges are principal markets so that no common
clearing facility exists and an investor may look only to the broker for
performance of the contract. In addition, any profits that a Fund might realize
in trading could be eliminated by adverse changes in the exchange rate, or a
Fund could incur losses as a result of those changes. Transactions on foreign
exchanges may include both commodities which are traded on domestic exchanges
and those which are not.
MORTGAGE-RELATED SECURITIES
(Asset Allocation and Bond Funds only) No assurance can be given as to the
liquidity of the market for certain mortgage-backed securities, such as
collateralized mortgage obligations and stripped mortgage-backed securities.
Determination as to the liquidity of interest-only and principal-only fixed
mortgage-backed securities issued by the U.S. Government or its agencies and
instrumentalities will be made in accordance with guidelines established by the
Board. Mortgage-related securities may be considered a derivative instrument.
DERIVATIVE INSTRUMENTS
Each Fund and the Money Market Fund may purchase certain "derivative
instruments" in accordance with their respective investment objectives and
policies. Derivative instruments are instruments that derive value from the
performance of underlying assets, interest or currency exchange rates, or
indices, and include, but are not limited to, futures contracts, options,
forward currency contracts and structured debt obligations (including
collateralized mortgage obligations and other types of asset backed securities,
"stripped" securities and various floating rate instruments, including inverse
floaters).
Derivative instruments present, to varying degrees, market risk that the
performance of the underlying assets, exchange rates or indices will decline;
credit risk that the dealer or other counterparty to the transaction will fail
to pay its obligations; volatility and leveraging risk that, if interest or
exchange rates change adversely, the value of the derivative instrument will
decline more than the assets, rates or indices on which it is based; liquidity
risk that a Fund or the Money Market Fund will be unable to sell a derivative
instrument when it wants because of lack of market depth or market disruption;
pricing risk that the value of a derivative instrument (such as an option) will
not correlate exactly to the value of the underlying assets, rates or indices
on which it is based; and operations risk that loss will occur as a result of
inadequate systems and controls, human error or otherwise. Some derivative
instruments are more complex than others, and for those instruments that have
been developed recently, data are lacking regarding their actual performance
over complete market cycles.
SPECIAL RISK CONSIDERATIONS APPLICABLE TO THE ASSET ALLOCATION FUNDS
An investment in a mutual fund involves risk and, although the Asset Allocation
Funds will ultimately be substantially invested in the Underlying Funds, such
investment will not eliminate investment risk. Investing in the Underlying
Funds through the Asset Allocation Funds also involves certain additional
expenses and tax considerations that would not be present in a direct
investment in the Underlying Funds. From time to time, the Underlying Funds may
experience relatively large purchases or redemptions due to asset allocation
decisions made by the Investment Adviser for its clients, including the Asset
Allocation Funds. These transactions may have a material effect on the
Underlying Funds because Underlying Funds that experience redemptions as a
result of reallocations may have to sell portfolio securities and because the
Underlying Funds that receive additional cash will have to invest it. While it
is impossible to predict the overall impact of these transactions over time,
there could be adverse effects on portfolio management to the extent that the
Underlying Funds may be required to sell securities at times when they would
not otherwise do so, or receive cash that cannot be invested in an expeditious
manner. There may be tax consequences associated with the purchase and sale of
securities and such sales may also increase transaction costs. The Investment
Adviser is committed to minimizing the impact of these transactions on the
Underlying Funds to the extent it is consistent with pursuing the investment
objectives of the Asset Allocation Funds. The Investment Adviser will monitor
the impact of asset allocation decisions on the Underlying Funds and, where
practicable, an Asset Allocation Fund will, at any
38 Pegasus Funds
<PAGE>
one time, only redeem shares of any particular Underlying Fund to reduce its
allocation to that Underlying Fund in increments of up to 5% (e.g. from 20% to
15%), except where such redemptions are to meet Fund shareholder redemption
requests. The Investment Adviser will nevertheless face conflicts in fulfilling
its responsibilities because of the possible differences between the interests
of its asset allocation clients (including shareholders of the Asset Allocation
Funds) and the interests of the Underlying Funds. Further information on the
investment policies and objectives of the Underlying Funds can be found in
"Supplemental Information" and the Statement of Additional Information.
SPECIAL RISK CONSIDERATIONS APPLICABLE TO THE MICHIGAN MUNICIPAL BOND FUND
The Michigan Municipal Bond Fund will under normal market conditions consist of
Michigan Municipal Obligations to the extent of 65% or more of its total
assets. This concentration in securities issued by governmental units of a
single state exposes the Fund to risk of loss greater than that of a more
diversified fund holding securities issued by governmental units of different
states and different regions of the country.
Moreover, the economy of the State of Michigan is heavily dependent upon the
automobile manufacturing industry, a highly cyclical industry. This factor
affects the revenue streams of the State of Michigan and its political
subdivisions because it impacts on tax sources, particularly sales taxes,
income taxes and Michigan single business taxes.
In 1993 and 1994, Michigan adopted complex statutory and constitutional
changes which, among several other changes in tax methods and rates, have the
effect of imposing limits on annual assessment increases and of transferring a
significant part of the operating cost of public education from locally based
property tax sources to state based sources, including increased sales tax.
These changes will affect state and local revenues of Michigan governmental
units in future years in differing ways, not all of which can be presently
known with certainty.
OTHER INVESTMENT CONSIDERATIONS
The classification of the Municipal Bond Funds and the International Equity and
International Bond Funds as "non-diversified" investment companies means that
the proportion of their assets that may be invested in the securities of a
single issuer is not limited by the 1940 Act. A "diversified" investment
company is required by the 1940 Act generally, with respect to 75% of its total
assets, to invest not more than 5% of such assets in the securities of a single
issuer and to hold not more than 10% of the voting securities of any single
issuer. Each Non-Diversified Fund, however, intends to conduct its operations
so as to qualify as a "regulated investment company" for purposes of the
Internal Revenue Code of 1986, as amended (the "Code"). The Code requires that,
at the end of each quarter of a fund's taxable year, (i) at least 50% of the
market value of its total assets be invested in cash, U.S. Government
securities, securities of other regulated investment companies and other
securities, with such other securities of any one issuer limited for the
purposes of this calculation to an amount not greater than 5% of the value of
the fund's total assets and 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of its total assets be invested
in the securities of any one issuer (other than U.S. Government securities or
the securities of other regulated investment companies). Since a relatively
high percentage of a Non-Diversified Fund's assets may be invested in the
securities of a limited number of issuers, some of which may be within the same
industry or economic sector, its portfolio securities may be more susceptible
to any single economic, political or regulatory occurrence than the portfolio
securities of a diversified investment company.
How to Buy Shares
GENERAL INFORMATION
DESCRIPTION OF CLASSES
This Prospectus offers investors three Classes of shares of each Fund for
investment, Class A, Class B and Class I shares, each of which represents an
identical pro rata interest in a Fund's investment portfolio. Class A shares
and Class B shares are offered to any investor. Orders for purchases of Class I
shares, however, may be placed only for certain eligible investors as described
below. An investor who is not eligible to purchase Class I shares may choose
either Class A or Class B shares based on which class best suits the investor's
needs, given the offering price, the length of time the investor expects to
hold the shares and any other relevant circumstances.
Class A shares are sold at net asset value per share plus an initial sales
charge imposed at the time of purchase. The initial sales charge may be reduced
or waived for certain purchases. The Market Expansion Index Fund also imposes a
transaction fee, as described below under "Transaction Fee Imposed on Share
Purchases." Class A shares of each Fund are subject to a shareholder servicing
fee. Class B shares are sold at net asset value per share with no initial sales
charge at the time of purchase; as a result, the entire purchase price is
immediately invested in the Fund (except for the Market Expansion Index Fund
which imposes a transaction fee). Class B shares may be subject to a CDSC, as
described under "How To Redeem Shares" below, and are subject to a distribution
fee and
Pegasus Funds 39
<PAGE>
shareholder servicing fee. See "Distribution and Shareholder Services Plans."
Class A and Class B shares are offered to the general public and may be
purchased through a number of institutions, including NBD, FCNIMCO, FNBC, ANB
and their affiliates, other Service Agents, and directly through the
Distributor.
Class I shares of all Funds (other than the Market Expansion Index Fund which
imposes a transaction fee) are sold at net asset value with no sales charge and
are sold exclusively to the following investors: (1) qualified trust, custody
and/or agency account clients of FNBC, NBD or their affiliates, including
defined benefit retirement plans for which FNBC, NBD or their affiliates act as
investment manager, but excluding other retirement, 401(k), employee benefit
and profit sharing plans ("Fiduciary Accounts"); (2) qualified retirement,
profit sharing, 401(k) or other employee benefit plans with plan assets of at
least $100 million invested in shares of the Funds or other investment
companies or accounts advised by FNBC, NBD, ANB or FCNIMCO ("Eligible
Retirement Plans"); (3) broker-dealers, registered investment advisers and
other financial institutions purchasing a minimum of $1 million, which have
entered into an agreement with a "mutual fund supermarket" or with the
Distributor, which includes the requirement that such shares be purchased for
the benefit of clients participating in a "wrap account" or similar program
under which such clients pay a fee ("Eligible Financial Intermediaries"); and
(4) the Asset Allocation Funds. Class I shares are not subject to an annual
service fee or distribution fee. Such financial institutions may require
different minimum initial charges, restrictions or cut-off times different from
those applicable to investors that invest in the Trust directly.
Class B shares will receive lower per share dividends and at any given time
the performance of Class B should be expected to be lower than for shares of
each other Class because of the higher expenses borne by Class B. Similarly,
Class A shares will receive lower per share dividends, and the performance of
Class A should be expected to be lower, than Class I shares because of the
higher expenses borne by Class A.
An investor who is not eligible to purchase Class I shares should consider
whether, during the anticipated life of the investor's investment in a Fund,
the accumulated distribution fee and CDSC on Class B shares prior to conversion
would be less than the initial sales charge, if any, on Class A shares
purchased at the same time, and to what extent, if any, such differential would
be offset by the return of Class A. Additionally, investors qualifying for
reduced initial sales charges who expect to maintain their investment for an
extended period of time might consider purchasing Class A shares because the
accumulated continuing distribution fees on Class B shares may exceed the
initial sales charge on Class A shares during the life of the investment.
INFORMATION APPLICABLE TO ALL PURCHASERS
When purchasing Fund shares, an investor must specify the Class of shares being
purchased. If no Class of shares is specified, Class A shares will be
purchased.
The minimum initial investment for each Class is $1,000, except for Eligible
Financial Intermediaries purchasing Class I shares, for which the minimum
initial investment is $1 million. However, for IRAs and other retirement plans,
the minimum initial purchase is $250. All subsequent investments must be at
least $100. The initial investment must be accompanied by the Account
Application. The Investment Adviser and Service Agents may impose initial or
subsequent investment minimums which are higher or lower than those specified
above and may impose different minimums for different types of accounts or
purchase arrangements. The Trust reserves the right to reject any purchase
order.
If an order is received by the Transfer Agent or certain authorized broker-
dealers or designated intermediaries by the close of trading on the floor of
the New York Stock Exchange (the "Exchange"), or at the Early Closing Time (as
defined below), on any Business Day (as defined below), shares will be
purchased at the public offering price determined as of the close of trading on
the floor of the Exchange (currently 4:00 p.m., Eastern time) or as of the
Early Closing Time on that day. Otherwise, shares will be purchased at the
public offering price determined as of the close of trading on the floor of the
Exchange or as of the Early Closing Time on the next Business Day.
The Trust has authorized certain broker-dealers to accept on its behalf
purchase orders made through a "mutual fund supermarket." Such authorized
broker-dealers may designate other intermediaries to accept purchase orders on
behalf of the Trust.
Federal regulations require that an investor provide a certified Taxpayer
Identification Number ("TIN") upon opening or reopening an account. See the
Statement of Additional Information for information concerning this
requirement. Failure to furnish a certified TIN to the Trust could subject an
investor to a $50 penalty imposed by the Internal Revenue Service (the "IRS"),
and could subject the investor to backup withholding.
Shares may also be paid for by wiring federal funds to NBD Bank, ABA
072000326, for the account of Pegasus Funds, deposit to FDIS Cashbook Account
number 79512, and identifying the customer name and account number. Before
wiring payment, customers must notify the Trust at 1-800-688-3350 of the dollar
amount of the purchase. Notification must be given before the respective
closing time of the fund to be purchased.
40 Pegasus Funds
<PAGE>
Share certificates will not be issued. It is not recommended that the
Municipal Bond Funds be used as vehicles for Keogh, IRA or other qualified
retirement plans.
NET ASSET VALUE
As to each Fund, net asset value per share of each Class is computed by
dividing the value of the Fund's net assets represented by such Class (i.e.,
the value of its assets less liabilities) by the total number of shares of such
Class outstanding. The assets of each Asset Allocation Fund will consist
primarily of shares of the Underlying Funds, which are valued at their
respective net asset values.
Shares for each Fund are sold on a continuous basis at the public offering
price (i.e., net asset value plus the applicable sales load and transaction
fee, if any, as set forth below). Net asset value per share of the Funds is
determined as of the close of trading on the floor of the Exchange (currently
4:00 p.m., New York time), on each day the New York Stock Exchange is open for
business (the "Business Days") except: (i) those holidays which the Exchange
observes (currently New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day); and (ii) those Business Days on which the Exchange closes
prior to the close of its regular trading hours ("Early Closing Time") in which
event the net asset value of each Fund will be determined and its shares will
be priced as of such Early Closing Time.
Shares of the Underlying Funds held by the Asset Allocation Funds are valued
by the Asset Allocation Funds at their respective net asset values. Securities
held by the Funds which are traded on a recognized U.S. stock exchange are
valued at the last sale price on the national securities market. Securities
which are primarily traded on foreign securities exchanges are generally valued
at the latest closing price on their respective exchanges, except when an
occurrence subsequent to the time a value was established is likely to have
changed such value, in which case the fair value of those securities will be
determined through consideration of other factors by the Investment Adviser
under the supervision of the Board of Trustees. Securities, whether U.S. or
foreign, traded on only over-the-counter markets and securities for which there
were no transactions are valued at the average of the current bid and asked
prices. Debt Securities are valued according to the broadest and most
representative market, which ordinarily will be the over-the-counter markets,
whether in the United States or in foreign countries. Such securities are
valued at the average of the current bid and asked prices. Securities (other
than shares of the Underlying Funds) for which accurate market quotations are
not readily available, and other assets are valued at fair value by the
Investment Adviser under the supervision of the Board of Trustees. Securities
(other than shares of the Underlying Funds) may be valued on the basis of
prices provided by independent pricing services when the Investment Adviser
believes such prices reflect the fair market value of such securities. The
prices provided by pricing services take into account institutional size
trading in similar groups of securities and any developments related to
specific securities. For valuation purposes, the value of assets and
liabilities expressed in foreign currencies will be converted to U.S. dollars
equivalent at the prevailing market rate on the day of valuation. Open futures
contracts will be "marked-to-market."
CLASS A SHARES
Class A shares of each Fund are subject to an annual service fee at the rate of
up to 0.25% of the value of the average daily net assets of Class A. See
"Distribution Plan" and "Shareholder Services Plan." Class A shares held by
investors who after purchasing Class A shares establish a Fiduciary Account
will convert to Class I shares upon depositing such shares into such Account,
based on the relative net asset values for shares of each such Class.
The public offering price for Class A shares of each Fund (other than the
Market Expansion Index Fund) is the net asset value per share plus a sales load
as shown below. The Market Expansion Index Fund also imposes a transaction fee
on purchases of its shares. See "Transaction Fee Imposed on Share Purchases."
ASSET ALLOCATION FUNDS AND EQUITY FUNDS
(OTHER THAN THE EQUITY INDEX AND MARKET EXPANSION INDEX FUNDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL SALES LOAD
------------------------------- DEALERS'
AS A % OF AS A % OF REALLOWANCE
OFFERING NET ASSET AS A % OF
PRICE VALUE PER OFFERING
AMOUNT OF TRANSACTION PER SHARE SHARE PRICE
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 5.00 5.26 4.50
$50,000 to less than $100,000 4.50 4.71 4.00
$100,000 to less than $250,000 3.50 3.63 3.00
$250,000 to less than $500,000 2.50 2.56 2.00
$500,000 to less than $1,000,000 2.00 2.04 1.75
$1,000,000 and above none* none none
</TABLE>
BOND, INTERNATIONAL BOND, HIGH YIELD BOND, MUNICIPAL
BOND AND MICHIGAN MUNICIPAL BOND FUNDS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL SALES LOAD
------------------------------- DEALERS'
AS A % OF AS A % OF REALLOWANCE
OFFERING NET ASSET AS A % OF
PRICE VALUE PER OFFERING
AMOUNT OF TRANSACTION PER SHARE SHARE PRICE
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 4.50 4.71 4.00
$50,000 to less than $100,000 4.00 4.17 3.50
$100,000 to less than $250,000 3.00 3.09 2.50
$250,000 to less than $500,000 2.00 2.04 1.50
$500,000 to less than $1,000,000 1.50 1.52 1.25
$1,000,000 and above none* none none
</TABLE>
Pegasus Funds 41
<PAGE>
EQUITY INDEX, MARKET EXPANSION INDEX, MULTI SECTOR BOND, INTERMEDIATE BOND AND
INTERMEDIATE MUNICIPAL BOND FUNDS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL SALES LOAD
------------------------------- DEALERS'
AS A % OF AS A % OF REALLOWANCE
OFFERING NET ASSET AS A % OF
PRICE VALUE PER OFFERING
AMOUNT OF TRANSACTION PER SHARE SHARE PRICE
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 3.00 3.09 2.75
$50,000 to less than $100,000 2.50 2.56 2.25
$100,000 to less than $250,000 2.00 2.04 1.75
$250,000 to less than $500,000 1.50 1.52 1.25
$500,000 to less than $1,000,000 1.00 1.01 0.75
$1,000,000 and above none* none none
</TABLE>
SHORT BOND AND SHORT MUNICIPAL BOND FUNDS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL SALES LOAD
------------------------------- DEALERS'
AS A % OF AS A % OF REALLOWANCE
OFFERING NET ASSET AS A % OF
PRICE VALUE PER OFFERING
AMOUNT OF TRANSACTION PER SHARE SHARE PRICE
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $1,000,000 1.00 1.01 0.75
$1,000,000 and above none* none none
</TABLE>
* A contingent deferred sales charge of up to 1.00% may be assessed on certain
redemptions of Class A shares purchased without an initial sales charge as
part of an investment of $1 million or more.
With respect to purchases of $1,000,000 or more of Class A shares or other
purchases of Class A shares made at net asset value (as described below) of
each Fund made through Service Agents, the Distributor may pay such Service
Agents from its own funds, with respect to the Asset Allocation and Equity
Funds (other than the Equity Index and Market Expansion Index Funds) and the
Bond, International Bond, High Yield Bond, Municipal Bond and Michigan
Municipal Bond Funds, a fee of 1.00% for each Fund for the first $2 million of
the amount invested, 0.80% of the next $1 million and 0.50% thereafter and,
with respect to the Equity Index, Market Expansion Index, Short Bond, Short
Municipal Bond, Multi Sector Bond, Intermediate Bond and Intermediate Municipal
Bond Funds, a fee of 0.75% on the first $3 million of the amount invested and
0.50% thereafter, to compensate Service Agents for their distribution
assistance in connection with such purchases. In addition, at its expense, the
Distributor may provide additional compensation and promotional incentives to
dealers in connection with the sales of shares of the Funds. Such compensation
will include financial assistance to dealers in connection with conferences,
sales or training programs for their employees, seminars for the public,
advertising campaigns regarding one or more of the Funds, and/or other special
events sponsored by dealers. In some instances, this compensation will be made
available only to certain dealers whose representatives have sold a significant
amount of Shares. Compensation may also include payment for travel expenses,
including lodging, incurred in connection with trips taken by invited
registered representatives and members of their families to locations within or
outside of the United States for meetings or seminars of a business nature.
Compensation will also include the following types of non-cash compensation
offered through sales contests: (1) trips, including the provision of travel
arrangements and lodging at vacation resorts, (2) tickets for entertainment
events (such as concerts, cruises, and sporting events) and (3) merchandise
(such as clothing, trophies, clocks, and pens). Dealers may not use sales of
shares to qualify for this compensation to the extent this may be prohibited by
the laws of any self-regulatory agency, such as the NASD. None of the
aforementioned will be paid for by the Funds or their shareholders.
Full-time employees of NASD member firms which have entered into an agreement
with the Distributor pertaining to the sale of Fund shares (or which otherwise
have a brokerage-related or clearing arrangement with an NASD member firm with
respect to sales of Fund shares), their spouses and minor children, and
accounts opened by a bank, trust company or thrift institution, acting as a
fiduciary or custodian, for accounts other than 401(k) and other defined
contribution or other retirement plan accounts, may purchase Class A shares for
themselves or itself, as the case may be, without a sales load, provided that
they have furnished the Distributor appropriate notification of such status at
the time of the investment and such other information as it may request from
time to time in order to verify eligibility for this privilege. In addition,
Class A shares may be purchased without a sales load for accounts registered
under the Uniform Gifts to Minors Act or Uniform Transfers to Minors Act which
are opened through FCNIS and 401(k) and other defined contribution or other
retirement plan accounts for which FNBC or its subsidiaries or affiliates have
served as custodian or trustee since at least June 1, 1995 or NBD or its
subsidiaries or affiliates, other than FNBC or ANB, have served as
administrator or trustee since January 1, 1996. Class A shares are also offered
without a sales load to directors and full-time or part-time employees of FCN,
or any of its affiliates and subsidiaries, retired employees of FCN, or any of
its affiliates and subsidiaries, Board members of a fund advised by the
Investment Adviser, including members of the Trust's Board of Trustees, or the
spouses, children, grandchildren, siblings, parents, grandparents and in-laws
of any of the foregoing individuals.
Class A shares may be purchased without a sales load through certain broker-
dealers, registered investment advisers and other financial institutions which
have entered into an agreement with a "mutual fund supermarket" or with the
Distributor, which includes a requirement that such shares be purchased for the
benefit of clients participating in a "wrap account" or a similar program under
which such clients pay a fee to such broker-dealer, registered investment
adviser or other financial institution. The Investment Adviser may
42 Pegasus Funds
<PAGE>
pay a fee of up to 1.5% of the amount invested by a participant in its
Investment Architect Account or any other wrap account to FCNIS, FNBC or other
parties.
Class A shares also may be purchased without a sales load with the proceeds
from the redemption of shares of an investment company sold with a sales charge
or commission or annuity contract or guaranteed investment contract subject to
a surrender charge. This also includes shares of an investment company that
were or would be subject to a contingent deferred sales charge upon redemption.
The purchase must be made within 60 days of the redemption, and the Transfer
Agent must be notified in writing by the investor at the time the purchase is
made.
Class A shares also will be offered without a sales load to employees
participating in accounts such as retirement, 401(k), profit sharing and other
employee benefit plan or program accounts where (i) the employers or affiliated
employers maintaining such plans or programs have a minimum of 200 employees
eligible for participation in such plans or programs or (ii) such plan's or
program's assets exceed $1,000,000 ("Eligible Benefit Plans").
If an individual is a participant in a qualified retirement, profit sharing,
401(k) or other employee benefit plan which, is eligible to purchase Class A
shares or Class I shares without a sales load and rolls Fund shares into a
qualified IRA, then that IRA may purchase Class A shares without a sales load.
Current shareholders of the Equity Index Fund who owned shares of the Fund
prior to August 26, 1996 and have held all or a portion of such shares
thereafter, are also entitled to purchase shares of the Equity Index Fund
without a sales load.
In order to qualify for any of the sales load exemptions indicated above, at
the time of purchase an investor must notify the Transfer Agent of the sales
load exemption. The sales load exemption is subject to verification by the
Transfer Agent through a check of appropriate records. If necessary, the
Transfer Agent may request additional supporting documentation from the
investor.
If an investor purchases Class A shares without an initial sales charge as
part of an investment of at least $1,000,000 or another method described above
and redeems those shares within a certain period after purchase, a CDSC will be
imposed at the time of redemption as described below unless the investor
qualifies for a waiver of the CDSC as described below under "Class B Shares --
Waiver of CDSC." The terms set forth under "How to Redeem Shares -- Class B --
Contingent Deferred Sales Charge" (other than the amount of the CDSC and its
time periods) are applicable to the Class A shares subject to a CDSC. The
following table sets forth the rates of such CDSC for each Fund other than the
Short Bond and Short Municipal Bond Funds for the indicated time periods:
<TABLE>
<CAPTION>
CDSC AS A % OF
AMOUNT INVESTED OR YEAR SINCE PURCHASE
REDEMPTION PROCEEDS PAYMENT WAS MADE
- ------------------------------------------------------------------------------
<S> <C>
1.00% First
- ------------------------------------------------------------------------------
0.50% Second
</TABLE>
- --------------------------------------------------------------------------------
The following table sets forth the rates of such CDSC for the Short Bond and
Short Municipal Bonds Funds for the indicated time periods:
<TABLE>
<CAPTION>
CDSC AS A % OF
AMOUNT INVESTED OR YEAR SINCE PURCHASE
REDEMPTION PROCEEDS PAYMENT WAS MADE
- ------------------------------------------------------------------------------
<S> <C>
1.00% First
- ------------------------------------------------------------------------------
None Second
</TABLE>
- --------------------------------------------------------------------------------
RIGHT OF ACCUMULATION -- CLASS A SHARES
Reduced sales loads apply to any purchase of Class A shares where the dollar
amount of shares being purchased, plus the value of shares of such Fund, shares
of other Funds and shares of certain other investment companies advised by the
Investment Adviser purchased with a sales load or acquired by a previous
exchange of shares purchased with a sales load (hereinafter referred to as
"Eligible Funds") held by an investor and any related "purchaser" as defined in
the Statement of Additional Information, is $50,000 or more. If, for example,
an investor previously purchased and still holds Class A shares of the Equity
Income Fund, or of any other Eligible Fund or combination of Eligible Funds,
with an aggregate current market value of $40,000 and subsequently purchases
Class A shares of such Fund or an Eligible Fund having a current value of
$20,000, the sales load applicable to the subsequent purchase would be reduced
to 4.50% of the offering price (4.71% of the net asset value). All present
holdings of Eligible Funds may be combined to determine the current offering
price of the aggregate investment in ascertaining the sales load applicable to
each subsequent purchase.
To qualify for reduced sales loads, at the time of a purchase an investor must
notify the Transfer Agent. The reduced sales load is subject to confirmation of
the investor's holdings through a check of appropriate records.
CLASS B SHARES
The Distributor will compensate certain Service Agents for selling Class B
shares at the time of purchase from its own assets. Proceeds of the CDSC and
distribution fees payable to the Distributor, in part, will be used to defray
these expenses.
CLASS I SHARES
Class I shares held by investors who after purchasing Class I shares for their
Fiduciary Accounts withdraw from such Accounts will convert to Class A shares
upon such withdrawal, based on the relative net asset values
Pegasus Funds 43
<PAGE>
for shares of each such Class, and will be subject to the annual service fee
charged to Class A shares.
Shareholder Services
The Exchange Privilege is available to shareholders of any Class. The Letter of
Intent is available only for Class A shareholders, and the Automatic Investment
Plan and Reinstatement Privilege are available only for Class A and Class B
shareholders. Such services and privileges may not be available to clients of
certain Service Agents and some Service Agents may impose conditions on their
clients which are different from those described in this Prospectus. Each
investor should consult his or her Service Agent in this regard.
EXCHANGE PRIVILEGE
The Exchange Privilege enables an investor in Class A and Class B shares to
purchase, in exchange for shares of a Fund which have been owned for at least
30 days, shares of the same Class of the other Funds or the other investment
portfolios of the Trust. This privilege may be expanded to permit exchanges
between a Fund and other funds that, in the future, may be advised by the
Investment Adviser. Exchanges may be made to the extent the shares being
received in the exchange are offered for sale in the shareholder's state of
residence.
Shares of the same Class of Funds and other investment portfolios of the Trust
purchased by exchange will be purchased on the basis of relative net asset
value per share as follows:
A. Shares of Funds purchased with or without a sales load may be exchanged
without a sales load for shares of other Funds and investment portfolios of the
Trust sold without a sales load.
B. Shares of Funds purchased without a sales load may be exchanged for shares
of other Funds and investment portfolios of the Trust sold with a sales load,
and the applicable sales load will be deducted.
C. Shares of Funds purchased with a sales load, shares of Funds acquired by a
previous exchange from shares purchased with a sales load and additional shares
acquired through reinvestment of dividends or distributions of any such Funds
(collectively referred to herein as "Purchased Shares") may be exchanged for
shares of other Funds sold with a sales load (referred to herein as "Offered
Shares"), provided that, if the sales load applicable to the Offered Shares
exceeds the maximum sales load that could have been imposed in connection with
the Purchased Shares (at the time the Purchased Shares were acquired), without
giving effect to any reduced loads, the difference will be deducted. To
accomplish such an exchange, shareholders must notify the Transfer Agent of
their prior ownership of Fund shares and their account number.
D. Shares of Funds subject to a CDSC that are exchanged for shares of another
Fund or of the Trust's Money Market Fund will be subject to the higher
applicable CDSC of the two funds, and for purposes of calculating CDSC rates
and conversion periods, if any, will be deemed to have been held since the date
the shares being exchanged were initially purchased.
E. A qualified or non-qualified employee benefit plan with assets of at least
$1 million or 200 eligible participants may be exchanged from Class B shares to
Class A shares on or after January 1 of the year following the year of the
plan's eligibility, provided that the sponsor of the plan has so notified the
Service Agent of its eligibility and in turn, the Service Agent has notified
the Transfer Agent of such eligibility.
No fees currently are charged shareholders directly in connection with
exchanges although the Trust reserves the right, upon not less than 60 days'
written notice, to charge shareholders a nominal fee in accordance with rules
promulgated by the SEC. The Trust reserves the right to reject any exchange
request in whole or in part. The Exchange Privilege may be modified or
terminated at any time upon notice to shareholders. Exchanges made into the
Market Expansion Index Fund will be charged a transaction fee applicable to
purchases of such Fund.
The exchange of shares of one Fund for shares of another is treated for
federal income tax purposes as a sale and, therefore, an exchanging shareholder
may realize a taxable gain or loss. See "Taxes--Federal."
LETTER OF INTENT -- CLASS A SHARES
By signing a Letter of Intent form, available from the Transfer Agent, the
Investment Adviser, certain of its affiliates or certain Service Agents, an
investor becomes eligible for the reduced sales load applicable to the total
number of Eligible Fund shares purchased in a 13-month period up to the amount
of the signed Letter of Intent (beginning up to 30 days before the date of
execution of the Letter of Intent), pursuant to the terms and conditions set
forth in the Letter of Intent. A minimum initial purchase of $10,000 is
required. To compute the applicable sales load, the offering price of shares
the investor holds (on the date of submission of the Letter of Intent) in any
Eligible Fund that may be
used toward "Right of Accumulation" benefits described
above may be used as a credit toward completion of the Letter of Intent.
However, the reduced sales load will be applied only to new purchases.
The Transfer Agent will hold in escrow 5% of the amount indicated in the
Letter of Intent for payment of a higher sales load if the investor does not
purchase the full amount indicated in the Letter of Intent. The escrow will be
released when the investor fulfills the terms of the Letter of Intent by
purchasing the specified amount. Assuming completion of the total minimum
investment specified under a Letter of Intent, an
44 Pegasus Funds
<PAGE>
adjustment will be made to reflect any reduced sales load applicable to shares
purchased during the 30-day period before submission of the Letter of Intent.
If total purchases are less than the amount specified, the investor will be
notified that a deduction from escrow to cover the difference between the sales
load actually paid and the sales load applicable to the aggregate purchases
actually made will be assessed. Signing a Letter of Intent does not bind the
investor to purchase, or the Trust to sell, the total amount indicated at the
sales load in effect at the time of signing, but the investor must complete the
intended purchase to obtain the reduced sales load. At the time an investor
purchases Class A shares, the investor must indicate his or her intention to do
so under a Letter of Intent.
AUTOMATIC INVESTMENT PLAN
The Automatic Investment Plan permits an investor in Class A and Class B Shares
to purchase shares in amounts of at least $100 at regular intervals selected by
the investor. Provided the investor's bank or other financial institution
allows automatic withdrawals, shares may be purchased by transferring funds
from the bank account designated by the investor. At the investor's option, the
account designated will be debited in the specified amount, on either the first
and/or the fifteenth day of the month. Only an account maintained at a domestic
financial institution which is an Automated Clearing House member may be so
designated. To establish an Automatic Investment Plan account, the investor
must check the appropriate box and supply the necessary information on the
Account Application. Investors may obtain the necessary applications from the
Transfer Agent by calling (800) 688-3350. Investors should be aware that
periodic investment plans do not guarantee a profit and will not protect an
investor against loss in a declining market. An investor may cancel his or her
participation in the Plan or change the amount of purchase at any time by
mailing written notification to the Transfer Agent and such notification will
be effective three business days following receipt. The Funds may modify or
terminate the Automatic Investment Plan at any time or charge a service fee. No
such fee currently is contemplated.
REINSTATEMENT PRIVILEGE
The Reinstatement Privilege enables investors who have redeemed Class A or
Class B shares to purchase, within 120 days of such redemption, Class A shares
without the imposition of a sales load in an amount not to exceed the
redemption proceeds received. Class A shares so reinstated or purchased will be
offered at a purchase price equal to the then-current net asset value of Class
A Shares determined after a reinstatement request and payment for Class A
shares are received by the Transfer Agent. This privilege also enables such
investors to reinstate their account for the purpose of exercising the Exchange
Privilege. To use the Reinstatement Privilege, an investor must submit a
written reinstatement request to the Transfer Agent. The reinstatement request
and payment must be received within 120 days of the trade date of the
redemption. There currently are no restrictions on the number of times an
investor may use this privilege.
OPTION TO MAKE SYSTEMATIC WITHDRAWALS
The Systematic Withdrawal Plan permits an investor who owns Class A or Class B
shares of a Fund having a minimum value of $15,000 at the time he or she elects
under the Systematic Withdrawal Plan to have a fixed sum distributed in
redemption at regular intervals. An application form and additional information
regarding this service may be obtained from an investor's financial institution
or the Transfer Agent by calling (800) 688-3350.
CROSS REINVESTMENT OF DIVIDEND PLAN
The Trust makes available to investors of Class A and Class B shares a Cross
Reinvestment of Dividend Plan pursuant to which an investor who owns shares of
any Fund with a minimum value of $10,000 at the time he or she elects may have
dividends paid by such Fund automatically reinvested into shares of another
Fund or investment portfolio of the Trust in which he or she has invested a
minimum of $1,000. A transaction fee will be charged to all investors who elect
to have dividends from other Funds reinvested in the Market Expansion Index
Fund. See "Transaction Fee Imposed on Share Purchases" below. Investors may
obtain an application and additional information from their financial
institutions or the Transfer Agent by calling (800) 688-3350.
PEGASUS FUNDS INDIVIDUAL RETIREMENT CUSTODIAL ACCOUNT
Class A and Class B shares may be purchased in conjunction with the Trust's
Individual Retirement Custodial Account Program ("IRA") where NBD acts as
custodian. Investors should consult their institutions or the Transfer Agent
for information as to applications and annual fees. The minimum investment for
an IRA is $250. Investors should also consult their tax advisers to determine
whether the benefits of an IRA are available or appropriate.
How to Redeem Shares
GENERAL INFORMATION
An investor may request redemption of his or her shares at any time. Redemption
requests should be transmitted to the Transfer Agent as described below. An
investor who has purchased shares through his or her Fiduciary Account or as a
participant in an Eligible
Pegasus Funds 45
<PAGE>
Retirement Plan or "mutual fund supermarket" or similar program must redeem
shares by following instructions pertaining to such Account or Plan or program.
It is the responsibility of the entity authorized to act on behalf of such
Account or Plan or program to transmit the redemption order to the Transfer
Agent and credit the investor's account with the redemption proceeds on a
timely basis. When a redemption request is received in proper form by the
Transfer Agent, certain broker-dealers authorized by the Trust to accept on its
behalf such redemption requests made through a "mutual fund supermarket" or
certain other designated intermediaries, the relevant Fund will redeem the
shares at the next determined net asset value as described below. If an
investor holds Fund shares of more than one Class, any request for redemption
must specify the Class of shares being redeemed. If an investor fails to
specify the Class of shares to be redeemed, Class A shares will be redeemed
first. If an investor owns fewer shares of the Class than specified to be
redeemed, the redemption request may be delayed until the Transfer Agent
receives further instructions from the investor or his or her Service Agent.
The Funds impose no charges when shares are redeemed. However, the Trust may
impose a CDSC as described below. Service Agents also may charge a nominal fee
for effecting redemptions of Fund shares. The value of the shares redeemed may
be more or less than their original cost, depending upon the Fund's then-
current net asset value.
A Fund ordinarily will make payment for all shares redeemed within seven days
after receipt by the Transfer Agent of a redemption request in proper form,
except as provided by the rules of the SEC. HOWEVER, IF AN INVESTOR HAS
PURCHASED FUND SHARES BY CHECK OR THROUGH THE AUTOMATIC INVESTMENT PLAN AND
SUBSEQUENTLY SUBMITS A WRITTEN REDEMPTION REQUEST TO THE TRANSFER AGENT, THE
REDEMPTION PROCEEDS WILL BE TRANSMITTED TO THE INVESTOR PROMPTLY UPON BANK
CLEARANCE OF THE INVESTOR'S PURCHASE CHECK OR AUTOMATIC INVESTMENT PLAN ORDER,
WHICH MAY TAKE UP TO EIGHT BUSINESS DAYS OR MORE. IN ADDITION, THE FUND WILL
NOT HONOR REDEMPTION CHECKS FOR A PERIOD OF EIGHT BUSINESS DAYS AFTER RECEIPT
BY THE TRANSFER AGENT OF THE PURCHASE CHECK OR AUTOMATIC INVESTMENT PLAN ORDER
AGAINST WHICH SUCH REDEMPTION IS REQUESTED. THESE PROCEDURES WILL NOT APPLY IF
THE INVESTOR OTHERWISE HAS A SUFFICIENT COLLECTED BALANCE IN HIS OR HER ACCOUNT
TO COVER THE REDEMPTION REQUEST. PRIOR TO THE TIME ANY REDEMPTION IS EFFECTIVE,
DIVIDENDS ON SUCH SHARES WILL ACCRUE AND BE PAYABLE, AND THE INVESTOR WILL BE
ENTITLED TO EXERCISE ALL OTHER RIGHTS OF BENEFICIAL OWNERSHIP. Fund shares will
not be redeemed until the Transfer Agent has received the investor's Account
Application.
Each Fund reserves the right to redeem an investor's account at the Fund's
option upon not less than 60 days' written notice if, due to share redemptions,
the account's net asset value decreases to less than $1,000 and remains so
during the notice period.
REDEMPTION PROCEDURES
An investor who has purchased shares through his or her account at FCN, its
affiliates, a Service Agent or a financial institution must redeem shares by
following instructions pertaining to such account. If an investor has given his
or her Service Agent authority to instruct the Transfer Agent to redeem shares
and to credit the proceeds of such redemption to a designated account at the
Service Agent, the investor may redeem shares only in this manner and in
accordance with a written redemption request described below. It is the
responsibility of FCN, its affiliates, the Investment Adviser, the Service
Agent, or the financial institution, as the case may be, to transmit the
redemption order and credit the investor's account with the redemption proceeds
on a timely basis.
If an investor wants his or her redemption proceeds sent to an address other
than the investor's address as it appears on the Transfer Agent's records, a
signature guarantee is required. The Transfer Agent usually requires additional
documentation for the sale of shares by a corporation, partnership, agent or
fiduciary, or a surviving joint owner. See the Transfer Agent for more
information about where to obtain a signature guarantee.
An investor may use the Transfer Agent's Telephone Redemption Privilege to
redeem shares from his or her account, unless the investor has notified the
Transfer Agent of an address change within the preceding 15 days with the
exception of redemptions to pre-authorized bank accounts. Unless an investor
indicates otherwise on the Account Application, the Transfer Agent will be
authorized to act upon redemption and transfer instructions received by
telephone from a shareholder, or any person claiming to act as his or her
representative, who can provide the Transfer Agent with his or her account
registration and address as it appears on the Transfer Agent's records. With
the telephone redemption or exchange privilege, an investor authorizes the
Transfer Agent to act on telephone instructions from any person representing
himself or herself to be the investor, or a representative of the investor's
Service Agent or financial institution, and reasonably believed by the Transfer
Agent to be genuine. The Trust will require the Transfer Agent to employ
reasonable procedures, such as requiring a form of personal identification, to
confirm that instructions are genuine and, if it does not follow such
procedures, the Trust or the Transfer Agent may be liable for any losses due to
unauthorized or fraudulent instructions. Neither the Trust nor the Transfer
Agent will be liable for following telephone instructions reasonably believed
to be genuine.
46 Pegasus Funds
<PAGE>
During times of drastic economic or market conditions, an investor may
experience difficulty in contacting the Transfer Agent by telephone to request
a redemption or exchange of Fund shares. In such cases, investors should
consider using the other redemption procedures described herein. Use of these
other redemption procedures may result in the investor's redemption request
being processed at a later time than it would have been if telephone redemption
had been used. During the delay, a Fund's net asset value may fluctuate.
WRITTEN REDEMPTION REQUESTS
Investors may redeem shares by written request mailed to the Transfer Agent at
P.O. Box 5142, Westborough, Massachusetts 01581-5120. Redemption requests must
be signed by each shareholder, including each owner of a joint account, and
each signature must be guaranteed for redemptions greater than $50,000. The
Transfer Agent has adopted standards and procedures pursuant to which
signature-guarantees in proper form generally will be accepted from domestic
banks, brokers, dealers, credit unions, national securities exchanges,
registered securities associations, clearing agencies and savings associations,
as well as from participants in the New York Stock Exchange Medallion Signature
Program, the Securities Transfer Agents Medallion Program ("STAMP"), and the
Stock Exchange's Medallion Program.
CLASS B SHARES
CONTINGENT DEFERRED SALES CHARGE
A CDSC payable to the Distributor may be imposed on redemptions of Class B
shares depending on the number of years such shares were held by the investor.
The following table sets forth the rates of the CDSC applied for the Funds:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EQUITY INDEX, MARKET
EXPANSION INDEX,
MULTI SECTOR
BOND,
INTERMEDIATE
SHORT BOND BOND AND
AND SHORT INTERMEDIATE
MUNICIPAL MUNICIPAL
BOND FUNDS BOND FUNDS ALL OTHER FUNDS
----------- -------------------- ---------------
CDSC AS A CDSC AS A CDSC AS A
YEAR % OF % OF % OF
SINCE AMOUNT AMOUNT AMOUNT
PURCHASE INVESTED OR INVESTED OR INVESTED OR
WAS REDEMPTION REDEMPTION REDEMPTION
MADE PROCEEDS PROCEEDS PROCEEDS
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
First 1.00 3.00 5.00
Second None 3.00 4.00
Third * 2.00 3.00
Fourth N/A 2.00 3.00
Fifth N/A 1.00 2.00
Sixth N/A None 1.00
Seventh N/A * None
Eighth N/A N/A *
</TABLE>
- --------------------------------------------------------------------------------
* Conversion to Class A shares.
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. Class B
shares redeemed will not be subject to a CDSC to the extent that the value of
such shares represents capital appreciation or reinvestment of dividends or
distributions. It will be assumed that the redemption is made first of Class B
shares acquired pursuant to the reinvestment of dividends and distributions or
representing any capital appreciation in the value of the Class B shares held
by the investor; then of Class B shares held for the longest period of time.
WAIVER OF CDSC
The CDSC will be waived in connection with (a) redemptions made within one year
after the death of the shareholder, (b) redemptions by shareholders after age
70 1/2 for purposes of the minimum required distribution from an IRA, Keogh
plan or custodial account pursuant to Section 403(b) of the Code, (c)
distributions from a qualified plan upon retirement or termination of
employment, (d) redemptions of shares acquired through a contribution in excess
of permitted amounts, (e) in-service withdrawals from tax qualified plans by
participants, (f) redemptions initiated by a Fund of accounts with net assets
of less than $1,000, and (g) redemptions by Eligible Financial Intermediaries
who have purchased Class A shares at net asset value as part of a "wrap
account" or similar program.
CONVERSION OF CLASS B SHARES
Class B shares automatically convert to Class A shares (and thus become subject
to the lower expenses borne by Class A shares) at the beginning of the eighth
year (the third year in the case of the Short Bond and Short Municipal Bond
Funds and the seventh year in the case of the Equity Index, Market Expansion
Index, Multi Sector Bond, Intermediate Bond and Intermediate Municipal Bond
Funds) after the date of purchase, together with the pro rata portion of all
Class B shares representing dividends and other distributions paid in
additional Class B shares. The conversion will be effected at the relative net
asset values per share of the two Classes on the first business day of the
month following the seventh anniversary (the second anniversary in the case of
the Short Bond and Short Municipal Bond Funds and the sixth anniversary in the
case of the Equity Index, Market Expansion Index, Multi Sector Bond,
Intermediate Bond and Intermediate Municipal Bond Funds) of the original
purchase. If any exchanges of Class B shares during the third-year, eighth-year
or seventh-year, as the case may be, occurred, the holding period for the
shares exchanged will be counted toward the third-year, eighth-year or seventh-
year, as the case may be. At the time of the conversion the net asset value per
share of
Pegasus Funds 47
<PAGE>
the Class A shares may be higher or lower than the net asset value per share of
the Class B shares; as a result, depending on the relative net asset values per
share, a shareholder may receive fewer or more Class A shares than the number
of Class B shares converted.
Upon conversion to Class A shares, such shares will no longer be subject to
the distribution fee. Class B shares that have been acquired through the
reinvestment of dividends and distributions will be converted on a pro rata
basis together with other Class B shares, in the proportion that a
shareholder's Class B shares converting to Class A shares bears to the total
Class B shares not acquired through the reinvestment of dividends and
distributions.
Each Fund reserves the right to cease offering Class B shares for sale at any
time or reject any order for the purchase of Class B shares and to cease
offering any services provided by a Service Agent.
TRANSACTION FEE IMPOSED ON SHARE PURCHASES
The Market Expansion Index Fund requires the payment of a transaction fee on
purchases of shares of the Market Expansion Index Fund equal to 0.50% of the
dollar amount invested. The transaction fee is paid to the Fund, not to the
adviser, distributor or transfer agent. It is not a sales charge. The fee
applies to initial investments in the Fund and all subsequent purchases
(including purchases made by exchange from the other Funds of the Trust), but
not to in-kind contributions, reinvested dividends or capital gain
distributions. The purpose of the transaction fee is to indirectly allocate
transaction costs associated with new purchases to investors making those
purchases, thus protecting existing shareholders. These costs include: (1)
brokerage costs; (2) market impact costs--i.e., the increase or decrease in
market prices which may result when the Fund purchases certain securities; and
(3) the effect of the "bid-ask" spread in the over-the-counter market. The
0.50% amount represents the Fund's estimate of the brokerage and other
transaction costs which may be incurred by the Fund in acquiring stocks in
which the Fund may invest. Without the transaction fee, the Fund would
generally be selling its shares at a price less than the cost to the Fund of
acquiring the portfolio securities necessary to maintain its investment
characteristics, resulting in reduced investment performance for all
shareholders in the Fund. With the transaction fee, the transaction costs of
acquiring additional stocks are not borne by all existing shareholders, but the
source of funds for these costs is the transaction fee paid by those investors
making additional purchases.
Management of the Trust
TRUSTEES AND OFFICERS OF THE TRUST
The Board of Trustees of the Trust is responsible for the management of the
business and affairs of the Trust. Information about the Trustees and officers
of the Trust is contained in the Statement of Additional Information.
INVESTMENT ADVISER AND CO-ADMINISTRATORS
First Chicago NBD Investment Management Company, located at Three First
National Plaza, Chicago, Illinois 60670 is each Fund's and the Money Market
Fund's Investment Adviser. FCNIMCO is a registered investment adviser and a
wholly-owned subsidiary of The First National Bank of Chicago ("FNBC"), which
in turn is a wholly-owned subsidiary of First Chicago NBD Corporation ("FCN"),
a registered bank holding company. FCNIMCO also acts as investment adviser for
other accounts and registered investment company portfolios.
FCNIMCO serves as Investment Adviser for the Trust pursuant to an Investment
Advisory Agreement dated as of April 12, 1996. Under the Investment Advisory
Agreement, FCNIMCO provides the day-to-day management of each Fund's
investments. Subject to the overall authority of the Trust's Board of Trustees
and in conformity with Massachusetts law and the stated policies of the Trust,
FCNIMCO is responsible for making investment decisions for the Trust, placing
purchase and sale orders (which may be allocated to various dealers based on
their sales of Fund shares) and providing research, statistical analysis and
continuous supervision of each Fund's investment portfolio.
Under the terms of the Investment Advisory Agreement, the Investment Adviser
is entitled to a monthly fee as a percentage of each Fund's and the Money
Market Fund's daily net assets. Each Fund's and the Money Market Fund's current
contractual fee for advisory services is set forth below.
48 Pegasus Funds
<PAGE>
<TABLE>
<CAPTION>
EFFECTIVE RATE FOR
CURRENT ADVISORY SERVICES
CONTRACTUAL FOR YEAR ENDED
ADVISORY FEE RATE DECEMBER 31, 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
ASSET ALLOCATION FUNDS:
Managed Assets Conservative Fund 0.65% 0.57%
Managed Assets Balanced Fund 0.65% 0.61%
Managed Assets Growth Fund 0.65% 0.14%
- ------------------------------------------------------------------------------
EQUITY FUNDS:
Equity Income Fund 0.50% 0.50%
Growth Fund 0.60% 0.60%
Mid-Cap Opportunity Fund 0.60% 0.60%
Small-Cap Opportunity Fund 0.70% 0.70%
Equity Index Fund 0.10% 0.10%
Market Expansion Index Fund 0.25% N/A
Intrinsic Value Fund 0.60% 0.60%
Growth and Value Fund 0.60% 0.60%
International Equity Fund 0.80% 0.80%
- ------------------------------------------------------------------------------
BOND FUNDS:
Intermediate Bond Fund 0.40% 0.40%
Bond Fund 0.40% 0.40%
Short Bond Fund 0.35% 0.35%
Multi Sector Bond Fund 0.40% 0.40%
International Bond Fund 0.70% 0.13%
High Yield Bond Fund 0.70% N/A
- ------------------------------------------------------------------------------
MUNICIPAL BOND FUNDS:
Municipal Bond Fund 0.40% 0.40%
Short Municipal Bond Fund 0.40% N/A
Intermediate Municipal Bond Fund 0.40% 0.40%
Michigan Municipal Bond Fund 0.40% 0.40%
- ------------------------------------------------------------------------------
MONEY MARKET FUND:
Money Market Fund 0.30% 0.29%
of the first $1
billion, 0.275%
of next $1 billion, 0.25%
of amount in excess of $2
billion
</TABLE>
- --------------------------------------------------------------------------------
In addition to the fees listed above, the Investment Adviser is entitled to
4/10ths of the gross income earned by a Fund on each loan of securities
(excluding capital gains and losses, if any). To date the Funds have not made
any such payments and have no current intention to do so.
Although the fee payable by the International Equity Fund is higher than the
fee payable by other funds, the Investment Adviser believes that it is within
the range of fees payable by funds with comparable investment objectives and
policies.
The following persons are responsible for the day-to-day management of each of
the Funds.
CLAUDE B. ERB, First Vice President and Director of Investment Planning, is
primarily responsible for the day-to-day management of the Asset Allocation
Funds and the International Bond Fund. Mr. Erb has served as Deputy Chief
Investment Officer and Senior Vice President of Trust Services of America and
TSA Capital Management from 1986 through 1992. Mr. Erb joined FCN in 1993.
CHRIS M. GASSEN, First Vice President, and F. RICHARD NEUMANN, First Vice
President, are primarily responsible for the day-to-day management of the
Equity Income and Intrinsic Value Funds. Mr. Gassen joined FCN in 1985 and Mr.
Neumann joined FCN in 1981.
RONALD L. DOYLE, First Vice President, and JOSEPH R. GATZ, Vice President, are
primarily responsible for the day-to-day management of the Mid-Cap Opportunity
and Small-Cap Opportunity Funds. Mr. Doyle joined FCN in 1982 and Mr. Gatz
joined FCN in 1986.
JEFFREY C. BEARD, First Vice President, and GARY L. KONSLER, First Vice
President, are primarily responsible for the day-to-day management of the
Growth and Value and Growth Funds. Mr. Beard joined FCN in 1982 and Mr. Konsler
joined FCN in 1973.
RICARDO F. CIPICCHIO, First Vice President, and MARK M. JACKSON, Vice
President, are primarily responsible for the day-to-day management of the Multi
Sector Bond Fund. Mr. Cipicchio joined FCN in 1989. Mr. Jackson served as
portfolio manager for Alexander Hamilton Life Insurance Company, 1993-1996, and
as portfolio manager for Public Employees Retirement System of Ohio, 1988-1993.
Mr. Jackson joined FCN in 1996.
RICHARD P. KOST, First Vice President, and CLYDE L. CARTER, JR., Vice
President, are primarily responsible for
Pegasus Funds 49
<PAGE>
the day-to-day portfolio management of the International Equity Fund. Mr. Kost
joined FCN in 1964 and Mr. Carter joined FCN in 1987.
DOUGLAS S. SWANSON, First Vice President, and MR. CIPICCHIO are primarily
responsible for the day-to-day management of the Intermediate Bond and Bond
Funds. Mr. Swanson joined FCN in 1983.
MR. CIPICCHIO and CHRISTOPHER J. NAUSEDA, Vice President, are primarily
responsible for the day-to-day portfolio management of the Short Bond Fund. Mr.
Nauseda joined FCN in 1982.
ROBERT T. GRABOWSKI, First Vice President and manager of the municipal desk at
FCN, and REBECCA L. GERSONDE, Vice President, are primarily responsible for the
day-to-day management of the Municipal Bond and Michigan Municipal Bond Funds.
Mr. Grabowski has been the manager of the municipal desk at FCN since 1984. Ms.
Gersonde joined FCN in 1982.
J. CHRISTOPHER NICHOLL, Vice President, and Mr. Grabowski are primarily
responsible for the day-to-day management of the Intermediate Municipal Bond
Fund. Mr. Nicholl joined FCN in 1996. He served as an Investment Associate at
Prudential Securities, Inc. from 1987-1995.
Ms. Gersonde and Mr. Nicholl are primarily responsible for the day-to-day
management of the Short Municipal Bond Fund.
Banking laws and regulations currently prohibit a bank holding company
registered under the Bank Holding Company Act of 1956 or any affiliate thereof
from sponsoring, organizing, controlling or distributing the shares of a
registered open-end investment company continuously engaged in the issuance of
its shares, and prohibit banks generally from underwriting securities, but do
not prohibit such a bank holding company or affiliate from acting as investment
adviser, transfer agent, or custodian to such an investment company or from
purchasing shares of such a company as agent for and upon the order of a
customer. Subject to such banking laws and regulations, the Investment Adviser
believes that it and its affiliated banks may perform the advisory,
administrative and custodial services for the Trust described in this
Prospectus, and may perform the shareholder services contemplated by this
Prospectus, without violation of such banking laws or regulations. However,
future changes in legal requirements relating to the permissible activities of
banks and their affiliates, as well as future interpretations of present
requirements, could prevent the Investment Adviser from continuing to perform
investment advisory or custodial services for the Trust or require them to
alter or discontinue the services they provide to shareholders.
If the Investment Adviser and its affiliated banks were prohibited from
performing investment advisory or custodial services for the Trust, it is
expected that the Board of Trustees would recommend that shareholders approve
new agreements with another entity or entities qualified to perform such
services and selected by the Board. The Trust does not anticipate that
investors would suffer any adverse financial consequences as a result of these
occurrences.
FCNIMCO and BISYS jointly serve as the Trust's Co-Administrators pursuant to
an Administration Agreement with the Trust. Under the Administration Agreement,
FCNIMCO and BISYS generally assist in all aspects of the Trust's operations,
other than providing investment advice, subject to the overall authority of the
Trust's Board in accordance with Massachusetts law. Under the terms of the
Administration Agreement the Trust pays FCNIMCO, as agent for the Co-
Administrators, a monthly administration fee at the annual rate of .15% of each
Fund's and the Money Market Fund's average daily net assets. For the fiscal
year ended December 31, 1996, the Trust paid administration fees at the
effective annual rate of .15% of each Fund's average daily net assets.
THE SUB-ADVISER
Federated Investment Counseling, located at Federated Investors Tower,
Pittsburgh, Pennsylvania 15222, is the sub-adviser for the High Yield Bond
Fund. Federated is a registered investment adviser and a subsidiary of
Federated Investors. All of the Class A voting securities of Federated
Investors are owned by a trust, the trustees of which are John F. Donahue,
Chairman and a trustee of Federated Investors, Mr. Donahue's wife, and Mr.
Donahue's son, J. Christopher Donahue, who is President and a trustee of
Federated Investors.
Under the terms of the Sub-Advisory Agreement, Federated provides the day-to-
day management of the High Yield Bond Fund's investments. Subject to the
oversight and supervision of FCNIMCO and the Trust's Board of Trustees,
Federated is responsible for making investment decisions for the High Yield
Bond Fund, placing purchase and sale orders (which may be allocated to various
dealers based on their sale of Fund shares) and providing research, statistical
analysis and continuous supervision of the Fund's investment portfolio.
For its services, Federated is entitled to a monthly fee at the following
annual rates (as a percentage of the High Yield Bond Fund's average daily net
assets), which vary according to the level of assets: .50% on the first $30
million of average daily net assets, .40% on the next $20 million, .30% on the
next $25 million, .25% on the next $25 million and .20% of the Fund's average
daily net assets in excess of $100 million. The Sub-Adviser's fee is paid by
FCNIMCO and not by the Fund.
Mark E. Durbiano, Senior Vice President, and Constantine Kartsonas are
primarily responsible for the day-to-day management of the High Yield Bond
Fund. Mr. Durbiano joined Federated in 1982. Mr. Kartsonas joined Federated in
1994 as an Investment Analyst and
50 Pegasus Funds
<PAGE>
has been an Assistant Vice President of an affiliate of the Sub-Adviser since
January 1997. Mr. Kartsonas served as an Operations Analyst at Lehman Brothers
from 1990-1993.
DISTRIBUTOR
BISYS Fund Services, located at 3435 Stelzer Road, Columbus, Ohio 43219-3035,
serves as the Trust's principal underwriter and distributor of the Funds'
shares.
TRANSFER AND DIVIDEND DISBURSING AGENT AND CUSTODIAN
First Data Investor Services Group, Inc., P.O. Box 5142, Westborough,
Massachusetts 01581-5120, serves as the Trust's Transfer and Dividend
Disbursing Agent. NBD, which is a wholly-owned subsidiary of FCN, serves as the
Trust's custodian (the "Custodian"). NBD is located at 900 Tower Drive, Troy,
Michigan 48098.
EXPENSES
All expenses incurred in the operation of the Trust are borne by it, except to
the extent specifically assumed by the Trust's service providers. The expenses
borne by the Trust include: organizational costs; taxes; interest; loan
commitment fees; interest and distributions paid on securities sold short;
brokerage fees and commissions, if any; fees of Board members; SEC fees; state
Blue Sky registration fees; advisory fees; charges of custodians, transfer and
dividend disbursing agents' fees; fees pursuant to agency, sub-transfer agency
and service agreements; certain insurance premiums; industry association fees;
outside auditing and legal expenses; costs of maintaining each Fund's
existence; costs of independent pricing services; costs attributable to
investor services (including, without limitation, telephone and personnel
expenses); costs of shareholders' reports and meetings; costs of preparing and
printing prospectuses and statements of additional information for regulatory
purposes and for distribution to existing shareholders; and any extraordinary
expenses. Class A, Class B and Class I shares are subject to their pro rata
portion of the fees payable by a Fund to financial institutions that provide
recordkeeping and other services in connection with employee benefit plans
which hold shares or to financial institutions that establish accounts on
behalf of investors in connection with the purchase and/or sale of Class A
and/or Class I shares. In addition, Class B shares are subject to an annual
distribution fee for advertising, marketing and distributing such shares and
Class A and Class B shares are subject to an annual service fee for ongoing
personal services relating to shareholder accounts and services related to the
maintenance of shareholder accounts. See "Distribution and Shareholder Services
Plans." Expenses attributable to a particular Fund or Class are charged against
the assets of that Fund or Class, respectively; other expenses of the Trust are
allocated among such Funds on the basis determined by the Board, including, but
not limited to, proportionately in relation to the net assets of each such
Fund.
The imposition of the advisory fee, as well as other operating expenses,
including the fees paid under any Distribution Plan and Shareholder Services
Plan, will have the effect of reducing the total return to investors. From time
to time, the Investment Adviser may waive receipt of its fees and/or
voluntarily assume certain expenses of a Fund, which would have the effect of
lowering that Fund's overall expense ratio and increasing total return to
investors at the time such amounts are waived or assumed, as the case may be.
The Fund will not pay the Investment Adviser at a later time for any amounts
which may be waived, nor will the Fund reimburse the Investment Adviser for any
amounts which may be assumed.
Distribution and Shareholder Services Plans
Class B shares of each Fund are subject to an annual distribution fee pursuant
to a Distribution Plan. Class A and Class B shares of each Fund are subject to
an annual service fee pursuant to a Shareholder Services Plan.
DISTRIBUTION PLAN
(Class B only) Under a Distribution Plan adopted pursuant to Rule 12b-1 under
the 1940 Act, the Trust has agreed to pay the Distributor for advertising,
marketing and distributing shares of a Fund at an aggregate annual rate not to
exceed .75% of the value of the average daily net assets of Class B shares. The
Distributor may pay one or more Service Agents in respect of these services.
The Investment Adviser and its subsidiaries and affiliates may act as Service
Agents and receive fees under the Distribution Plan. The Distributor determines
the amount, if any, to be paid to Service Agents under the Distribution Plan
and the basis on which such payments are made. The fees payable under the
Distribution Plan are payable without regard to actual expenses incurred.
SHAREHOLDER SERVICES PLAN
(Class A and Class B) Under a Shareholder Services Plan, the Trust pays the
Distributor for the provision of certain services to the holders of Class A and
Class B shares a fee at an annual rate of .25% of the value of the average
daily net assets of such shares. The services provided may include personal
services relating to shareholder accounts, such as answering shareholder
inquiries regarding the Funds and providing reports and other information and
services related to the
Pegasus Funds 51
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maintenance of shareholder accounts. Under the Shareholder Services Plan, the
Distributor may make payments to Service Agents in respect of these services.
The Investment Adviser and its subsidiaries and affiliates may act as Service
Agents and receive fees under the Shareholder Services Plan. The Distributor
determines the amounts to be paid to Service Agents.
Dividends and Distributions
THE MANAGED ASSETS BALANCED, MANAGED ASSETS GROWTH, GROWTH, MID-CAP
OPPORTUNITY, SMALL-CAP OPPORTUNITY, INTRINSIC VALUE, GROWTH AND VALUE, EQUITY
INDEX, MARKET EXPANSION INDEX AND INTERNATIONAL EQUITY FUNDS declare and pay
dividends from net investment income on a quarterly basis. THE BOND FUNDS, THE
MUNICIPAL BOND FUNDS AND THE MANAGED ASSETS CONSERVATIVE AND EQUITY INCOME
FUNDS declare and pay dividends from net investment income on a monthly basis.
Each Fund will make distributions from net realized securities gains, if any,
once a year, but may make distributions on a more frequent basis to comply with
the distribution requirements of the Code, in all events in a manner consistent
with the provisions of the 1940 Act. Dividends are automatically reinvested in
additional Fund shares of the same Class from which they were paid at net asset
value, unless payment in cash is requested. If cash payment is requested,
checks will be mailed within five days. No interest will accrue on amounts
represented by uncashed distribution or redemption checks.
Taxes
FEDERAL
Each Fund intends to qualify as a "regulated investment company" under the
Code. Such qualification generally will relieve the Funds of liability for
federal income taxes to the extent their earnings are distributed in accordance
with the Code.
Each Fund intends to distribute as dividends substantially all of its net
income each year. With the exception of dividends paid by the Municipal Bond
Funds, such dividends will be taxable as ordinary income to a Fund's
shareholders regardless of whether a distribution is received in cash or
reinvested in additional shares. Such ordinary income distributions will
qualify for the dividends received deduction for corporations to the extent of
the total qualifying dividends received by the distributing Fund from domestic
corporations for the taxable year.
Dividends derived from net capital gains will be taxable to Fund shareholders
as long-term capital gains, regardless of how long the shareholders have held
the shares and whether such gains are paid in cash or reinvested in Fund
shares.
Dividends paid by a Fund derived from net investment income, together with
distributions from net realized short-term securities gains and all or a
portion of any gain realized from the sale or other disposition of certain
market discount bonds, paid by such Fund to a foreign investor who is the
beneficial owner of such Fund's shares generally are subject to U.S.
nonresident withholding taxes at the rate of 30%, unless the foreign investor
claims the benefit of a lower rate specified in a tax treaty. Distributions
from net realized long-term securities gains paid by the Fund to such foreign
investor generally will not be subject to U.S. nonresident withholding tax.
However, such distributions may be subject to backup withholding, unless the
foreign investor certifies his non-U.S. residency status.
Federal regulations generally require the Trust to withhold ("backup
withholding") and remit to the U.S. Treasury 31% of dividends and distributions
from net realized securities gains paid to a shareholder if such shareholder
fails to certify either that the TIN furnished in connection with opening an
account is correct, or that such shareholder has not received notice from the
IRS of being subject to backup withholding as a result of a failure to properly
report taxable dividend or interest income on a federal income tax return.
Furthermore, the IRS may notify the Trust to institute backup withholding if
the IRS determines a shareholder's TIN is incorrect or if a shareholder has
failed to properly report taxable dividend and interest income on a federal
income tax return.
Any dividends declared in October, November or December with a record date
before the end of the year will be deemed for federal tax purposes to have been
paid by the Fund and received by the shareholders in that year if such
dividends are actually paid on or before January 31 of the following year.
Shareholders considering buying shares of a Fund on or just before the record
date of a dividend should be aware that the amount of the dividend payment,
although in effect a return of capital, is subject to tax.
A taxable gain or loss may be realized by a shareholder upon his or her
redemption, transfer or exchange of shares of a Fund depending upon the tax
basis and their price at the time of redemption, transfer or exchange. If a
shareholder has held shares for six months or less and during that time
received a distribution taxable as a long-term capital gain, then any loss the
shareholder might realize on the sale of those shares will be treated as a
long-term loss to the extent of the earlier capital gain distribution.
It is expected that dividends and certain interest income earned by the
International Equity and International Bond Funds from foreign securities will
be subject to foreign withholding taxes or other taxes.
52 Pegasus Funds
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So long as more than 50% of the value of a Fund's total assets at the close of
any taxable year consists of equity securities of foreign corporations, the
Fund may elect to treat certain foreign taxes paid by it on behalf of its
shareholders. As a consequence, the amount of such foreign taxes paid by a Fund
will be included in its shareholders' income pro rata (in addition to taxable
distributions actually received by them), and each shareholder will be entitled
(a) to credit the shareholders proportionate amounts of such taxes against the
shareholders' U.S. federal income tax liabilities, or (b) if the shareholder
itemizes his or her deductions, to deduct such proportionate amounts from his
or her U.S. income, should the shareholder so choose.
Shareholders will be advised at least annually as to the federal income tax
consequences of distributions made to them each year.
The foregoing discussion summarizes some of the important tax considerations
generally affecting the Funds and their shareholders and is not intended as a
substitute for careful tax planning. Accordingly, potential investors in the
Funds should consult their tax advisers with specific reference to their own
tax situation.
MUNICIPAL BOND FUNDS
Dividends derived from tax-exempt interest income ("exempt-interest dividends")
paid by the Municipal Bond Funds may be treated by its shareholders as items of
interest excludable from their gross income unless under the circumstances
applicable to the particular shareholder the exclusion would be disallowed.
(See "Additional Information Concerning Taxes" in the Statement of Additional
Information.)
If a Municipal Bond Fund holds certain so-called "private activity bonds,"
shareholders will need to include as an item of tax preference for purposes of
the federal alternative minimum tax that portion of the dividends paid by the
Fund derived from interest received on such bonds. In addition, corporate
shareholders will need to take into account all exempt-interest dividends paid
by a Municipal Bond Fund in determining certain adjustments for the federal
alternative minimum tax.
If a shareholder has held shares for six months or less and during that time
received an exempt-interest dividend attributable to those shares, any loss
realized on the sale or exchange of those shares will be disallowed to the
extent of the exempt-interest dividend.
STATE AND LOCAL
Dividends paid by the Michigan Municipal Bond Fund that are derived from
interest attributable to Michigan Municipal Obligations will be exempt from
Michigan income tax, Michigan intangibles tax and Michigan single business tax.
Conversely, to the extent that the Fund's dividends are derived from interest
on obligations other than Michigan Municipal Obligations or certain U.S.
Government Obligations (or are derived from short term or long term gains),
such dividends will be subject to Michigan income tax, Michigan intangibles tax
and Michigan single business tax, even though the dividends may be exempt for
federal income tax purposes. The Fund is unable to predict in advance the
portion of its dividends that will be derived from interest on Michigan
Municipal Obligations, but will mail to its shareholders not later than sixty
days after the close of the Fund's taxable year a written notice containing
information as to the interest derived from Michigan Municipal Obligations and
exempt from Michigan income tax, Michigan intangibles tax and Michigan single
business tax.
Except as noted above with respect to Michigan income taxation, distributions
of net income may be taxable to investors as dividend income under other state
or local laws even though a substantial portion of such distributions may be
derived from interest on tax-exempt obligations which, if realized directly,
would be exempt from such income taxes.
MISCELLANEOUS
The Trust may be subject to state or local taxes in jurisdictions in which the
Trust may be deemed to be doing business. In addition, in those states or
localities which have income tax laws, the treatment of the Trust and its
shareholders under such laws may differ from treatment under federal income tax
laws. Shareholders are advised to consult their tax advisers concerning the
application of state and local taxes, which may have different consequences
from those of the federal income tax law described above.
Performance Information
From time to time, in advertisements or in reports to shareholders the
performance of the Funds may be compared to the performance of other mutual
funds with similar investment objectives and to stock and other relevant
indices or to rankings prepared by independent services or other financial or
industry publications that monitor the performance of mutual funds. For
example, the performance of a Fund's shares may be compared to data prepared by
Lipper Analytical Services, Inc. In addition, the performance of the Funds may
be compared to the S&P 500 Index, the S&P Small Cap Index, the S&P Mid Cap
Index (indices of unmanaged groups of common stocks), a combination of the S&P
Small Cap and S&P Mid Cap Indices, the Consumer Price Index, or the Dow Jones
Industrial Average, a recognized unmanaged index of common stocks of thirty
industrial companies listed on the New
Pegasus Funds 53
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York Stock Exchange. Performance data as reported in national financial
publications such as Money Magazine, Forbes, Barron's, The Wall Street Journal
and The New York Times, or in publications of a local or regional nature, may
also be used in comparing the performance of a Fund.
A Fund's "yield" refers to the income generated by an investment in a Fund
over a thirty-day period for the Asset Allocation, Bond and Municipal Bond
Funds identified in the advertisement. This income is then "annualized," i.e.,
the income generated by the investment during the respective period is assumed
to be earned and reinvested at a constant rate and compounded semi-annually and
is shown as a percentage of the investment. Each Municipal Bond Fund may from
time to time advertise a "tax-equivalent yield" to demonstrate the level of
taxable yield necessary to produce an after-tax yield equivalent to that
achieved by the Fund. The "tax-equivalent yield" will be computed by dividing
the tax-exempt portion of the Fund's yield by a denominator consisting of one
minus a stated federal income tax rate and adding the product to that portion,
if any, of the Fund's yield which is not tax-exempt.
The Funds calculate their total returns on an "average annual total return"
basis for various periods from the date they commenced investment operations
and for other periods as permitted under the rules of the SEC. Average annual
total return reflects the average annual percentage change in value of an
investment in the Funds over the measuring period. Total returns may also be
calculated on an "aggregate total return basis" for various periods. Aggregate
total return reflects the total percentage change in value over the measuring
period. Both methods of calculating total return also reflect changes in the
price of a Fund's shares and assume that any dividends and capital gain
distributions made by the Fund during the period are reinvested in Fund shares.
When considering average total return figures for periods longer than one year,
it is important to note that a Fund's annual total return for any one year in
the period might have been greater or less than the average for the entire
period.
The total return performance of the Equity Income, Growth, Small-Cap
Opportunity International Bond and Short Municipal Bond Funds includes
performance of a common trust fund managed by FNBC which had substantially the
same investment objective, policies, restriction and methodologies as its
corresponding Fund for periods before such Fund's registration statement became
effective. The common trust funds were not registered under the 1940 Act and
therefore were not subject to certain investment restrictions imposed by the
1940 Act. If the common trust funds had registered under the 1940 Act,
performance may have been adversely affected.
The Market Expansion Index Fund may advertise total return data without
reflecting the 0.50% transaction fee, if, in accordance with the rules of the
SEC, it is accompanied by average annual return data reflecting this fee.
Quotations which do not reflect the fee will, of course, be higher than
quotations which do.
Performance of the Funds is based on historical earnings and will fluctuate
and is not intended to indicate future performance. The investment performance
of an investment in the Funds will fluctuate so that a shareholder's shares,
when redeemed, may be worth more or less than their original cost. A Fund's
performance data may not provide a basis for comparison with bank deposits and
other investments which provide a fixed yield for a stated period of time.
Performance data should also be considered in light of the risks associated
with a Fund's portfolio composition, quality, maturity, operating expenses and
market conditions. Any fees charged by financial institutions directly to their
customer accounts in connection with investments in Fund shares will not be
reflected in a Fund's performance calculations.
54 Pegasus Funds
<PAGE>
General Information
The Trust was organized as a Massachusetts business trust on April 21, 1987
under a Declaration of Trust. The Trust is a series fund having thirty-one
series of shares of beneficial interest, each of which evidences an interest in
a separate investment portfolio. The Declaration of Trust permits the Board of
Trustees to issue an unlimited number of full and fractional shares and to
create an unlimited number of series of shares ("Series") representing
interests in a portfolio and an unlimited number of classes of shares within a
Series. In addition to the Funds described herein, the Trust offers the
following investment portfolios: the Money Market, Treasury Money Market,
Municipal Money Market, Michigan Municipal Money Market, Cash Management,
Treasury Cash Management, Municipal Cash Management, U.S. Government Securities
Cash Management and Treasury Prime Cash Management Funds.
Each Fund described herein and the Money Market Fund offer three classes of
shares: Class A, Class B and Class I. The Treasury Money Market, Municipal
Money Market and Michigan Money Market Funds offer two classes of shares: Class
A and Class I. The Cash Management, Treasury Cash Management, Municipal Cash
Management, U.S. Government Cash Management and Treasury Prime Cash Management
Funds offer two Classes of shares: Class S and Class I. Each share has $.10 par
value, represents an equal proportionate interest in the related Fund with
other shares of the same class outstanding, and is entitled to such dividends
and distributions out of the income earned on the assets belonging to such Fund
as are declared in the discretion of the Board of Trustees.
Shareholders are entitled to one vote for each full share held, and a
proportionate fractional vote for each fractional share held, and each Series
entitled to vote on a matter will vote thereon in the aggregate and not by
Series, except as otherwise expressly required by law or when the Board of
Trustees determines that the matter to be voted on affects only the interests
of shareholders of a particular Series. In addition, shareholders of each of
the Series have equal voting rights except that only shares of a particular
class within a Series are entitled to vote on matters affecting only that
class. Voting rights are not cumulative, and accordingly the holders of more
than 50% of the aggregate number of shares of all Trust portfolios may elect
all of the Trustees. Each Asset Allocation Fund will vote its Underlying Fund
shares in proportion to the votes of all other shareholders of each respective
Underlying Funds.
As of November 7, 1997, FCN and its affiliates held beneficially of record
approximately 15.24%, 13.52%, 42.48%, 56.06%, 25.83%, 70.70%, 62.39%, 68.52%,
57.57%, 64.08%, 64.36%, 90.50%, 71.14%, 94.05%, 17.54%, and 46.13%,
respectively of the outstanding shares of the Managed Assets Balanced, Managed
Assets Growth, Growth, Mid-Cap Opportunity, Small-Cap Opportunity, Intrinsic
Value, Growth and Value, Equity Index, International Equity, Intermediate Bond,
Bond, Short Bond, International Bond, High Yield Bond, Municipal Bond and
Michigan Municipal Bond Funds, respectively.
Because NBD serves the Trust as Custodian, the Board of Trustees has
established a procedure requiring three annual verifications, two of which are
unannounced, of all investments held pursuant to the Custodian Agreement, to be
conducted by the Trust's independent accountants.
The Trust does not presently intend to hold annual meetings of shareholders
except as required by the 1940 Act or other applicable law. The Trust's By-Laws
provide that special meetings of shareholders of any Series shall be called at
the written request of shareholders entitled to cast at least 10% of the votes
of a Series entitled to be cast at such meeting. The Trust also stands ready to
assist shareholder communications in connection with any meeting of
shareholders as prescribed in Section 16(c) of the 1940 Act.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE FUNDS'
OFFICIAL SALES LITERATURE IN CONNECTION WITH THE OFFER OF THE FUNDS' SHARES,
AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
Pegasus Funds 55
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Supplemental Information
RATINGS
The ratings of Rating Agencies represent their opinions as to the quality of
the obligations which they undertake to rate. It should be emphasized,
however, that ratings are relative and subjective and, although ratings may be
useful in evaluating the safety of interest and principal payments, they do
not evaluate the market value risk of such obligations. Therefore, although
these ratings may be an initial criterion for selection of portfolio
investments, the Investment Adviser or Sub-Adviser also will evaluate such
obligations and the ability of their issuers to pay interest and principal.
Each Fund will rely on the Investment Adviser's or Sub-Adviser's judgment,
analysis and experience in evaluating the assets of an issuer. Obligations
rated in the lowest of the top four investment grade rating categories (Baa by
Moody's or BBB by S&P, Fitch or Duff) are considered to have less capacity to
pay interest and repay principal and have certain speculative characteristics.
SHORT-TERM INVESTMENTS
Each Fund and the Money Market Fund may hold the types of short-term U.S.
Government obligations described under "Investment Objectives and Policies--
Asset Allocation Funds" above.
U.S. GOVERNMENT OBLIGATIONS
U.S. Government obligations include all types of U.S. Government securities,
including U.S. Treasury bonds, notes and bills, and obligations of Federal
Home Loan Banks, Federal Farm Credit Banks, Federal Land Banks, the Federal
Housing Administration, Farmers Home Administration, Export-Import Bank of the
United States, Small Business Administration, Government National Mortgage
Association, Federal National Mortgage Association, General Services
Administration, Student Loan Marketing Association, Central Bank for
Cooperatives, Federal Home Loan Mortgage Corporation, Federal Intermediate
Credit Banks, Tennessee Valley Authority, Resolution Funding Corporation and
Maritime Administration. U.S. Government obligations also include interests in
the foregoing securities, including collateralized mortgage obligations
guaranteed by a U.S. Government agency or instrumentality, and in Government-
backed trusts which hold obligations of foreign governments that are
guaranteed or backed by the full faith and credit of the United States.
Obligations of certain U.S. agencies and instrumentalities such as those of
the Government National Mortgage Association, are supported by the full faith
and credit of the U.S. Treasury; others, such as the Export-Import Bank of the
United States, are supported by the right of the issuer to borrow from the
Treasury; others, such as those of the Federal National Mortgage Association,
are supported by the discretionary authority of the U.S. Government to
purchase the agency's obligations; still others, such as those of the Student
Loan Marketing Association, are supported only by the credit of the
instrumentality.
BANK OBLIGATIONS
Bank obligations in which the Funds and the Money Market Fund may invest
include certificates of deposit, time deposits, bankers' acceptances and other
short-term obligations of domestic banks, foreign subsidiaries of domestic
banks, foreign branches of domestic banks, and domestic and foreign branches
of foreign banks, domestic savings and loan associations and other banking
institutions. With respect to such securities issued by foreign branches of
domestic banks, foreign subsidiaries of domestic banks, and domestic and
foreign branches of foreign banks, the Funds and the Money Market Fund may be
subject to additional investment risks that are different in some respects
from those incurred by a fund which invests only in debt obligations of U.S.
domestic issuers. Such risks include possible future political and economic
developments, the possible imposition of foreign withholding taxes on interest
income payable on the securities, the possible establishment of exchange
controls or the adoption of other foreign governmental restrictions which
might adversely affect the payment of principal and interest on these
securities and the possible seizure or nationalization of foreign deposits.
Obligations issued or guaranteed by foreign branches of U.S. banks (commonly
known as "Eurodollar" obligations) or U.S. branches of foreign banks (commonly
known as "Yankee dollar" obligations) may be general obligations of the parent
bank or obligations only of the issuing branch. Where the obligation is only
that of the issuing branch, the parent bank has no legal duty to pay such
obligation. Such obligations would thus be subject to risks comparable to
those which would be present if the issuing branch were a separate bank. The
Money Market Fund will not invest in a Eurodollar obligation if upon making
such investment the total Eurodollar obligations which are not general
obligations of domestic parent banks would thereby exceed 25% of its total
assets.
Certificates of deposit are negotiable certificates evidencing the obligation
of a bank to repay funds deposited with it for a specified period of time.
Time deposits are non-negotiable deposits maintained in a banking institution
for a specified period of time at a stated interest rate. Time deposits which
may be held by each Fund and the Money Market Fund will not benefit from
insurance from the Bank Insurance Fund or the Savings Association Insurance
Fund administered by the FDIC.
Pegasus Funds A-1
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Bankers' acceptances are credit instruments evidencing the obligation of a
bank to pay a draft drawn on it by a customer. These instruments reflect the
obligation both of the bank and of the drawer to pay the face amount of the
instrument upon maturity. The other short-term obligations may include
uninsured, direct obligations bearing fixed, floating or variable interest
rates.
CERTAIN CORPORATE OBLIGATIONS
Commercial paper in which the Funds and the Money Market Fund may invest
consists of short-term, unsecured promissory notes issued by domestic or
foreign entities to finance short-term credit needs.
VARIABLE AND FLOATING RATE INSTRUMENTS
Each Fund and the Money Market Fund may invest in variable and floating rate
instruments, including without limitation, for each fund other than the Money
Market Fund, inverse floating rate debt instruments ("inverse floaters") some
of which may be leveraged. The interest rate of an inverse floater resets in
the opposite direction from the market rate of interest to which it is indexed.
An inverse floater may be considered to be leveraged to the extent that its
interest rate varies by a magnitude that exceeds the magnitude of the change in
the index rate of interest. The higher degree of leverage inherent in inverse
floaters is associated with greater volatility in their market values.
The absence of an active secondary market with respect to particular variable
and floating rate instruments could make it difficult for the Funds and the
Money Market Fund to dispose of them if the issuer defaulted on its payment
obligation or during periods that a fund is not entitled to exercise demand
rights, and the fund could, for these or other reasons, suffer a loss with
respect to such instruments. In the absence of an active secondary market,
variable and floating rate instruments (including inverse floaters) will be
subject to a fund's limitation on illiquid investments. See "Illiquid
Securities."
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
To increase their income, each Fund and the Money Market Fund may agree to
purchase portfolio securities from financial institutions subject to the
seller's agreement to repurchase them at a mutually agreed-upon date and price
("repurchase agreements"). The Funds and the Money Market Fund will not enter
into repurchase agreements with the Investment Adviser, the Sub-Adviser, the
Distributor, or any of their affiliates, except as may be permitted by the SEC.
Although the securities subject to repurchase agreements may bear maturities
exceeding 13 months provided the repurchase agreement itself matures in 13
months or less, the funds generally intend to enter into repurchase agreements
which terminate within seven days after notice by them. The seller under a
repurchase agreement will be required to maintain the value of the securities
subject to the agreement at not less than the repurchase price, marked to
market daily. Default by the seller would, however, expose a fund to possible
loss because of adverse market action or delay in connection with the
disposition of the underlying obligations.
Each Fund and the Money Market Fund may also obtain funds for temporary
purposes by entering into reverse repurchase agreements. Pursuant to such
agreements, a fund will sell portfolio securities to financial institutions
such as banks and broker-dealers and agree to repurchase them at a particular
date and price. Reverse repurchase agreements involve the risk that the market
value of the securities sold by a fund may decline below the price of the
securities it is obligated to repurchase. Whenever a fund enters into a reverse
repurchase agreement, it will place in a segregated custodial account liquid
assets equal to the repurchase price marked to market daily (including accrued
interest) and will subsequently monitor the account to ensure such equivalent
value is maintained.
LENDING PORTFOLIO SECURITIES
To increase income or offset expenses, each of the Funds and the Money Market
Fund may lend its portfolio securities to financial institutions such as banks
and broker dealers in accordance with their investment limitations. Agreements
will require that the loans be continuously secured by collateral equal at all
times in value to at least the market value of the securities loaned plus
accrued interest. Collateral for such loans could include cash or securities of
the U.S. Government, its agencies or instrumentalities, some of which may bear
maturities exceeding 13 months. Such loans will not be made if, as a result,
the aggregate of all outstanding loans of a particular fund exceeds one-third
of the value of its total assets. Loans of securities involve risk of delay in
receiving additional collateral or in recovering the securities loaned or
possible loss of rights in the collateral should the borrower of the securities
become insolvent. Loans will be made only to borrowers that provide the
requisite collateral comprised of liquid assets and when, in the Investment
Adviser's or Sub-Adviser's judgment, the income to be earned from the loan
justifies the attendant risks.
ZERO COUPON OBLIGATIONS AND PAY-IN-KIND SECURITIES
Each Fund and the Money Market Fund may invest in zero coupon obligations which
are discount debt obligations that do not make periodic interest payments
although income is generally imputed to the holder on a current basis. The High
Yield Bond Fund may invest in pay-in-kind securities which make periodic
payments in the form of additional securities (as opposed to
A-2 Pegasus Funds
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cash). Such obligations may have higher price volatility than those which
require the payment of interest periodically. The Investment Adviser and Sub-
Adviser will consider the liquidity needs of a fund when any investment in zero
coupon obligations is made.
Federal income tax law requires the holder of a zero coupon security or of
certain pay-in-kind securities to accrue income with respect to these
securities prior to the receipt of cash payments. To maintain its qualification
as a regulated investment company and avoid liability for federal income taxes,
each of the Funds and the Money Market Fund that invests in such securities may
be required to distribute such income accrued with respect to these securities
and may have to dispose of portfolio securities under disadvantageous
circumstances in order to generate cash to satisfy these distribution
requirements. Such fund will not be able to purchase additional income
producing securities with cash used to make such distributions and its current
income may be reduced as a result.
WHEN ISSUED PURCHASES AND FORWARD COMMITMENTS
The Funds and the Money Market Fund may purchase securities on a "when-issued"
basis and may purchase or sell securities on a "forward commitment" basis.
These transactions, which involve a commitment by a fund to purchase or sell
particular securities with payment and delivery taking place at a future date
(perhaps one or two months later), permit the fund to lock-in a price or yield
on a security it owns or intends to purchase, regardless of future changes in
interest rates. When-issued and forward commitment transactions involve the
risk, however, that the yield obtained in a transaction may be less favorable
than the yield available in the market when the securities delivery takes
place. Each fund's forward commitments and when-issued purchases are not
expected to exceed 25% of the value of its total assets absent unusual market
conditions. A fund does not earn income with respect to these transactions
until the subject securities are delivered to the fund. The Funds, and the
Money Market Fund, do not intend to engage in when-issued purchases and forward
commitments for speculative purposes but only in furtherance of their
investment objectives.
FOREIGN SECURITIES
Investments by the Asset Allocation, Equity and Bond Funds and the Money Market
Fund in foreign securities, with respect to certain foreign countries, expose
them to the possibility of expropriation or confiscatory taxation, limitations
on the removal of funds or other assets or diplomatic developments that could
affect investment within those countries. Similarly, volume and liquidity in
most foreign securities markets are less than in the United States and, at
times, volatility of price can be greater than in the United States. In
addition, there may be less publicly available information about a non-U.S.
issuer, and non-U.S. issuers generally are not subject to uniform accounting
and financial reporting standards, practices and requirements comparable to
those applicable to U.S. issuers. Because of these and other factors,
securities of foreign companies acquired by the funds may be subject to greater
fluctuation in price than securities of domestic companies.
Since foreign securities often are purchased with and payable in currencies of
foreign countries, the value of these assets as measured in U.S. dollars may be
affected favorably or unfavorably by changes in currency rates and exchange
control regulations. Some currency exchange costs may be incurred when a fund
changes investments from one country to another.
Furthermore, some securities may be subject to brokerage taxes levied by
foreign governments, which have the effect of increasing the costs of such
investments and reducing the realized gain or increasing the realized loss on
such securities at the time of sale. Income received by the funds from sources
within foreign countries may be reduced by withholding or other taxes imposed
by such countries. Tax conventions between certain countries and the United
States, however, may reduce or eliminate such taxes. All such taxes paid by a
fund will reduce its net income available for distribution to investors.
DEPOSITORY RECEIPTS
Each Asset Allocation and Equity Fund may invest in securities of foreign
issuers in the form of American Depository Receipts ("ADRs"), European
Depository Receipts ("EDRs") and similar securities representing securities of
foreign issuers. These securities may not be denominated in the same currency
as the securities they represent. ADRs are receipts typically issued by a
United States bank or trust company evidencing ownership of the underlying
foreign securities and are denominated in U.S. dollars. Certain such
institutions issuing ADRs may not be sponsored by the issuer. A non-sponsored
depository may not provide the same shareholder information that a sponsored
depository is required to provide under its contractual arrangements with the
issuer. EDRs are receipts issued by a European financial institution evidencing
ownership of the underlying foreign securities and are generally denominated in
foreign currencies. Generally, EDRs, in bearer form, are designed for use in
the European securities markets.
SUPRANATIONAL BANK OBLIGATIONS
The Asset Allocation, Equity and Bond Funds and the Money Market Fund may
invest in obligations of supranational banks. Supranational banks are
international banking institutions designed or
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supported by national governments to promote economic reconstruction,
development or trade between nations (e.g., the World Bank). Obligations of
supranational banks may be supported by appropriated but unpaid commitments of
their member countries and there is no assurance that these commitments will be
undertaken or met in the future.
CONVERTIBLE SECURITIES
Each Fund may invest in convertible securities. A convertible security is a
security that may be converted either at a stated price or rate within a
specified period of time into a specified number of shares of common stock. By
investing in convertible securities, a Fund seeks the opportunity, through the
conversion feature, to participate in the capital appreciation of the common
stock into which the securities are convertible, while earning higher current
income than is available from the common stock. The High Yield Bond Fund does
not limit convertible securities by rating, and there is no minimal acceptance
rating for a convertible security to be purchased or held in the Fund.
Therefore, the High Yield Bond Fund invests in convertible securities
irrespective of their ratings. This could result in the High Yield Bond Fund
purchasing and holding, without limit, convertible securities rated below
investment grade by a Rating Agency.
SECURITIES OF INVESTMENT COMPANIES
Each Fund and the Money Market Fund may invest in securities issued by open-end
(and closed-end for the Funds) investment companies which principally invest in
securities in which such fund invests. Under the 1940 Act, a fund's investment
in such securities, subject to certain exceptions, currently is limited to (i)
3% of the total voting stock of any one investment company, (ii) 5% of the
fund's net assets with respect to any one investment company and (iii) 10% of
the fund's net assets in the aggregate. Such purchases will be made in the open
market where no commission or profit to a sponsor or dealer results from the
purchase other than the customary brokers' commissions. As a shareholder of
another investment company, each of the Funds and the Money Market Fund would
bear, along with other shareholders, its pro rata portion of the other
investment company's expenses, including advisory fees. These expenses would be
in addition to the advisory and other expenses that a fund bears directly in
connection with its own operations.
ASSET BACKED SECURITIES
Asset Backed Securities acquired by the Asset Allocation, Equity and Bond Funds
consist of both mortgage and non-mortgage backed securities. Asset backed
securities held by the Funds arise through the grouping by governmental,
government-related and private organizations of loans, receivables and other
assets originated by various lenders ("Asset Backed Securities"), as described
below.
The yield characteristics of Asset Backed Securities differ from traditional
debt securities. A major difference is that the principal amount of the
obligations may be prepaid at any time because the underlying assets (i.e.
loans) generally may be prepaid at any time. As a result, if an Asset Backed
Security is purchased at a premium, a prepayment rate that is faster than
expected will reduce yield to maturity, while a prepayment rate that is slower
than expected will have the opposite effect of increasing yield to maturity.
Conversely, if an Asset Backed Security is purchased at a discount, faster than
expected prepayments will increase, while slower than expected prepayments will
decrease, yield to maturity. In calculating the average weighted maturity of
the Funds, the maturity of Asset Backed Securities will be based on estimates
of average life.
Prepayments on Asset Backed Securities generally increase with falling
interest rates and decrease with rising interest rates. Prepayment rates are
also influenced by a variety of economic and social factors. In general, the
collateral supporting non-mortgage backed securities is of shorter maturity
than mortgage loans and is less likely to experience substantial prepayments.
Like other fixed income securities, when interest rates rise the value of an
Asset Backed Security with prepayment features may not increase as much as that
of other fixed income securities, and, as noted above, changes in market rates
of interest may accelerate or retard prepayments and thus affect maturities.
These characteristics may result in higher level of price volatility for these
assets under certain market conditions. In addition, while the trading market
for short-term mortgages and Asset Backed Securities is ordinarily quite
liquid, in times of financial stress the trading market for these securities
sometimes becomes restricted.
Mortgage backed securities represent an ownership interest in a pool of
mortgages, the interest on which is in most cases issued and guaranteed by an
agency or instrumentality of the U.S. Government, although not necessarily by
the U.S. Government itself. Mortgage backed securities include collateralized
mortgage obligations ("CMOs"), real estate investment trusts ("REITs") and
mortgage pass-through certificates.
CMOs provide the holder with a specified interest in the cash flow of a pool
of underlying mortgages or other mortgage backed securities. Issuers of CMOs
ordinarily elect to be taxed as pass-through entities known as real estate
mortgage investment conduits ("REMICs"). CMOs are issued in multiple classes,
each with a specified fixed or floating interest rate and a final distribution
date. The relative payment rights of the various CMO classes may be structured
in a variety of
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ways. The multiple class securities may be issued or guaranteed by U.S.
Government agencies or instrumentalities, including the Government National
Mortgage Association ("GNMA"), Federal National Mortgage Association ("FNMA")
and Federal Home Loan Mortgage Corporation ("FHLMC"), or issued by trusts
formed by private originators of, or investors in, mortgage loans. Classes in
CMOs which the Funds may hold are known as "regular" interests. CMOs also issue
"residual" interests, which in general are junior to and more volatile than
regular interests. The Funds do not intend to purchase residual interests.
Mortgage pass-through certificates provide the holder with a pro rata interest
in the underlying mortgages. One type of such certificate in which the Funds
may invest is a GNMA Certificate which is backed as to the timely payment of
principal and interest by the full faith and credit of the U.S. Government.
Another type is a FNMA Certificate, the principal and interest of which are
guaranteed only by FNMA itself, not by the full faith and credit of the U.S.
Government. Another type is a FHLMC Participation Certificate which is
guaranteed by FHLMC as to timely payment of principal and interest. However,
like a FNMA security, it is not guaranteed by the full faith and credit of the
U.S. Government. Privately issued mortgage backed securities will carry a
rating at the time of purchase of at least A by S&P or by Moody's or, if
unrated, will be in the Investment Adviser's opinion equivalent in credit
quality to such rating. Mortgage backed securities issued by private issuers,
whether or not such obligations are subject to guarantees by the private
issuer, may entail greater risk than obligations directly or indirectly
guaranteed by the U.S. Government.
The Funds may also invest in non-mortgage backed securities including
interests in pools of receivables, such as motor vehicle installment purchase
obligations and credit card receivables. Such securities are generally issued
as pass-through certificates, which represent undivided fractional ownership
interests in the underlying pools of assets. Such securities may also be debt
instruments, which are also known as collateralized obligations and are
generally issued as the debt of a special purpose entity organized solely for
the purpose of owning such assets and issuing such debt. Non-mortgage backed
securities are not issued or guaranteed by the U.S. Government or its agencies
or instrumentalities.
Non-mortgage backed securities involve certain risks that are not presented by
mortgage backed securities. Primarily, these securities do not have the benefit
of the same security interest in the underlying collateral. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws. Most issuers
of motor vehicle receivables permit the servicers to retain possession of the
underlying obligations. If the servicer were to sell these obligations to
another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the related motor vehicle receivables. In
addition, because of the large number of vehicles involved in a typical
issuance and technical requirements under state laws, the trustee for the
holders of the motor vehicle receivables may not have an effective security
interest in all of the obligations backing such receivables. Therefore, there
is a possibility that recoveries on repossessed collateral may not, in some
cases, be able to support payments on these securities.
STRIPPED GOVERNMENT OBLIGATIONS
The Asset Allocation, Bond and Municipal Bond Funds and the Money Market Fund
may purchase Treasury receipts and other "stripped" securities that evidence
ownership in either the future interest payments or the future principal
payments on U.S. Government obligations. These participations, which may be
issued by the U.S. Government (or a U.S. Government agency or instrumentality)
or by private issuers such as banks and other institutions, are issued at a
discount to their "face value," and, for each fund other than the Money Market
Fund, may include stripped mortgage backed securities ("SMBS"), which are
derivative multi-class mortgage securities. Stripped securities, particularly
SMBS, may exhibit greater price volatility than ordinary debt securities
because of the manner in which their principal and interest are returned to
investors.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions from a pool of mortgage
backed obligations. A common type of SMBS will have one class receiving all of
the interest, while the other class will receive all of the principal. However,
in some instances, one class will receive some of the interest and most of the
principal while the other class will receive most of the interest and the
remainder of the principal. With respect to investments in interest only
securities, should the underlying obligations experience greater than
anticipated prepayments of principal, a Fund may fail to fully recoup its
initial investment in these securities. The market value of the class
consisting entirely of principal payments may be more volatile in response to
change in interest rates. The yields on a class SMBS that receives all or most
of the interest are generally higher than prevailing market yields on other
mortgage backed obligations because their cash flow patterns are more volatile.
For interest only securities, there is a greater risk that the initial
investment will not be fully recouped.
RISKS RELATED TO LOWER-RATED SECURITIES
The Asset Allocation, Equity, International Bond and High Yield Bond Funds may
purchase lower-rated securities (commonly known as junk bonds). While any
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investment carries some risk, some of the risks associated with lower-rated
securities are different from the risks associated with investment grade
securities. The risk of loss through default is greater because lower-rated
securities are usually unsecured and are often subordinate to an issuer's other
obligations. Additionally, the issuers of these securities frequently have high
debt levels and are thus more sensitive to difficult economic conditions,
individual corporate developments and rising interest rates. Consequently, the
market price of these securities, and the net asset value of a fund's shares,
may be quite volatile.
RELATIVE YOUTH OF LOWER-RATED SECURITIES' MARKET. Because the market for
lower-rated securities, at least in its present size and form, is relatively
new, there remains some uncertainty about its performance level under adverse
market and economic environments. An economic downturn or increase in interest
rates could have a negative impact on both the market for lower-rated
securities (resulting in a greater number of bond defaults) and the value of
lower-rated securities held in a fund's portfolio.
SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES. The economy and interest
rates can affect lower-rated securities differently than other securities. For
example, the prices of lower-rated securities are more sensitive to adverse
economic changes or individual corporate developments than are the prices of
higher-rated investments. Also, during an economic downturn or a period in
which interest rates are rising significantly, highly leveraged issuers may
experience financial difficulties, which, in turn, would adversely affect their
ability to service their principal and interest payment obligations, meet
projected business goals and obtain additional financing. If the issuer of a
security defaults, a fund may incur additional expenses to seek recovery. In
addition, periods of economic uncertainty would likely result in increased
volatility for the market prices of securities as well as a fund's net asset
value. In general, both the prices and yields of lower-rated securities will
fluctuate.
LIQUIDITY AND VALUATION. In certain circumstances it may be difficult to
determine a security's fair value due to a lack of reliable objective
information. Such instances occur when there is not an established secondary
market for the security or the security is thinly traded. As a result, a fund's
valuation of a security and the price it is actually able to obtain when it
sells the security could differ.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of lower-rated
securities held by a fund, especially in a thinly traded market. Illiquid or
restricted securities held by a fund may involve special registration
responsibilities, liabilities and costs, and could involve other liquidity and
valuation difficulties.
CONGRESSIONAL PROPOSALS. Current laws, as well as pending proposals, may have
a material impact on the market for lower-rated securities.
MUNICIPAL AND RELATED OBLIGATIONS
Municipal Obligations that may be acquired by the Asset Allocation, Bond and
Municipal Bond Funds may include general obligations, revenue obligations,
notes and moral obligations bonds. Each of these Funds, other than the
Municipal Bond Funds, currently intends to invest no more than 25% of its total
assets in Municipal Obligations. General obligations are secured by the
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest. Revenue obligations are payable only from the revenues
derived from a particular facility, class of facilities or, in some cases, from
the proceeds of a special excise or other specific revenue source such as the
user of the facility being financed. Private activity bonds (i.e. bonds issued
by industrial development authorities) are in most cases revenue securities and
are not payable from the unrestricted revenues of the issuer. Consequently, the
credit quality of a private activity bond is usually directly related to the
credit standing of the private user of the facility involved. From time to
time, a Municipal Bond Fund may invest more than 25% of the value of its total
assets in industrial development bonds which, although issued by industrial
development authorities, may be backed only by the assets and revenues of the
nongovernmental users. The Municipal Bond Funds may invest without limitation
in such Municipal Obligations if the Investment Adviser determines that their
purchase is consistent with such Fund's investment objective. Although interest
paid on private activity bonds is exempt from regular federal income tax, it
may be treated as a specific tax preference item under the federal alternative
minimum tax. Where a fund receives such interest, a proportionate share of its
exempt-interest dividends also may be treated as a tax preference item to the
recipient shareholders. See "Description of the Funds--Risk Factors--Municipal
Obligations." See also "Taxes."
Notes are short-term instruments which are obligations of the issuing
municipalities or agencies and are sold in anticipation of a bond sale,
collection of taxes or receipt of other revenues. Moral obligation bonds are
normally issued by a special purpose public authority. If the issuer of a moral
obligation bond is unable to meet its debt service obligations from current
revenues, it may draw on a reserve fund, the restoration of which is a moral
commitment but not a legal obligation of the state or municipality which
created the issuer. Municipal Obligations also include municipal lease/purchase
agreements which are similar to installment purchase contracts for property or
equipment issued by municipalities. The funds will only invest in rated
municipal lease/purchase agreements.
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There are, of course, variations in the quality of Municipal Obligations both
within a particular classification and between classifications, and the yields
on Municipal Obligations depend upon a variety of factors, including general
money market conditions, the financial condition of the issuer, general
conditions of the municipal bond market, the size of a particular offering, the
maturity of the obligation and the rating of the issue.
Each Municipal Bond Fund may invest more than 25% of the value of its total
assets in Municipal Obligations which are related in such a way that an
economic, business or political development or change affecting one such
security also would affect the other securities; for example, securities the
interest upon which is paid from revenues of similar types of projects, or
securities of issuers that are located in the same state. As a result, a
Municipal Bond Fund may be subject to greater risk as compared to a fund that
does not follow this practice.
Certain municipal lease/purchase obligations in which the Municipal Bond Funds
may invest may contain "non-appropriation" clauses which provide that the
municipality has no obligation to make lease payments in future years unless
money is appropriated for such purpose on a yearly basis. Although "non-
appropriation" lease/purchase obligations are secured by the leased property,
disposition of the leased property in the event of foreclosure might prove
difficult. In evaluating the credit quality of a municipal lease/purchase
obligation that is unrated, the Investment Adviser will consider, on an ongoing
basis, a number of factors including the likelihood that the issuing
municipality will discontinue appropriating funding for the leased property.
Among other securities, the Municipal Bond Funds may purchase short-term Tax
Anticipation Notes, Bond Anticipation Notes, Revenue Anticipation Notes and
other forms of short-term loans. Such notes are issued with a short-term
maturity in anticipation of the receipt of tax or other funds, the proceeds of
bonds or other revenues.
Opinions relating to the validity of Municipal Obligations and to the
exemption of interest thereon from federal income tax are rendered by bond
counsel to the respective issues at the time of issuance. Neither the Funds nor
the Investment Adviser will review the proceedings relating to the issuance of
Municipal Obligations or the bases for such opinions.
CUSTODIAL RECEIPTS AND CERTIFICATES OF PARTICIPATION
The Asset Allocation, Bond and Municipal Bond Funds and the Money Market Fund
may purchase participations in trusts that hold U.S. Treasury securities (such
as TIGRs and CATS) where the trust participations evidence ownership in either
the future interest payments or the future principal payments on the U.S.
Treasury obligations. These participations are normally issued at a discount to
their "face value," and may exhibit greater price volatility than ordinary debt
securities because of the manner in which their principal and interest are
returned to investors.
Securities acquired by the Municipal Bond Funds may be in the form of
custodial receipts evidencing rights to receive a specific future interest
payment, principal payment or both on certain Municipal Obligations. Such
securities are held in custody by a bank on behalf of holders of the receipts.
These custodial receipts are known by various names, including "Municipal
Receipts," "Municipal Certificates of Accrual on Tax-Exempt Securities" ("M-
CATS") and "Municipal Zero-Coupon Receipts." The Municipal Bond Funds may also
purchase from time to time certificates of participation that, in the opinion
of counsel to the issuer, are exempt from federal income tax. A certificate of
participation gives a Fund an undivided interest in a pool of Municipal
Obligations. Certificates of participation may have fixed, floating or variable
rates of interest. If a certificate of participation is unrated, the Investment
Adviser will have determined that the instrument is of comparable quality to
those instruments in which the Investment Adviser may invest pursuant to
guidelines approved by the Board of Trustees.
TENDER OPTION BONDS
The Municipal Bond Funds may hold tender option bonds, which are Municipal
Obligations (generally held pursuant to a custodial arrangement) having a
relatively long maturity and bearing interest at a fixed rate substantially
higher than prevailing short-term tax exempt rates, that have been coupled with
the agreement of a third party, such as a bank, broker-dealer or other
financial institution, pursuant to which such institution grants the security
holders the option, at periodic intervals, to tender their securities to the
institution and receive the face value thereof. As consideration for providing
the option, the financial institution receives periodic fees equal to the
difference between the Municipal Obligation's fixed coupon rate and the rate,
as determined by a remarketing or similar agent at or near the commencement of
such period, that would cause the securities, coupled with the tender option,
to trade at par on the date of such determination. Thus, after payment of this
fee, the security holder effectively holds a demand obligation that bears
interest at the prevailing short-term tax exempt rate. The Investment Adviser,
on behalf of a Fund, will consider on an ongoing basis the assets of the issuer
of the underlying Municipal Obligation, of any custodian and of the third party
provider of the tender option. In certain instances and for certain tender
option bonds, the option may be terminable in
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the event of a default in payment of principal or interest on the underlying
Municipal Obligations and for other reasons.
STAND-BY COMMITMENTS
The Asset Allocation, Bond and Municipal Bond Funds may acquire "stand-by
commitments" with respect to Municipal Obligations held in their portfolios.
Under a stand-by commitment, a Fund obligates a broker, dealer or bank to
repurchase, at the Fund's option, specified securities at a specified price
and, in this respect, stand-by commitments are comparable to put options. The
exercise of a stand-by commitment therefore is subject to the ability of the
seller to make payment on demand. A Fund will acquire stand-by commitments
solely to facilitate portfolio liquidity and does not intend to exercise its
rights thereunder for trading purposes. A Fund may pay for stand-by commitments
if such action is deemed necessary, thus increasing to a degree the cost of the
underlying Municipal Obligation and similarly decreasing such securities yield
to investors.
OPTIONS TRANSACTIONS
Each Fund is permitted to invest up to 5% of its assets, represented by the
premium paid, in the purchase of call and put options. Options transactions are
a form of derivative security.
Each Fund is permitted to purchase call and put options in respect of specific
securities (or groups or "baskets" of specific securities) in which the Fund
may invest. A Fund may write (i.e., sell) covered call option contracts on
securities owned by the Fund not exceeding 25% of the market value of its net
assets at the time such option contracts are written. Each Fund also may
purchase call options to enter into closing purchase transactions. The Funds
also may write covered put option contracts to the extent of 25% of the value
of their net assets at the time such option contracts are written. A call
option gives the purchaser of the option the right to buy, and obligates the
writer to sell, the underlying security at the exercise price at any time
during the option period. Conversely, a put option gives the purchaser of the
option the right to sell, and obligates the writer to buy, the underlying
security at the exercise price at any time during the option period. A covered
put option sold by a Fund exposes it during the term of the option to a decline
in price of the underlying security or securities. A put option sold by a Fund
is covered when, among other things, cash or liquid securities are placed in a
segregated account with the Fund's custodian to fulfill the obligation
undertaken.
The Asset Allocation Funds, the International Equity Fund and the
International Bond Fund may also purchase and sell call and put options on
foreign currency for the purpose of hedging against changes in future currency
exchange rates. Call options convey the right to buy the underlying currency at
a price which is expected to be lower than the spot price of the currency at
the time the option expires. Put options convey the right to sell the
underlying currency at a price which is anticipated to be higher than the spot
price of the currency at the time the option expires.
Each Fund also may purchase cash-settled options on interest rate swaps,
interest rate swaps denominated in foreign currency and equity index swaps. See
"Interest Rate and Equity Index Swaps" below. A cash-settled option on a swap
gives the purchaser the right, but not the obligation, in return for the
premium paid, to receive an amount of cash equal to the value of the underlying
swap as of the exercise date. These options typically are purchased in
privately negotiated transactions from financial institutions, including
securities brokerage firms.
Each Fund may purchase and sell call and put options on stock indexes listed
on U.S. securities exchanges or traded in the over-the-counter market. A stock
index fluctuates with changes in the market values of the stocks included in
the index. Because the value of an index option depends upon movements in the
level of the index rather than the price of a particular stock, whether a Fund
will realize a gain or loss from the purchase or writing of options on an index
depends upon movements in the level of stock prices in the stock market
generally or, in the case of certain indices, in an industry or market segment,
rather than movements in the price of a particular stock.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
Each Fund may enter into futures contracts and options on future contracts. The
Equity Funds may enter into stock index futures contracts and all Funds may
enter into interest rate futures contracts and currency futures contracts, and
options with respect thereto. See "Options Transactions" above. These
transactions will be entered into as a substitute for comparable market
positions in the underlying securities or for hedging purposes. A Fund may not
engage in such transactions if the sum of the amount of initial margin deposits
and premiums paid for unexpired commodity options, other than for bona fide
hedging transactions, would exceed 5% of the liquidation value of the Fund's
assets, after taking into account unrealized profits and unrealized losses on
such contracts it has entered into; provided, however, that in the case of an
option that is in-the-money at the time of purchase, the in-the-money amount
may be excluded in calculating the 5%. To the extent a Fund engages in the use
of futures and options on futures for other than bona fide hedging purposes,
the Fund may be subject to additional risk. Although none of these Funds would
be a commodity pool, each would be subject to rules of the CFTC limiting the
extent to which it could engage in these transactions.
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Futures and options transactions are a form of derivative security. In
addition, in such situations, if the Fund has insufficient cash, it may have to
sell securities to meet daily variation margin requirements. Such sales of
securities may, but will not necessarily, be at increased prices which reflect
the rising market. A Fund may have to sell securities at a time when it may be
disadvantageous to do so.
FOREIGN CURRENCY TRANSACTIONS
The Asset Allocation, International Equity and International Bond Funds may
engage in currency exchange transactions either on a spot (i.e., cash) basis at
the rate prevailing in the currency exchange market, or through entering into
forward contracts to purchase or sell currencies. A forward currency exchange
contract involves an obligation to purchase or sell a specific currency at a
future date, which must be more than two days from the date of the contract, at
a price set at the time of the contract. These contracts are entered into in
the interbank market conducted directly between currency traders (typically
commercial banks or other financial institutions) and their customers. They may
be used to reduce the level of volatility caused by changes in foreign currency
exchange rates or when such transactions are economically appropriate for the
reduction of risks in the ongoing management of the Funds. Although forward
currency exchange contracts may be used to minimize the risk of loss due to a
decline in the value of the hedged currency, at the same time they tend to
limit any potential gain that might be realized should the value of such
currency increase. The Funds also may combine forward currency exchange
contracts with investments in securities denominated in other currencies.
Each of these Funds also may maintain short positions in forward currency
exchange transactions, which would involve it agreeing to exchange an amount of
a currency it did not currently own for another currency at a future date in
anticipation of a decline in the value of the currency sold relative to the
currency the Fund contracted to receive in the exchange.
OPTIONS ON FOREIGN CURRENCY
The Asset Allocation Funds, the International Equity Fund and the International
Bond Fund may purchase and sell call and put options on foreign currency for
the purpose of hedging against changes in future currency exchange rates. Call
options convey the right to buy the underlying currency at a price which is
expected to be lower than the spot price of the currency at the time the option
expires. Put options convey the right to sell the underlying currency at a
price which is anticipated to be higher than the spot price of the currency at
the time the option expires. The Funds may use foreign currency options for the
same purposes as forward currency exchange and futures transactions, as
described herein. See also "Options" and "Currency Futures and Options on
Currency Futures" below.
RISKS ASSOCIATED WITH FUTURES, OPTIONS AND FOREIGN CURRENCY TRANSACTIONS AND
OPTIONS
To the extent a Fund is engaging in a futures or option transaction as a
hedging device, due to the risk of an imperfect correlation between securities
in its portfolio that are the subject of a hedging transaction and the futures
contract or option used as a hedging device, it is possible that the hedge will
not be fully effective. In futures contracts and options based on indices, the
risk of imperfect correlation increases as the composition of the Fund varies
from the composition of the index. In an effort to compensate for the imperfect
correlation of movements in the price of the securities being hedged and
movements in the price of contracts, the Fund may buy or sell futures contracts
and options in a greater or lesser dollar amount than the dollar amount of the
securities being hedged if the historical volatility of the futures contract
has been less or greater than that of the securities. Such "over hedging" or
"under hedging" may adversely affect the Fund's net investment results if
market movements are not as anticipated when the hedge is established.
Successful use of futures and options by a Fund also is subject to the
Investment Adviser's or Sub-Adviser's ability to predict correctly movements in
the direction of securities prices, interest rates, currency exchange rates and
other economic factors. In addition, in such situations, if the Fund has
insufficient cash, it may have to sell securities to meet daily variation
margin requirements. Such sales of securities may, but will not necessarily, be
at increased prices which reflect the rising market. The Fund may have to sell
securities at a time when it may be disadvantageous to do so.
Although a Fund intends to enter into futures contracts and options
transactions only if there is an active market for such contracts, no assurance
can be given that a liquid market will exist for any particular contract at any
particular time. See "Illiquid Securities" above. Many 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 or trading may be suspended for specified periods during the trading day.
Futures contracts prices could move to the limit for several consecutive
trading days with little or no trading, thereby preventing prompt liquidation
of futures positions and potentially subjecting the Fund to substantial losses.
If it is not possible, or the Fund determines not, to close a futures position
in anticipation of adverse price movements, the Fund will 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
Pegasus Funds A-9
<PAGE>
hedged, if any, may offset partially or completely losses on the futures
contract.
Currency exchange rates may fluctuate significantly over short periods of
time. They generally are determined by the forces of supply and demand in the
foreign exchange markets and the relative merits of investments in different
countries, actual or perceived changes in interest rates and other complex
factors as seen from an international perspective. Currency exchange rates also
can be affected unpredictably by intervention by U.S. or foreign governments or
central banks, or the failure to intervene, or by currency controls or
political developments in the United States or abroad. The foreign currency
market offers less protection against defaults in the forward trading of
currencies than is available when trading in currencies occurs on an exchange.
Since a forward currency contract is not guaranteed by an exchange or
clearinghouse, a default on the contract would deprive the Fund of unrealized
profits or force the Fund to cover its commitments for purchase or resale, if
any, at the current market price.
Unlike trading on domestic commodity exchanges, trading on foreign commodity
exchanges is not regulated by the CFTC and may be subject to greater risks than
trading on domestic exchanges. For example, some foreign exchanges are
principal markets so that no common clearing facility exists and a trader may
look only to the broker for performance on the contract. In addition, unless
the Fund hedges against fluctuations in the exchange rate between the U.S.
dollar and the currencies in which trading is done on foreign exchanges, any
profits that the Fund might realize in trading could be eliminated by adverse
changes in the exchange rate, or the Fund could incur losses as a result of
those changes. Transactions on foreign exchanges may include both commodities
which are traded on domestic exchanges and those which are not.
INTEREST RATE AND EQUITY INDEX SWAPS
Each Fund may enter into interest rate swaps and equity index swaps, to the
extent described under "Description of the Funds--Management Policies," in
pursuit of their respective investment objectives. Interest rate swaps involve
the exchange by a Fund with another party of their respective commitments to
pay or receive interest (for example, an exchange of floating-rate payments for
fixed-rate payments). Equity index swaps involve the exchange by a Fund with
another party of cash flows based upon the performance of an index or a portion
of an index which usually includes dividends. In each case, the exchange
commitments can involve payments to be made in the same currency or in
different currencies. Swaps are a form of derivative security.
Each Fund usually will enter into swaps on a net basis. In so doing, the two
payment streams are netted out, with the Fund receiving or paying, as the case
may be, only the net amount of the two payments. If a Fund enters into a swap,
it would maintain a segregated account in the full amount accrued on a daily
basis of the Fund's obligations with respect to the swap. The Funds will enter
into swap transactions with counterparties only if: (1) for transactions with
maturities under one year, such counterparty has outstanding short-term paper
rated at least A-1 by S&P, Prime-1 by Moody's, F-1 by Fitch or Duff-1 by Duff,
or (2) for transactions with maturities greater than one year, the counterparty
has outstanding debt securities rated at least Aa by Moody's or AA by S&P,
Fitch or Duff.
The use of swaps is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
security transactions. There is no limit on the amount of swap transactions
that may be entered into by a Fund. These transactions do not involve the
delivery of securities or other underlying assets or principal. Accordingly,
the risk of loss with respect to swaps is limited to the net amount of payments
that a Fund is contractually obligated to make. If the other party to a swap
defaults, the relevant Fund's risk of loss consists of the net amount of
payments that such Fund contractually is entitled to receive.
RESTRICTED AND ILLIQUID SECURITIES
Each Fund and the Money Market Fund will not invest more than 15% (10% for the
Money Market Fund) of the value of their respective total net assets in
securities that are illiquid. Securities having legal or contractual
restrictions on resale and with no readily available market, and instruments
(including repurchase agreements, variable and floating rate instruments and
time deposits) that do not provide for payment to the Funds within seven days
after notice are subject to this limitation. Securities that have legal or
contractual restrictions on resale but have a readily available market are not
deemed to be illiquid for purposes of this limitation.
The Funds and the Money Market Fund may purchase securities which are not
registered under the Securities Act of 1933, as amended (the "1933 Act"), but
which can be sold to "qualified institutional buyers" in accordance with Rule
144A under the 1933 Act. Any such security will not be considered to be
illiquid so long as it is determined by the Board of Trustees or the Investment
Adviser, acting under guidelines approved and monitored by the Board, that an
adequate trading market exists for that security. This investment practice
could have the effect of increasing the level of illiquidity in a Fund and the
Money Market Fund during any period that qualified institutional buyers become
uninterested in purchasing these restricted securities. The ability to sell to
qualified
A-10 Pegasus Funds
<PAGE>
institutional buyers under Rule 144A is a recent development, and it is not
possible to predict how this market will develop. The Board of Trustees will
carefully monitor any investments by a fund in these securities.
PORTFOLIO TURNOVER
Generally, the Funds will purchase securities for capital appreciation or
investment income, or both, and not for short-term trading profits. However, a
Fund may sell a portfolio investment soon after its acquisition if the
Investment Adviser or Sub-Adviser believes that such a disposition is
consistent with or in furtherance of the Fund's investment objective. Fund
investments may be sold for a variety of reasons, such as more favorable
investment opportunities or other circumstances. As a result, such Funds are
likely to have correspondingly greater brokerage commissions and other
transaction costs which are borne indirectly by shareholders. Portfolio
turnover may also result in the realization of substantial net capital gains.
Asset reallocation decisions for the Asset Allocation Funds typically will
occur on a monthly basis. However, if market conditions warrant, the Investment
Adviser may make more frequent reallocation decisions which will result in a
higher portfolio turnover rate. The Asset Allocation Funds will purchase or
sell shares of the Underlying Funds: (a) to accommodate purchases and
redemptions of each Asset Allocation Fund's shares; (b) in response to market
or other economic conditions; and (c) to maintain or modify the allocation of
each Asset Allocation Fund's assets among the Underlying Funds within its
target asset allocation ranges. See "Taxes--Federal" in the Prospectus and
"Additional Information Concerning Taxes" in the Statement of Additional
Information. While it is not possible to accurately predict portfolio turnover
rates, the annual turnover rates for the Market Expansion Index Fund and Short
Municipal Bond Fund are not expected to exceed 100% and 100%, respectively.
Pegasus Funds A-11
<PAGE>
Debt Ratings
CORPORATE BOND RATINGS
Excerpts from Moody's description of its corporate bond ratings: Aaa--judged to
be the best quality, carry the smallest degree of investment risk and are
generally referred to as "gilt edged"; Aa--judged to be of high quality by all
standards; A--deemed to have many favorable investment attributes and
considered as upper medium grade obligations; Baa--considered as medium grade
obligations, i.e. they are neither highly protected nor poorly secured; Ba, B,
Caa, Ca, C--protection of interest and principal payments is questionable (Ba
indicates some speculative elements, B represents bonds that generally lack
characteristics of the desirable investment, Caa represents bonds which are in
poor standing, Ca represents a high degree of speculation and C represents the
lowest rated class of bonds); Caa, Ca and C bonds may be in default. Moody's
applies numerical modifiers 1, 2 and 3 in each generic classification from Aa
to B in its bond rating systems. The modifier 1 indicates that the security
ranks in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that the issue
ranks at the lower end of its generic rating category.
An S&P corporate debt rating is a current assessment of the creditworthiness
of an obligor with respect to a specific obligation. Debt rated "AAA" has the
highest rating assigned by S&P. The obligor's capacity to meet its financial
commitment on the obligation is extremely strong. Debt rated "AA" is considered
to have a very strong capacity to pay interest and to repay principal and
differs from the highest rated issues only in small degree. Debt rated "A" is
somewhat more susceptible to the adverse effects of changes in circumstances
and economic conditions than obligations in higher rated categories. The
obligor's capacity to meet its financial commitment on the obligation is still
strong. Debt rated "BBB" exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity of the obligor to meet its financial commitment on the
obligation. Debt rated "BB," "B," "CCC," "CC" or "C" is regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major risk exposures to adverse conditions. Debt rated "D" is
in payment default. This rating is used when payments on an obligation are not
made on the date due, even if the applicable grace period has not expired,
unless S&P believes that such payments will be made during such grace period.
The "D" rating is also used upon the filing of a bankruptcy petition or the
taking of similar action if payments on an obligation are jeopardized. The
ratings from "AA" to "CCC" may be modified by the addition of a plus or minus
sign to show relative standing within the major rating categories.
Excerpts from Fitch's description of its corporate bond ratings: "AAA"--
considered to be investment grade and of the highest credit quality. The
obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably forseeable events;
"AA"--judged to be investment grade and of very high credit quality. Although
the obligor's ability to pay interest and repay principal is very strong, it is
not quite as strong as bonds rated "AAA"; "A"--considered investment grade and
of high credit quality. Although the obligor's ability to pay interest and
repay principal is considered to be strong, it may be somewhat more vulnerable
to adverse changes in economic conditions and circumstances than bonds with
higher ratings; "BBB" is considered to be investment grade and of satisfactory
credit quality with an adequate obligors ability to pay interest and repay
principal although adverse changes in economic conditions and circumstances are
more likely to have an adverse impact and impair timely payment than for higher
rated categories; "BB," "B," "CCC," "CC," "C," " DDD," "DD," and "D"--regarded
as speculative investments. The ratings "BB" to "C" represent the likelihood of
timely payment of principal and interest in accordance with the terms of
obligation for bond issues not in default. For defaulted bonds, the rating
"DDD" to "D" is an assessment of the ultimate recovery value through
reorganization or liquidation of the obligor. The ratings from "AA" to "C" may
be modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
The following summarizes the ratings used by Duff for corporate debt. Debt
rated "AAA" is of the highest credit quality. The risk factors are negligible,
being only slightly more than for risk-free U.S. Treasury debt. Debt rated "AA"
is of high credit quality. Protection factors are strong. Risk is modest but
may vary slightly from time to time because of economic conditions. Debt rated
"A" has protection factors which are average but adequate. However, risk
factors are more variable and greater in periods of economic stress. Debt rated
"BBB" possess below average protection factors but such protection factors are
still considered sufficient for prudent investment. Considerable variability in
risk is present during economic cycles. Debt rated below "BBB" is considered to
be below investment grade. Although below investment grade, debt rated "BB" is
deemed likely to meet obligations when due. Debt rated "B" possesses the risk
that obligations will not be met when due. Debt rated "CCC" is well below
investment grade and has considerable uncertainty as to timely
Pegasus Funds B-1
<PAGE>
payment of principal, interest or preferred dividends. Debt rated "DD"
represents defaulted obligations. To provide more detailed indications of
credit quality, the "AA," "A," "BBB," "BB" and "B" ratings may be modified by
the addition of a plus or minus sign to show relative standing within these
major categories.
COMMERCIAL PAPER RATINGS
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 designation "A-1" indicates the degree of safety regarding timely payment
is considered to be strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) sign designation. The
designation "A-2" indicates the capacity for timely payment is satisfactory,
however, the relative degree of safety is very strong it is not as high as for
issues designated "A-1." The designation "A-3" indicates the capacity for
timely payment; however, they are more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations. The
designation "B" indicates that the issue has only a speculative capacity for
timely payment. The designation "C" indicates that the issue has a doubtful
capacity for payment. Commercial paper rated "D" indicates that the issue is in
payment default. The "D" rating category is used when interest payments of
principal payments are not made on the date due, even if the applicable grace
period has not expired, unless S&P believes such payments will be made during
such grace period. Moody's commercial paper ratings are opinions of the ability
of issuers to repay punctually senior debt obligations not having an original
maturity in excess of one year, unless explicitly noted. The rating "Prime-1"
is the highest commercial paper rating assigned by Moody's. Issuers (or related
supporting institutions) rated "Prime-1" are considered to have a superior
ability for repayment of senior short-term debt obligations. Issuers (or
related supporting institutions) rated "Prime-2" are considered to have a
strong ability for repayment of senior short-term debt obligations. Issuers (or
related supporting institutions) rated "Prime 3" are considered to have an
acceptable ability for repayment of senior short-term debt obligations. Moody's
uses the designation "Not Prime" for issuers that do not fall within any of the
Prime rating categories.
Fitch short-term ratings apply to debt obligations that are payable on demand
or have original maturities of up to three years. The designation "F-1"
indicates that the securities possess very strong credit quality. Those
securities determined to possess exceptionally strong credit quality are
denoted with a plus (+) sign designation. Securities rated "F-2" are considered
to possess good credit quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment. Securities rated "F-3" possess fair
credit quality. Issues assigned this rating have characteristics suggesting
that the degree of assurance for timely payment is adequate; however, near term
adverse changes could cause these securities to be rated below investment
grade. Securities rated "F-S" possess weak credit quality. Securities rated "D"
are in actual or imminent payment default.
The three highest rating categories of Duff for short-term debt are "D-1," "D-
2" and "D-3." Duff employs three designations, "D-1+," "D-1" and "D-1-," within
the highest rating category. "D-1+" indicates highest certainty of timely
payment. Short-term liquidity, including internal operating factors and/or
access to alternative sources of funds, is outstanding, and safety is just
below risk-free U.S. Treasury short-term obligations. "D-1" indicates very high
certainty of timely payment. Liquidity factors are excellent and supported by
good fundamental protection factors. Risk factors are minor. "D-1-" indicates
high certainty of timely payment. Liquidity factors are strong and supported by
good fundamental protection factors. Risk factors are very small. "D-2"
indicates good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small. "D-3" indicates satisfactory liquidity and other protection factors
qualify issues as investment grade. Risk factors are larger and subject to more
variation. Nevertheless, timely payment is expected. D&P may also rate short-
term municipal debt as "D-4" or "D-5." "D-4" indicates speculative investment
characteristics. "D-5" indicates that the issuer has failed to meet scheduled
principal and/or interest payments.
UNRATED SECURITIES
Unrated securities are securities which have not been rated by a nationally
recognized statistical rating organization.
B-2 Pegasus Funds
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
_______, 1997
for
CLASS A, CLASS B AND CLASS I SHARES
OF THE
MANAGED ASSETS CONSERVATIVE FUND
MANAGED ASSETS BALANCED FUND
MANAGED ASSETS GROWTH FUND
EQUITY INCOME FUND
GROWTH FUND
MID-CAP OPPORTUNITY FUND
SMALL-CAP OPPORTUNITY FUND
INTRINSIC VALUE FUND
GROWTH AND VALUE FUND
EQUITY INDEX FUND
MARKET EXPANSION INDEX FUND
INTERNATIONAL EQUITY FUND
INTERMEDIATE BOND FUND
BOND FUND
SHORT BOND FUND
MULTI SECTOR BOND FUND
INCOME FUND
INTERNATIONAL BOND FUND
HIGH YIELD BOND FUND
MUNICIPAL BOND FUND
SHORT MUNICIPAL BOND
INTERMEDIATE MUNICIPAL BOND FUND
MICHIGAN MUNICIPAL BOND FUND
of
PEGASUS FUNDS
P.O. Box 5142
Westborough, Massachusetts 01581
(800) 688-3350
This Statement of Additional Information ("Additional Statement") is
meant to be read in conjunction with Pegasus Funds' Prospectuses dated June 30,
1997 and ____ __,
<PAGE>
1997 pertaining to all or some of the classes of shares of the Funds listed
above (each, a "Prospectus" and together, the "Prospectuses") (each, a "Fund"
and collectively, the "Funds"), as it may be revised from time to time, and is
incorporated by reference in its entirety into such Prospectuses. Because this
Additional Statement is not itself a prospectus, no investment in shares of the
Funds should be made solely upon the information contained herein. Copies of the
Funds' Prospectuses may be obtained from any office of the Distributor by
writing or calling the Distributor or the Trust at the address or telephone
number listed above. Capitalized terms used but not defined herein have the same
meanings as in the Prospectuses.
-2-
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
The Trust............................................................... 1
Investment Objectives, Policies and Risk Factors........................ 1
Additional Purchase and Redemption Information.......................... 25
Description of Shares................................................... 30
Additional Information Concerning Taxes................................. 39
Management.............................................................. 43
Independent Auditors.................................................... 58
Counsel................................................................. 58
Additional Information on Performance................................... 58
Appendix A.............................................................. A-1
Appendix B.............................................................. B-1
</TABLE>
-i-
<PAGE>
THE TRUST
The Pegasus Funds (the "Trust"), formerly "The Woodward Funds," was
organized as a Massachusetts business trust on April 21, 1987. As of the date of
this Additional Statement, the Trust consisted of thirty-one separate funds, of
which twenty-two Funds are covered by this Additional Statement.
During the period August 23, 1996 through September 23, 1996, various
funds of the Trust, The Prairie Funds, Prairie Intermediate Bond Fund and
Prairie Municipal Bond Fund, Inc. reorganized pursuant to an agreement and plan
of reorganization (the "Reorganization"). Certain of the information contained
in this Additional Statement includes information about a Fund's predecessor
Prairie Fund, Prairie Intermediate Bond Fund or the Prairie Municipal Bond Fund,
Inc.
In connection with the Reorganization, the Balanced Fund changed its
name to the "Managed Assets Balanced Fund," the Capital Growth Fund changed its
name to the "Growth Fund," the Opportunity Fund changed its name to the "Mid-Cap
Opportunity Fund" and the Growth/Value Fund changed its name to the "Growth and
Value Fund." References in this Additional Statement are to a Fund's current
name.
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS
The following policies supplement the Funds' respective investment
objectives and policies as set forth in the Prospectus.
Additional Information on Fund Instruments
- ------------------------------------------
Ratings Information
- -------------------
Attached to this Additional Statement is Appendix A which contains
descriptions of the rating symbols used by Rating Agencies for securities in
which the Funds and the Money Market Fund may invest.
Portfolio Transactions
- ----------------------
Subject to the general supervision of the Trust's Board of Trustees,
the Investment Adviser is responsible for, making decisions with respect to, and
placing orders for all purchases and sales of portfolio securities for each Fund
and the Money Market Fund. Federated Investment Counseling ("Federated" or the
"Sub-Adviser") is the sub-adviser to the High Yield Bond Fund and, subject to
the general supervision of the Investment Adviser, is
<PAGE>
responsible for, making decisions with respect to, and placing orders for all
purchases and sales of portfolio securities for this Fund.
The annualized portfolio turnover rate for each Fund and the Money
Market Fund is calculated by dividing the lesser of purchases or sales of
portfolio securities for the reporting period by the monthly average value of
the portfolio securities owned during the reporting period. The calculation
excludes all securities, including options, whose maturities or expiration dates
at the time of acquisition are one year or less. Portfolio turnover may vary
greatly from year to year as well as within a particular year, and may be
affected by cash requirements for redemption of shares and by requirements which
enable the Funds and the Money Market Fund to receive favorable tax treatment.
Portfolio turnover will not be a limiting factor in making portfolio decisions,
and the Funds and the Money Market Fund may engage in short term trading to
achieve their respective investment objectives.
For the fiscal years or periods indicated, the portfolio turnover
rates for the Funds were as follows:
<TABLE>
<CAPTION>
Year or Period Ended
December 31, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Managed Assets Conservative Fund/(1)/ 63.41% 8.23%
Managed Assets Balanced Fund 50.50% 31.76%
Managed Assets Growth Fund 0.00% --
Equity Income Fund 61.41% 44.07%
Growth Fund/(2)/ 61.95% 106.02%
Mid-Cap Opportunity Fund 34.87% 53.55%
Small-Cap Opportunity Fund 93.82% 38.89%
Intrinsic Value Fund 34.24% 45.55%
Growth and Value Fund/(3)/ 43.21% 26.80%
Equity Index Fund 12.25% 10.66%
International Equity Fund 6.37% 2.09%
Intermediate Bond Fund 31.62% 36.47%
Bond Fund 24.92% 41.91%
Short Bond Fund/(3)/ 109.58% 30.94%
Multi Sector Bond Fund/(4)/ 103.93% 173.26%
International Bond Fund 97.82% 48.03%
Municipal Bond Fund 64.51% 69.31%
Intermediate Municipal Bond Fund 52.95% 44.75%
Michigan Municipal Bond Fund 24.49% 26.97%
</TABLE>
___________________________________
(1) Increase in portfolio turnover is due to the realignment of the Fund into a
fund-of-funds structure.
(2) Increase in portfolio turnover is due to a realignment of the portfolio in
connection with the Reorganization.
(3) Increase in portfolio turnover reflects the efforts to take advantage of
increased market opportunities.
(4) Decrease in portfolio turnover is due to fewer market opportunities.
Purchases of money market instruments are made from dealers,
underwriters and issuers. The Funds and the Money Market Fund currently do not
expect to incur any brokerage commission expense on such transactions because
money market instruments are
-2-
<PAGE>
generally traded on a "net" basis acting as principal for their own accounts
without a stated commission. The price of the security, however, usually
includes a profit to the dealer. Securities purchased in underwritten offerings
include a fixed amount of compensation to the underwriter, generally referred to
as the underwriter's concession or discount. When securities are purchased
directly from or sold directly to an issuer, no commissions or discounts are
paid.
Transactions on U.S. stock exchanges involve the payment of negotiated
brokerage commissions. On exchanges on which commissions are negotiated, the
cost of transactions may vary among different brokers. Transactions in the over-
the-counter market are generally on a net basis (i.e., without commission)
through dealers, or otherwise involve transactions directly with the issuer of
an instrument.
The Funds and the Money Market Fund may participate, if and when
practicable, in bidding for the purchase of portfolio securities directly from
an issuer in order to take advantage of the lower purchase price available to
members of a bidding group. A Fund and the Money Market Fund will engage in this
practice, however, only when the Investment Adviser or Sub-Adviser, in its sole
discretion, believes such practice to be otherwise in the fund's interests.
Total brokerage commissions paid by the Funds for the fiscal years or
periods ended December 31, 1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Managed Assets Conservative Fund $ 19,830 $ 13,601 $ 47,110
Managed Assets Balanced Fund $126,292 $ 81,178 $123,890
Managed Assets Growth Fund $ 0 N/A N/A
Equity Income Fund $ 93,874 $379,012 N/A
Growth Fund $113,467 $929,747 N/A
Mid-Cap Opportunity Fund $621,056 $866,286 $683,613
Small-Cap Opportunity Fund $114,320 $178,632 N/A
Intrinsic Value Fund $214,355 $209,816 $325,912
Growth and Value Fund $729,368 $504,214 $519,412
Equity Index Fund $282,069 $137,443 $169,830
International Equity Fund $358,776 $ 72,856 $ 4,492
</TABLE>
The Bond Funds and Municipal Bond Funds as well as the Money Market Fund
incurred no brokerage commissions for the fiscal years or periods ended December
31, 1996, 1995 and 1994. Prior to November 20, 1996, the Managed Assets
Conservative and Managed
-3-
<PAGE>
Assets Balanced Funds invested directly in portfolio securities. After such
date, the Asset Allocation Funds began investing in shares of the Underlying
Funds.
The Advisory and Sub-Advisory Agreements provide that, in executing
portfolio transactions and selecting brokers or dealers, the Investment Adviser
or Sub-Adviser will seek to obtain the best overall terms available for each
Fund and the Money Market Fund. In assessing the best overall terms available
for any transaction, the Investment Adviser or Sub-Adviser shall consider
factors it deems relevant, including the breadth of the market in the security,
the price of the security, the financial condition and execution capability of
the broker or dealer, and the reasonableness of the commission, if any, both for
the specific transaction and on a continuing basis. In addition, the Agreement
authorizes the Investment Adviser or Sub-Adviser to cause a Fund and the Money
Market Fund to pay a broker-dealer which furnishes brokerage and research
services a higher commission than that which might be charged by another broker-
dealer for effecting the same transaction, provided that the Investment Adviser
or Sub-Adviser determines in good faith that such commission is reasonable in
relation to the value of the brokerage and research services provided by such
broker-dealer, viewed in terms of either the particular transaction or the
overall responsibilities of the Investment Adviser or Sub-Adviser to the Funds
and the Money Market Fund. Such brokerage and research services might consist of
reports and statistics relating to specific companies or industries, general
summaries of groups of stocks or bonds and their comparative earnings and
yields, or broad overviews of the stock, bond and government securities markets
and the economy.
For the fiscal year or period ended December 31, 1996, the Investment
Adviser, on behalf of the Funds and the Money Market Fund, directed brokerage
transactions to broker-dealers in return for the provision of investment
information or services as stated above as follows:
<TABLE>
<CAPTION>
Aggregate
Fund Commissions
---- -----------
<S> <C>
Managed Assets Conservative Fund/(1)/ $ 6,019
Managed Assets Balanced Fund $ 73,565
Managed Assets Growth Fund --
Equity Income Fund/(1)/ $ 11,243
Growth Fund/(1)/ $ 6,980
Mid-Cap Opportunity Fund $ 86,401
Small-Cap Opportunity Fund/(1)/ $ 23,195
Intrinsic Value Fund $ 30,772
Growth and Value Fund $158,428
Equity Index Fund --
International Equity Fund --
International Equity Fund --
</TABLE>
-4-
<PAGE>
<TABLE>
<S> <C>
Bond Fund --
Short Bond Fund --
Multi Sector Bond Fund --
International Bond Fund --
Municipal Bond Fund --
Intermediate Municipal Bond Fund --
Michigan Municipal Bond Fund --
Money Market Fund --
</TABLE>
- ---------------------------
(1) Commissions paid after the Reorganization with respect to such Fund (see
"The Trust").
Supplementary research information so received is in addition to, and not
in lieu of, services required to be performed by the Investment Adviser or Sub-
Adviser and does not reduce the advisory fees payable by the Funds and the Money
Market Fund. The Trustees will periodically review any commissions paid to
consider whether the commissions paid over representative periods of time appear
to be reasonable in relation to the benefits. It is possible that certain of the
supplementary research or other services received will primarily benefit one or
more other investment companies or other accounts for which investment
discretion is exercised by the Investment Adviser or Sub-Adviser. Conversely, a
Fund, or the Money Market Fund, may be the primary beneficiary of the research
or services received as a result of portfolio transactions effected for such
other account or investment company.
The Trust will not execute portfolio transactions through, acquire
portfolio securities issued by, make savings deposits in or enter into
repurchase or reverse repurchase agreements with the Investment Adviser, the
Sub-Adviser, the Distributor or an affiliated person of any of them (as such
term is defined in the 1940 Act) acting as principal, except to the extent
permitted under the 1940 Act by the SEC or its staff. In addition, a Fund or the
Money Market Fund, will not purchase securities during the existence of any
underwriting or selling group relating thereto of which the Distributor, the
Investment Adviser or the Sub-Adviser, or an affiliated person of any of them,
is a member, except to the extent permitted under the 1940 Act. Under certain
circumstances, the Funds and the Money Market Fund may be at a disadvantage
because of these limitations in comparison with other investment companies which
have similar investment objectives but are not subject to such limitations.
Investment decisions for each Fund and the Money Market Fund are made
independently from those for the other Funds and for any other investment
companies and accounts advised or managed by the Investment Adviser or Sub-
Adviser. Such other investment companies and accounts may also invest in the
same securities as the Funds and the Money Market Fund. To the extent permitted
by law, the Investment Adviser or Sub-Adviser
-5-
<PAGE>
may aggregate the securities to be sold or purchased for the Funds and the Money
Market Fund with those to be sold or purchased for other investment companies or
accounts in executing transactions. When a purchase or sale of the same security
is made at substantially the same time on behalf of one or more of the Funds and
another investment company or account, the transaction will be averaged as to
price and available investments allocated as to amount, in a manner which the
Investment Adviser or Sub-Adviser believes to be equitable to each Fund, the
Money Market Fund and such other investment company or account. In some
instances, this investment procedure may adversely affect the price paid or
received or the size of the position obtained or sold.
Investment Techniques
- ---------------------
Asset Allocation Funds
- ----------------------
In order to achieve its investment objective, each Asset Allocation Fund
will typically invest its assets in the Underlying Funds, within a predetermined
target asset allocation range, as set forth in the Prospectus under "Description
of the Fund - Investment Objectives and Policies - Asset Allocation Funds."
Substantially all of the assets of the Managed Assets Balanced Fund are
currently generally invested directly in the same types of underlying securities
as are permissible investments for the Underlying Funds. Except as set forth in
the Prospectus, the Asset Allocation Funds will no longer continue to purchase
these securities and will limit their investments to the Underlying Funds. The
Investment Adviser currently expects that the transition of the Managed Assets
Balanced Fund to having substantially all of its assets invested in the
Underlying Funds will be gradual.
Equity Securities
- -----------------
Equity Securities are generally selected by the Equity Funds in a "bottom-
up" manner. "Bottom-up" refers to an analytical approach to securities selection
which first focuses on the company and company-related matters as contrasted to
a "top-down" analysis which first focuses on the industry or the economy. In the
Investment Adviser's opinion, this procedure may generally be expected to result
in a portfolio characterized by lower price/earnings ratios, above average
growth prospects and average market risk.
Index Funds
- -----------
The Investment Adviser believes that a sampling methodology allows the
Index Funds to maintain a close correlation to the performance of their
respective index or combined indices while at the same time controlling the
portfolio turnover and transaction costs of the Funds.
Under normal market conditions, each Fund invests substantially all of its
total assets in the common stocks that comprise its respective index or conbined
indices in accordance with its relative capitalization and sector weightings as
described in the Prospectus. It is possible, that if an issuer drops
-6-
<PAGE>
in ranking, or is eliminated entirely from an index, the Investment Adviser may
be required to sell some or all of the common stock of such issuer then held by
the affected Fund. Sales of portfolio securities may be made at times when, if
the Investment Adviser is not required to effect purchases and sales of
portfolio securities in accordance with the indices, such securities might not
be sold. Such sales may result in lower prices for such securities than may have
been realized or in losses that may not have been incurred if the Investment
Adviser is not required to effect the purchases and sales. The failure of an
issuer to declare or pay dividends, the institution against an issuer of
materially adverse legal proceedings, the existence or threat of defaults
materially and adversely affecting an issuer's future declaration and payment of
dividends, or the existence of other materially adverse credit factors will not
necessarily be the basis for the disposition of portfolio securities, unless
such event causes the issuer to be eliminated entirely from such index. The
Funds may receive from time to time as part of a "spin-off" or corporate
restructuring of an issuer included in the indices, securities that are
themselves outside of the indices. Such securities will be disposed of by the
affected Fund in due course consistent with such Fund's investment
objective.
Debt Securities
- ---------------
The Investment Adviser selects Debt Securities based on anticipated
interest rate changes and the use of active management strategies which may
include sector rotation, intra-sector adjustments and yield curve and convexity
considerations. Sector rotation involves the Investment Adviser selecting among
different economic or industry sectors based upon apparent or relative
attractiveness. Thus at times a sector offers yield advantages relative to other
sectors. An intra-sector adjustment occurs when the Investment Adviser
determines to select a particular issue within a sector. Yield curve
considerations involve the Investment Adviser attempting to compare the
relationship between time to maturity and yield to maturity in order to identify
the relative value in the relationship. Convexity considerations consist of the
Investment Adviser seeking securities that rise in price more quickly, or
decline in price less quickly, than the typical security of that price risk
level and therefore enable the Investment Adviser to obtain an additional return
when interest rates change dramatically.
In acquiring particular Debt Securities, the Investment Adviser may
consider, among other things, historical yield relationships between private and
governmental debt securities, intermarket yield relationships among various
industry sectors, current economic cycles and the attractiveness and
creditworthiness of particular issuers. Depending upon the Investment Adviser's
analysis of these and other factors, a Fund's or the Money Market Fund's
holdings of issues in particular industry sectors may be overweighted or
underweighted when compared to the relative industry weightings in recognized
indices. The value of the portfolio holdings can be expected to vary inversely
with changes in prevailing interest rates.
-7-
<PAGE>
In selecting Debt Securities for the High Yield Bond Fund, the
professional portfolio management techniques used by the Sub-Adviser includes:
Credit Research. The High Yield Bond Fund's Sub-Adviser will perform
its own credit analysis in addition to using Rating Agencies and other
sources, including discussions with the issuer's management, the
judgment of other investment analysis, and its own informed judgment.
The Sub-Adviser's credit analysis will consider the issuer's financial
soundness, its responsiveness to changes in interest rates and
business conditions, and its anticipated cash flow, interest or
dividend coverage and earnings. In evaluating an issuer, the Sub-
Adviser places special emphasis on the estimated current value of the
issuer's assets rather than historical costs.
Diversification. The High Yield Bond Fund invests in securities of
many different issuers, industries, and economic sectors.
Economic Analysis. The Sub-Adviser will analyze current developments
and trends in the economy and in the financial markets. When investing
in lower-rated securities, timing and selection are critical, and
analysis of the business cycle can be important.
Money Market Fund
- -----------------
The net asset value of the Money Market Fund is determined as of 3:00
P.M., Eastern Time, on each of its Business Days. The Money Market Fund intends
to value its portfolio securities based upon their amortized cost in accordance
with Rule 2a-7 under the 1940 Act. Where it is not appropriate to value a
security by the amortized cost method, the security will be valued either by
market quotations, or by fair value as determined by the Board of Trustees.
While 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 the Fund would receive if it sold the securities.
Pursuant to Rule 2a-7, the Money Market Fund is required to maintain a
dollar-weighted average portfolio maturity of 90 days or less, to purchase
securities having remaining deemed maturities of 397 days or less, and to invest
only in securities determined by the Board of Trustees to be of high quality
with minimal credit risks. The Board of Trustees has established procedures
designed to stabilize, to the extent reasonably possible, the Money Market
Fund's price per share as computed for the purpose of sales and redemptions at
$1.00. These procedures include review of the investment holdings by the Board
of Trustees, at such intervals as it may deem appropriate, to determine whether
the Money Market Fund's net asset value calculated by using available market
quotations deviates from $1.00 per share based on amortized cost. The extent of
any deviation will be examined by the Board of Trustees. If the deviation
exceeds 1/2 of 1%, the Board of Trustees will promptly consider what action, if
any,
-8-
<PAGE>
will be initiated. In the event the Board of Trustees determines that a
deviation exists which may result in material dilution or other unfair results
to investors or existing shareholders, it may take such corrective actions as it
deems necessary and appropriate to eliminate or reduce, to the extent reasonably
practicable, any such dilution or unfair results. These actions may include
selling portfolio securities prior to maturity to realize capital gains or
losses or to shorten a Fund's average maturity, withholding or reducing
dividends, redeeming shares in kind, splitting, combining or otherwise
recapitalizing outstanding shares or establishing a net asset value per share by
using available market quotations.
The Money Market Fund calculates its dividends based on daily net
investment income. Expenses of the Money Market Fund are accrued daily. As the
Money Market Fund's portfolio securities are normally valued at amortized cost,
unrealized gains or losses on such securities based on their market values will
not normally be recognized. However, should the net asset value deviate
significantly from market value, the Trustees could decide to value the
securities at market value and then unrealized gains and losses would be
included in net investment income.
The Money Market Fund will purchase only "eligible securities" that
present minimal credit risks as determined by the Investment Adviser pursuant to
guidelines established by the Trust's Board of Trustees. Eligible securities
generally include: (1) securities that are rated by two or more Rating Agencies
(or the only Rating Agency which has issued a rating) in one of the two highest
rating categories for short term debt securities; (2) securities that have no
short term rating, if the issuer has other outstanding short term obligations
that are comparable in priority and security as determined by the Investment
Adviser ("Comparable Obligations") and that have been rated in accordance with
(1) above; (3) securities that have no short term rating, but are determined to
be of comparable quality to a security satisfying (1) or (2) above, and the
issuer does not have Comparable Obligations rated by a Rating Agency; and (4)
obligations that carry certain types of guarantees. Obligations that carry
certain types of conditional demand features also may be purchased pursuant to
similar standards.
Other Investments
- -----------------
Stripped U.S. Government Obligations
- ------------------------------------
Within the past several years, the Treasury Department has facilitated
transfers of ownership of zero coupon securities by accounting separately for
the beneficial ownership of particular interest coupon and principal payments on
Treasury securities through the Federal Reserve book-entry record-keeping
system. The Federal Reserve program as established by the Treasury Department is
known as "STRIPS" or "Separate Trading of Registered Interest and Principal of
Securities." To the extent consistent with their respective investment
objectives, the Bond and Municipal Bond Funds and the Money Market Fund may
purchase securities registered in the STRIPS program. Under the STRIPS program,
these Funds will be
-9-
<PAGE>
able to have their beneficial ownership of zero coupon securities recorded
directly in the book-entry record-keeping system in lieu of having to hold
certificates or other evidences of ownership of the underlying U.S. Treasury
securities.
In addition, the Bond and Municipal Bond Funds may acquire U.S.
Government obligations and their unmatured interest coupons that have been
separated ("stripped") by their holder, typically a custodian bank or investment
brokerage firm. Having separated the interest coupons from the underlying
principal of the U.S. Government obligations, the holder will resell the
stripped securities in custodial receipt programs with a number of different
names, including "Treasury Income Growth Receipts" ("TIGRs") and "Certificate of
Accrual on Treasury Securities" ("CATS"). The stripped coupons are sold
separately from the underlying principal, which is usually sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. The underlying U.S. Treasury bonds and notes themselves are
held in book-entry form at the Federal Reserve Bank or, in the case of bearer
securities (i.e., unregistered securities which are ostensibly owned by the
bearer or holder), in trust on behalf of the owners. Counsel to the underwriters
of these certificates or other evidences of ownership of U.S. Treasury
securities have stated that, in their opinion, purchasers of the stripped
securities most likely will be deemed the beneficial holders of the underlying
U.S. Government obligations for federal tax purposes. The Trust is not aware of
any binding legislative, judicial or administrative authority on this issue.
As described in the Prospectus, such Funds may also purchase stripped
mortgage-backed securities ("SMBS"). SMBS that are interest only or principal
only and not issued by the U.S. Government may be considered illiquid securities
if they can not be disposed of promptly in the ordinary course of business at a
value reasonably close to that used in the calculation of net asset value per
share.
Custodial Receipts and Certificates of Participation
- ----------------------------------------------------
For certain certificates of participation, the Funds and the Money
Market Fund will have the right to demand payment, on not more than 30 days'
notice, for all or any part of such Fund's or the Money Market Fund's
participation interest, plus accrued interest. As to these instruments, the
Funds and the Money Market Fund intend to exercise their rights to demand
payment as needed to provide liquidity, to maintain or improve the quality of
their investment portfolio or upon a default (if permitted under the terms of
the instrument).
Bank Obligations
- ----------------
In accordance with their respective investment objectives, each Fund
and the Money Market Fund may purchase bank obligations, which include bankers'
acceptances, negotiable certificates of deposit and non-negotiable time
deposits, including U.S. dollar-denominated instruments issued or supported by
the credit of U.S. or foreign banks or savings
-10-
<PAGE>
institutions. Although the Funds invest in obligations of foreign banks or
foreign branches of U.S. banks only where the Investment Adviser or Sub-Adviser
deems the instrument to present minimal credit risks, such investments may
nevertheless entail risks that are different from those of investments in
domestic obligations of U.S. banks due to differences in political, regulatory
and economic systems and conditions. All investments in bank obligations are
limited to the obligations of financial institutions having more than $1.0
billion in total assets at the time of purchase.
Commercial Paper
- ----------------
Except for the High Yield Bond Fund, commercial paper, including
variable and floating rate notes and other short term corporate obligations,
must be rated in one of the two highest categories by at least two Rating
Agencies, or if not rated, for the Money Market Fund must have been
independently determined by the Investment Adviser to be of comparable quality,
and for the other Funds must have been issued by a corporation having an
outstanding bond issue rated A or higher by a Rating Agency. The High Yield Bond
Fund may invest in lower-rated commercial paper. Except as provided in the
Prospectus for the International Bond and High Yield Bond Funds, bonds and other
short term obligations (if not rated as commercial paper) purchased by the Funds
must be rated BBB or Baa, or higher, by a Rating Agency, respectively, or if
unrated, be of comparable investment quality in the judgment of the Investment
Adviser.
Lower-Rated Securities
- ----------------------
The Asset Allocation, Equity, International Bond and High Yield Bond
Funds may each invest in lower-rated securities. There is no minimal acceptable
rating for a security to be purchased or held in the High Yield Bond Fund's
portfolio and the Fund may, from time to time, purchase or hold securities rated
in the lowest rating category or securities in default. In general, investments
in lower-rated fixed-income securities are subject to a significant risk of a
change in the credit rating or financial condition of the issuing entity.
Investments in lower-rated fixed-income securities of medium or lower quality
are also likely to be subject to greater market fluctuation and to greater risk
of loss of income and principal due to default than investments of higher-rated
fixed-income securities. Such lower-rated securities generally tend to reflect
short-term corporate and market developments to a greater extent than higher-
rated securities, which react more to fluctuations in the general level of
interest rates. Each Equity Fund is permitted to invest up to 5% of its net
assets in lower-rated convertible securities.
In seeking to attain the investment objective of the Funds, the
Investment Adviser or Sub-Adviser may consider both the relative risks and
potential returns of higher-rated and lower-rated securities. As a result, a
Fund may hold higher-rated fixed-income securities when the differential in
return between lower-rated and higher-rated securities narrows and the
Investment Adviser or Sub-Adviser believes that the risk of loss of income
-11-
<PAGE>
and principal may be substantially reduced with only a relatively small
reduction in potential capital appreciation and yield. The relative proportions
of the types of securities in a Fund may vary from time to time according to the
prevailing and projected market and economic conditions and other factors.
Variable and Floating Rate Instruments
- --------------------------------------
With respect to variable and floating rate obligations that may be
acquired by each Fund and the Money Market Fund, the Investment Adviser or Sub-
Adviser will consider the earning power, cash flows and other liquidity ratios
of the issuers and guarantors of such notes and will continuously monitor their
financial status to meet payment on demand. The absence of an active secondary
market with respect to particular variable and floating rate instruments could
make it difficult to dispose of instruments if the issuer defaulted on its
payment obligation or during periods that the Fund or the Money Market Fund is
not entitled to exercise its demand rights, and the Fund or the Money Market
Fund could, for these or other reasons, suffer a loss with respect to such
instruments.
Lending Securities
- ------------------
When a Fund or the Money Market Fund lends its securities, it
continues to receive interest or dividends on the securities loaned and may
simultaneously earn interest on the investment of the cash collateral. Although
voting rights, or rights to consent, attendant to securities on loan pass to the
borrower, such loans will be called so that the securities may be voted by a
Fund or the Money Market Fund if a material event affecting the investment is to
occur.
Repurchase Agreements and Reverse Repurchase Agreements
- -------------------------------------------------------
The repurchase price under the repurchase agreements described in the
Prospectus generally equals the price paid by a Fund or the Money Market Fund
plus interest negotiated on the basis of current short term rates (which may be
more or less than the rate on the securities underlying the repurchase
agreement). Securities subject to repurchase agreements are held by the Trust's
Custodian, in the Federal Reserve/Treasury book-entry system or by another
authorized securities depository. Repurchase agreements are considered to be
loans under the 1940 Act.
Reverse repurchase agreements are considered to be borrowings by a
Fund and by the Money Market Fund under the 1940 Act. At the time a Fund or the
Money Market Fund enters into a reverse repurchase agreement, it will place in a
segregated custodial account liquid assets such as U.S. Government securities or
other liquid high-grade debt securities having a value equal to or greater than
the repurchase price (including accrued interest) and will subsequently monitor
the account to ensure that such value is maintained. Reverse repurchase
agreements involve the risk that the market value of the securities sold by the
Fund
-12-
<PAGE>
or the Money Market Fund may decline below the price of the securities it is
obligated to repurchase.
American Depository Receipts ("ADRs")
- -------------------------------------
The Asset Allocation and Equity Funds may invest in ADRs, which are
receipts issued by an American bank or trust company evidencing ownership of
underlying securities issued by a foreign issuer. ADRs may be listed on a
national securities exchange or may trade in the over-the-counter market.
Although ADR prices are denominated in U.S. dollars, the underlying security may
be denominated in a foreign currency. The underlying security may be subject to
foreign government taxes which would reduce the yield on such securities.
When-Issued Purchases and Forward Commitments
- ---------------------------------------------
A Fund or the Money Market Fund will purchase securities on a when-
issued basis or purchase or sell securities on a forward commitment basis only
with the intention of completing the transaction and actually purchasing or
selling the securities. If deemed advisable as a matter of investment strategy,
however, a Fund or the Money Market Fund may dispose of or renegotiate a
commitment after it is entered into, and may sell securities it has committed to
purchase before those securities are delivered on the settlement date. In these
cases the Fund or the Money Market Fund may realize a capital gain or loss.
When a Fund or the Money Market Fund engages in when-issued and
forward commitment transactions, it relies on the other party to consummate the
trade. Failure of such party to do so may result in the Fund or the Money Market
Fund incurring a loss or missing an opportunity to obtain a price considered to
be advantageous.
Mortgage Backed Securities
- --------------------------
Mortgage Backed Securities Generally. Mortgage backed securities held
by the Asset Allocation, Equity and Bond Funds represent an ownership interest
in a pool of residential mortgage loans. These securities are designed to
provide monthly payments of interest and principal to the investor. The
mortgagor's monthly payments to his lending institution are "passed-through" to
an investor such as the Funds. Most issuers or poolers provide guarantees of
payments, regardless of whether or not the mortgagor actually makes the payment.
The guarantees made by issuers or poolers are supported by various forms of
credit, collateral, guarantees or insurance, including individual loan, title,
pool and hazard insurance purchased by the issuers or poolers so that they can
meet their obligations under the policies. Mortgage backed securities issued by
private issuers or poolers, whether or not such securities are subject to
guarantees, may entail greater risk than securities directly or indirectly
guaranteed by the U.S. Government.
-13-
<PAGE>
Interests in pools of mortgage backed securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a "pass-
through" of the monthly payments made by the individual borrowers on their
residential mortgage loans, net of any fees paid. Additional payments are caused
by repayments resulting from the sale of the underlying residential property,
refinancing or foreclosure net of fees or costs which may be incurred. Some
mortgage backed securities are described as "modified pass-through". These
securities entitle the holders to receive all interest and principal payments
owed on the mortgages in the pool, net of certain fees, regardless of whether or
not the mortgagors actually make the payments.
Residential mortgage loans are pooled by the Federal Home Loan
Mortgage Corporation ("FHLMC"). FHLMC is a corporate instrumentality of the U.S.
Government and was created by Congress in 1970 for the purpose of increasing the
availability of mortgage credit for residential housing. Its stock is owned by
the twelve Federal Home Loan Banks. FHLMC issues Participation Certificates
("Pcs"), which represent interests in mortgages from FHLMC's national portfolio.
FHLMC guarantees the timely payment of interest and ultimate collection of
principal.
The Federal National Mortgage Association ("FNMA") is a U.S.
Government sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases residential mortgages from a list of approved seller/servicers
which include state and federally-chartered savings and loan credit unions and
mortgage bankers. Pass-through securities issued by FNMA are guaranteed as to
timely payment of principal and interest by FNMA.
The principal guarantor of mortgage-backed securities is the
Government National Mortgage Association ("GNMA"). GNMA is a wholly-owned U.S.
Government corporation within the Department of Housing and Urban Development.
GNMA is authorized to guarantee, with the full faith and credit of the U.S
Government, the timely payment of principal and interest on securities issued by
approved institutions and backed by pools of FHA-insured or VA-guaranteed
mortgages.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-through pools of conventional residential mortgage loans. Pools
created by such non-governmental issuers generally offer a higher rate of
interest than government and government-related pools because there are no
direct or indirect government guarantees of payments in the former pools. Timely
payment of interest and principal of some of these pools is supported by various
forms of insurance or guarantees, including individual loan, title, pool and
hazard insurance purchased by the issuer. The insurance and guarantees are
issued by governmental entities,
-14-
<PAGE>
private insurers and the mortgage poolers. There can be no assurance that the
private insurers or mortgage poolers can meet their obligations under the
policies.
The Trust expects that governmental or private entities may create
mortgage loan pools offering pass-through investments in addition to those
described above. The mortgages underlying these securities may be alternative
mortgage instruments, that is, mortgage instruments whose principal or interest
payment may vary or whose terms to maturity may be shorter than previously
customary. As new types of mortgage backed securities are developed and offered
in the market, the Trust may consider making investments in such new types of
securities.
Underlying Mortgages. Pools consist of whole mortgage loans or
participations in loans. The majority of these loans are made to purchasers of
one to four family homes. The terms and characteristics of the mortgage
instruments are generally uniform within a pool but may vary among pools. For
example, in addition to fixed-rate, fixed-term mortgages, the Bond Funds may
purchase pools of variable rate mortgages ("VRM"), growing equity mortgages
("GEM"), graduated payment mortgages ("GPM") and other types where the principal
and interest payment procedures vary. VRMs are mortgages which reset their
interest rate periodically with changes in open market interest rates. To the
extent that a Fund is actually invested in VRMs, its interest income will vary
with changes in the applicable interest rate on pools of VRMs. GPM and GEM pools
maintain constant interest rates, with varying levels of principal repayment
over the life of the mortgage.
All poolers apply standards for qualification to local lending
institutions which originate mortgages for the pools. Poolers also establish
credit standards and underwriting criteria for individual mortgages included in
the pools. In addition, some mortgages included in pools are insured through
private mortgage insurance companies.
Average Life. The average life of pass-through pools varies with the
maturities of the underlying mortgage instruments. In addition, a pool's term
may be shortened by unscheduled or early payments of principal and interest on
the underlying mortgages. The occurrence of mortgage prepayments is affected by
factors including the level of interest rates, general economic conditions, the
location and age of the mortgage and other social and demographic conditions.
Returns on Mortgage Backed Securities. Yields on mortgage backed pass-
through securities are typically quoted based on the maturity of the underlying
instruments and the associated average life assumption.
Reinvestment of prepayments may occur at higher or lower interest
rates than the original investment, thus affecting the yields of a Fund. The
compounding effect from reinvestments of monthly payments received by a Fund
will increase its yield to shareholders, compared to bonds that pay interest
semi-annually.
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<PAGE>
Foreign Currency Transactions
- -----------------------------
When the Asset Allocation Funds, the International Equity,
International Bond and High Yield Bond Funds enter into a currency transaction,
it will deposit, if so required by applicable regulations, with its custodian
cash or readily marketable securities in a segregated account of a Fund in an
amount at least equal to the value of the Fund's total assets committed to the
consummation of the forward contract.
At or before the maturity of a forward contract, a Fund either may
sell a security and make delivery of the currency, or retain the security and
offset its contractual obligation to deliver the currency by purchasing a second
contract pursuant to which the Fund will obtain, on the same maturity date, the
same amount of the currency which it is obligated to deliver. If the Fund
retains the security and engages in an offsetting transaction, at the time of
execution of the offsetting transaction, the Fund will incur a gain or loss to
the extent movement has occurred in forward contract prices. Should forward
prices decline during the period between the Fund entering into a forward
contract for the sale of a currency and the date it enters into an offsetting
contract for the purchase of the currency, it will realize a gain to the extent
the price of the currency it has agreed to sell exceeds the price of the
currency it has agreed to purchase. Should forward prices increase, the Fund
will suffer a loss to the extent the price of the currency it has agreed to
purchase exceeds the price of the currency it has agreed to sell.
The cost of currency transactions varies with factors such as the
currency involved, the length of the contract period and the market conditions
then prevailing. Because transactions in currency exchange usually are conducted
on a principal basis, no fees or commissions are involved. The use of forward
currency exchange contracts does not eliminate fluctuations in the underlying
prices of the securities, but it does establish a rate of exchange that can be
achieved in the future. If a devaluation generally is anticipated, a Fund may
not be able to contract to sell the currency at a price above the devaluation
level it anticipates. The requirements for qualification as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"Code"), may cause the Fund to restrict the degree to which it engages in
currency transactions. See "Additional Information Concerning Taxes."
Futures Contracts and Related Options
- -------------------------------------
See Appendix B to this Additional Statement for a discussion of
futures contracts and related options.
Options Trading
- ---------------
As stated in the Prospectus, each Fund may purchase and sell put and
call options listed on a national securities exchange and issued by the Options
Clearing Corporation. Such transactions may be effected on a principal basis
with primary reporting
-16-
<PAGE>
dealers in U.S. Government securities in an amount not exceeding 5% of a Fund's
net assets. This is a highly specialized activity which entails greater than
ordinary investment risks. Regardless of how much the market price of the
underlying security increases or decreases, the option buyer's risk is limited
to the amount of the original investment for the purchase of the option.
However, options may be more volatile than the underlying securities, and
therefore, on a percentage basis, an investment in options may be subject to
greater fluctuation than an investment in the underlying securities. A listed
call option gives the purchaser of the option the right to buy from a clearing
corporation, and a writer has the obligation to sell to the clearing
corporation, the underlying security at the stated exercise price at any time
prior to the expiration of the option, regardless of the market price of the
security. The premium paid to the writer is in consideration for undertaking the
obligations under the option contract. A listed put option gives the purchaser
the right to sell to a clearing corporation the underlying security at the
stated exercise price at any time prior to the expiration date of the option,
regardless of the market price of the security. Put and call options purchased
by a Fund will be valued at the last sale price or, in the absence of such a
price, at the mean between bid and asked prices.
A Fund's obligation to sell a security subject to a covered call
option written by it, or to purchase a security subject to a secured put option
written by it, may be terminated prior to the expiration date of the option by
the Fund executing a closing purchase transaction, which is effected by
purchasing on an exchange an option of the same series (i.e., same underlying
security, exercise price and expiration date) as the option previously written.
Such a purchase does not result in the ownership of an option. A closing
purchase transaction will ordinarily be effected to realize a profit on an
outstanding option, to prevent an underlying security from being called, to
permit the sale of the underlying security or to permit the writing of a new
option containing different terms on such underlying security. The cost of such
a liquidation purchase plus transaction costs may be greater than the premium
received upon the original option, in which event the Fund will have incurred a
loss in the transaction. An option position may be closed out only on an
exchange which provides a secondary market for an option of the same series.
There is no assurance that a liquid secondary market on an exchange will exist
for any particular option. A covered call option writer, unable to effect a
closing purchase transaction, will not be able to sell the underlying security
until the option expires or the underlying security is delivered upon exercise
with the result that the writer in such circumstances will be subject to the
risk of market decline in the underlying security during such period. A Fund
will write an option on a particular security only if the Investment Adviser or
Sub-Adviser believes that a liquid secondary market will exist on an exchange
for options of the same series which will permit the Fund to make a closing
purchase transaction in order to close out its position.
When a Fund writes a covered call option, an amount equal to the net
premium (the premium less the commission) received by the Fund is included in
the liability section of the Fund's statement of assets and liabilities as a
deferred credit. The amount of the deferred credit will be subsequently marked-
to-market to reflect the current value of the option written.
-17-
<PAGE>
The current value of the traded option is the last sale price or, in the absence
of a sale, the average of the closing bid and asked prices. If an option expires
on the stipulated expiration date or if the Fund enters into a closing purchase
transaction, it will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the net premium received when the option is sold) and the
deferred credit related to such option will be eliminated. Any gain on a covered
call option may be offset by a decline in the market price of the underlying
security during the option period. If a covered call option is exercised, the
Fund may deliver the underlying security held by it or purchase the underlying
security in the open market. In either event, the proceeds of the sale will be
increased by the net premium originally received and the Fund will realize a
gain or loss. If a secured put option is exercised, the amount paid by the Fund
involved for the underlying security will be partially offset by the amount of
the premium previously paid to the Fund. Premiums from expired options written
by a Fund and net gains from closing purchase transactions are treated as short-
term capital gains for federal income tax purposes, and losses on closing
purchase transactions are short-term capital losses.
Stock Index Options
- -------------------
The Asset Allocation and Equity Funds may purchase and write put and
call options on stock indices listed on U.S. securities exchanges or traded in
the over-the-counter market. The International Equity Fund may also purchase and
write put and call options on stock indices listed on a foreign securities
exchange. A stock index fluctuates with changes in the market values of the
stocks included in the index.
Options on stock indices are similar to options on stock except that
(a) the expiration cycles of stock index options are generally monthly, while
those of stock options are currently quarterly, and (b) the delivery
requirements are different. Instead of giving the right to take or make delivery
of a stock at a specified price, an option on a stock index gives the holder the
right to receive a cash "exercise settlement amount" equal to (i) the amount, if
any, by which the fixed exercise price of the option exceeds (in the case of a
put) or is less than (in the case of a call) the closing value of the underlying
index on the date of exercise, multiplied by (ii) a fixed "index multiplier."
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 equal to such difference between the closing price of
the index and the exercise price of the option expressed in dollars times a
specified multiple. The writer of the option is obligated, in return for the
premium received, to make delivery of this amount. The writer 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.
Convertible Securities
- ----------------------
In general, the market value of a convertible security is the higher
of its "investment value" (i.e., its value as a fixed-income security) or its
"conversion value" (i.e.,
-18-
<PAGE>
the value of the underlying shares of common stock if the security is
converted). As a fixed-income security, the market value of a convertible
security generally increases when interest rates decline and generally decreases
when interest rates rise. However, the price of a convertible security also is
influenced by the market value of the security's underlying common stock. Thus,
the price of a convertible security generally increases as the market value of
the underlying stock increases, and generally decreases as the market value of
the underlying stock declines.
Warrants
- --------
Each Asset Allocation and Equity Fund may invest up to 5% of their
respective assets at the time of purchase in warrants and similar rights (other
than those that have been acquired in units or attached to other securities).
Certain fixed rate obligations in which the High Yield Bond Fund invests may
involve equity characteristics. The High Yield Bond Fund may, for example,
invest in unit offerings that combine fixed rate securities and common stock or
common stock equivalents such as warrants, rights, and options. Warrants
represent rights to purchase securities at a specified price valid for a
specified period of time. The prices of warrants do not necessarily correlate
with the prices of underlying securities.
Municipal and Related Obligations
- ---------------------------------
To the extent consistent with its investment objective, the Asset
Allocation, Bond and Municipal Bond Funds may invest in Municipal Obligations.
There are, of course, variations in the quality of Municipal Obligations, both
within a particular classification and between classifications, and the yields
on Municipal Obligations depend in part on a variety of factors, including
general market conditions, the financial condition of the issuer, general
conditions of the municipal bond market, the size of a particular offering, the
maturity of the obligation and the rating of the issue. The ratings of Municipal
Obligations by Rating Agencies represent their opinions as to the quality of
Municipal Obligations. It should be emphasized, however, that ratings are
general and are not absolute standards of quality, and Municipal Obligations
with the same maturity, interest rate and rating may have different yields while
Municipal Obligations with the same maturity and interest rate with different
ratings may have the same yield. Subsequent to its purchase by a Fund, a
Municipal Obligation may cease to be rated or its rating may be reduced below
the minimum rating required for purchase by the Fund. The Investment Adviser or
Sub-Adviser may consider such an event in determining whether the Fund should
continue to hold the obligation.
The payment of principal and interest on most Municipal Obligations
purchased by a Fund will depend upon the ability of the issuers to meet their
obligations. For the purpose of diversification under the 1940 Act, the
identification of the issuer of Municipal Obligations depends on the terms and
conditions of the security. When the assets and revenues of an agency,
authority, instrumentality or other political subdivision are separate from
those of the government creating the subdivision and the security is backed only
by the assets and
-19-
<PAGE>
revenues of the subdivision, such subdivision would be deemed to be the sole
issuer. Similarly, in the case of an industrial development bond, if that bond
is backed only by the assets and revenues of the non-governmental user, then
such non-governmental user would be deemed to be the sole issuer. If, however,
in either case, the creating government or some other entity guarantees a
security, such a guaranty would be considered a separate security and will be
treated as an issue of such government or other entity.
An issuer's obligations under its Municipal Obligations are subject to
the provisions of bankruptcy, insolvency, and other laws affecting the rights or
remedies of creditors, such as the Federal Bankruptcy Code, and any laws, that
may be enacted by federal or state legislatures extending the time for payment
of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations or upon the ability of municipalities to levy
taxes. The power or ability of an issuer to meet its obligations for the payment
of interest or principal of its Municipal Obligations may be materially
adversely affected by litigation or other conditions.
Certain Municipal Obligations are subject to redemption at a date
earlier than their stated maturity pursuant to call options, which may be
separated from the related Municipal Obligation and purchased and sold
separately.
Certain of the Municipal Obligations held by the Funds may be insured
at the time of issuance as to the timely payment of principal and interest. The
insurance policies will usually be obtained by the issuer of the Municipal
Obligations at the time of original issuance. There is, however, no guarantee
that the insurer will meet its obligations. In addition, such insurance will not
protect against market fluctuations caused by changes in interest rates and
other factors.
The Municipal Bond Funds will purchase tender option bonds only when
the Investment Adviser is satisfied that the custodial and tender option
arrangements, including the fee payment arrangements, will not adversely affect
the tax exempt status of the underlying Municipal Obligations and that payment
of any tender fees will not have the effect of creating taxable income for the
Fund. Based on the tender option bond agreement, that Fund expects to be able to
value the tender option bond at par; however, the value of the instrument will
be monitored by the Investment Adviser to assure that it is valued at fair
value.
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 Obligations. For example, pursuant to federal tax
legislation passed in 1986 interest on certain private activity bonds must be
included in an investor's federal alternative minimum taxable income, and
corporate investors must include all tax-exempt interest in their federal
alternative minimum taxable income. The Trust cannot predict what legislation,
if any, may be proposed in Congress in the future as regards the federal income
tax status of interest on Municipal Obligations in general, or which proposals,
if any, might be enacted. Such
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<PAGE>
proposals, if enacted, might materially adversely affect the availability of
Municipal Obligations for investments by the Funds and their liquidity and
value. In such event, the Board of Trustees would re-evaluate the Funds'
investment objectives and policies and consider changes in their structure or
possible dissolution.
Stand-By Commitments
- --------------------
The Asset Allocation, Bond, Municipal Bond and Money Market Funds may
acquire "stand-by commitments" with respect to Municipal Obligations they hold.
Under a stand-by commitment, a dealer agrees to purchase at such Fund's option
specified Municipal Obligations at a specified price. Stand-by commitments may
be exercisable at any time before the maturity of the underlying Municipal
Obligations and may be sold, transferred or assigned only with the instruments
involved.
Such Funds expect that stand-by commitments will generally be
available without the payment of any direct or indirect consideration. However,
if necessary or advisable, they may pay for a stand-by commitment either
separately in cash or by paying a higher price for Municipal Obligations which
are acquired subject to the commitment (thus reducing the yield to maturity
otherwise available for the same securities). Such Funds may acquire a stand-by
commitment unless immediately after the acquisition, with respect to 75% of its
assets not more than 5% of its total assets will be invested in instruments
subject to a demand feature, including stand-by commitments, with the same
institution.
Such Funds intend to enter into stand-by commitments only with
dealers, banks and broker-dealers which, in the Investment Adviser's or Sub-
Adviser's opinion, present minimal credit risks. The credit of these dealers,
banks and broker-dealers will be secured by the value of the underlying
Municipal Obligations that are subject to the commitment. Thus, the risk of loss
in connection with a "stand-by commitment" will not be qualitatively different
from the risk of loss faced by a person that is holding securities pending
settlement after having agreed to sell the securities in the ordinary course of
business.
Stand-by commitments will be acquired solely to facilitate portfolio
liquidity and not to exercise their rights thereunder for trading purposes. The
acquisition of a stand-by commitment will not affect the valuation or assumed
maturity of the underlying Municipal Obligations which will continue to be
valued in accordance with the amortized cost method. The actual stand-by
commitment will be valued at zero in determining net asset value. Where a stated
Fund pays directly or indirectly for a stand-by commitment, its cost will be
reflected as an unrealized loss for the period during which the commitment is
held by the Fund and will be reflected in realized gain or loss when the
commitment is exercised or expires.
-21-
<PAGE>
Special Investment Considerations Relating To Investing In The Michigan
- -----------------------------------------------------------------------
Municipal Bond Fund
- -------------------
The following information is drawn from various Michigan governmental
publications and from official statements relating to securities offerings of
the State and its political subdivisions. While the Trust has not
independently verified such information, it has no reason to believe that it is
not correct in all material respects.
The State of Michigan's economy is principally dependent on
manufacturing (particularly automobiles, office equipment and other durable
goods), tourism and agriculture, and historically has been highly cyclical.
Total State wage and salary employment is estimated to have grown by
1.6% in 1996. The rate of unemployment is estimated to have been 4.7% in 1996,
below the national average for the third consecutive year. Personal income grew
at an estimated 4.2% annual rate in 1996, down from the 6.5% growth reported for
1995. Michigan employment is expected to grow by a moderate 1.5% in 1997. The
unemployment rate in 1997 is expected to increase to 5.0% but personal income is
also expected to increase by 5.0% in 1997. The inflation rate, as measured by
the Detroit Consumer Price Index, is expected to be at approximately 2.5% in
1997. As a result, inflation adjusted purchasing power is expected to grow 2.5%
in 1997.
During the past five years, improvements in the Michigan economy have
resulted in increased revenue collections which, together with restraints on the
expenditure side of the budget, have resulted in State General Fund budget
surpluses, most of which were transferred to the State's Counter-Cyclical Budget
and Economic Stabilization Fund. The balance of that Fund as of September 30,
1996 is estimated to have been in excess of $1.1 billion.
The Michigan Constitution limits the amount of total State revenues
that can be raised from taxes and certain other sources. State revenues
(excluding federal aid and revenues for payment of principal and interest on
general obligation bonds) in any fiscal year are limited to a fixed percentage
of State personal income in the prior calendar year or the average of the prior
three calendar years, whichever is greater, and this fixed percentage equals the
percentage of the 1978-79 fiscal year state government revenues to total
calendar 1977 State personal income (which was 9.49%).
The Michigan Constitution also provides that the proportion of State
spending paid to all units of local government to total State spending may not
be reduced below the proportion in effect in the 1978-79 fiscal year. The State
originally determined that portion to be 41.6%. If such spending does not meet
the required level in a given year, an additional appropriation for local
governmental units is required by the following fiscal year; which means the
year following the determinations of the shortfall, according to an opinion
issued by
-22-
<PAGE>
the State's Attorney General. Spending for local units met this requirement for
fiscal years 1986-87 through 1991-92. As the result of litigation, the State
agreed to reclassify certain expenditures, beginning with fiscal year 1992-93,
and has recalculated the required percentage of spending paid to local
government units to be 48.97%.
The State has issued and has outstanding general obligation full faith
and credit bonds for Water Resources, Environmental Protection Program,
Recreation Program and School Loan purposes. As of September 30, 1996, the
State had approximately $685 million of general obligations bonds outstanding.
The State may issue notes or bonds without voter approval for the
purposes of making loans to school districts. The proceeds of such notes or
bonds are deposited in the School Bond Loan Fund maintained by the State
Treasurer and used to make loans to school districts for payment of debt on
qualified general obligations bonds issued by local school districts. As of
December 31, 1996, approximately $6,270 million in principal amount of
"qualified" bonds of local school districts was outstanding.
The State is a party to various legal proceedings seeking damages or
injunctive or other relief. In addition to routine litigation, certain of these
proceedings could, if unfavorably resolved from the point of view of the State,
substantially affect State programs or finances. As of early 1997, these
lawsuits involved programs generally in the areas of corrections, tax
collection, commerce, and proceedings by school districts claiming failure of
the State to fund certain mandated services, other budgetary reductions to
school districts and governmental units, and court funding.
The State Constitution limits the extent to which municipalities or
political subdivisions may levy taxes upon real and personal property through a
process that regulates assessments.
On March 15, 1994, Michigan voters approved a property tax and school
finance reform measure commonly known as Proposal A. Under Proposal A, as
approved, effective May 1, 1994, the State sales and use tax increased from 4%
to 6%, the State income tax decreased from 4.6% to 4.4%, the cigarette tax
increased from $.25 to $.75 per pack and an additional tax of 16% of the
wholesale price began to be imposed on certain other tobacco products. A .75%
real estate transfer tax became effective January 1, 1995. Beginning in 1994, a
state property tax of 6 mills began to be imposed on all real and personal
property currently subject to the general property tax. All local school boards
are authorized, with voter approval, to levy up to the lesser of 18 mills or the
number of mills levied in 1993 for school operating purposes on nonhomestead
property and nonqualified agricultural property. Proposal A contains additional
provisions regarding the ability of local school districts to levy taxes, as
well as a limit on assessment increases for each parcel of property, beginning
in 1995. Such increases for each parcel of property are limited to the lesser
of 5% or the rate of inflation. When property is subsequently sold, its
assessed value will revert to the current
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<PAGE>
assessment level of 50% of true cash value. Under Proposal A, much of the
additional revenue generated by the new taxes will be dedicated to the State
School Aid Fund.
Proposal A and its implementing legislation shifted significant
portions of the cost of local school operations from local school districts to
the State and raised additional State revenues to fund these additional State
expenses. These additional revenues will be included within the State's
constitutional revenue limitations and may impact the State's ability to raise
additional revenues in the future.
Derivative Securities
- ---------------------
The Investment Adviser or Sub-Adviser will evaluate the risks
presented by the derivative instruments purchased by the Funds and the Money
Market Fund, and will determine, in connection with its day-to-day management of
the Funds and the Money Market Fund, how they will be used in furtherance of the
Funds' and the Money Market Fund's investment objectives. It is possible,
however, that the Investment Adviser's or Sub-Adviser's evaluations will prove
to be inaccurate or incomplete and, even when accurate and complete, it is
possible that the Funds and the Money Market Fund will, because of the risks
discussed above, incur loss as a result of their investments in derivative
instruments.
Additional Investment Limitations
- ---------------------------------
In addition to the investment limitations disclosed in the Prospectus,
the Funds and the Money Market Fund are subject to the following investment
limitations which may not be changed without approval of the holders of the
majority of the outstanding shares of the affected Fund or the Money Market Fund
(as defined under "Description of Shares" below).
Each Fund and the Money Market Fund may not:
1. Purchase or sell real estate, except that each may purchase
securities of issuers which deal in real estate and may purchase securities
which are secured by interests in real estate.
2. Invest in commodities, except that as consistent with a Fund's
investment objective and policies: (a) each Fund and the Money Market Fund,
other than the Intermediate Bond Fund, may purchase and sell options, forward
contracts, futures contracts, including without limitation those relating to
indices, and options on futures contracts or indices; (b) each Fund and the
Money Market Fund may purchase publicly traded securities of companies engaging
in whole or in part in such activities; and (c) the Intermediate Bond Fund will
not purchase or sell commodity contracts, or invest in oil, gas or mineral
exploration or development programs, except that it may, to the extent
appropriate to its investment objective, purchase publicly traded securities of
companies engaging in whole or in part in such activities and may enter into
futures contracts and related options.
-24-
<PAGE>
3. Act as an underwriter of securities within the meaning of the
Securities Act of 1933 except insofar as it might be deemed to be an underwriter
upon the disposition of portfolio securities acquired within the limitation on
purchases of restricted securities and except to the extent that the purchase of
obligations directly from the issuer thereof in accordance with its investment
objective, policies and limitations may be deemed to be underwriting.
In addition to the above fundamental limitations, the Funds and the
Money Market Fund are subject to the following non-fundamental limitations,
which may be changed without a shareholder vote:
Each Fund and the Money Market Fund may not:
1. Acquire any other investment company or investment company
security except in connection with a merger, consolidation, reorganization or
acquisition of assets or where otherwise permitted under the 1940 Act.
2. Write or sell put options, call options, straddles, spreads, or
any combination thereof, except as consistent with a Fund's investment objective
and policies, for transactions in options on securities or indices of
securities, futures contracts and options on futures contracts and in similar
investments.
3. Purchase securities on margin, make short sales of securities or
maintain a short position, except that (a) this investment limitation shall not
apply to its transactions in futures contracts and related options and in
options on securities or indices of securities and similar instruments, and (b)
it may obtain short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities.
4. Purchase securities of companies for the purpose of exercising
control.
5. Invest more than 15% (10% for the Money Market Fund) of its net
assets in illiquid securities.
No Fund intends to purchase securities while its outstanding
borrowings (including reverse repurchase agreements) are in excess of 5% of its
assets. Securities held in escrow or separate accounts in connection with its
investment practices are not deemed to be pledging for purposes of this
limitation.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of the Funds are offered and sold on a continuous basis by the
Trust's distributor, BISYS Fund Services ("BISYS"), acting as agent.
-25-
<PAGE>
As of the date of this Statement of Additional Information, no shares
of the Short Muncipal Bond Fund or Market Expansion Index Fund were issued or
outstanding. An illustration of the computation of the public offering price per
share of the Funds, based on the value of each class of the Fund's total net
assets and total number of shares of each class outstanding on June 30, 1997 is
as follows:
<TABLE>
<CAPTION>
Net Asset Offering
Outstanding Value Per Sales Price to
Fund Net Assets Shares Share Charge Public
- ---- ------------ ----------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
Managed Assets Conservative Fund
Class A Shares $ 78,001,148 4,859,016 $16.05 $0.84/(1)/ $16.15
Class B Shares $ 8,408,990 523,202 $16.07 -- $16.07
Class I Shares $ 5,420,041 336,512 $16.11 -- $16.11
Managed Assets Balanced Fund
Class A Shares $ 88,009,650 7,056,570 $12.47 $0.66/(1)/ $13.13
Class B Shares $ 4,097,209 297,967 $13.75 -- $13.75
Class I Shares $142,097,3499 11,407,686 $12.46 -- $12.46
Managed Assets Growth Fund
Class A Shares $ 1,679,967 151,523 $11.09 $0.58/(1)/ $11.67
Class B Shares $ 2,063,668 188,571 $10.94 -- $10.94
Class I Shares $ 726,561 65,262 $11.13 -- $11.13
Equity Income Fund
Class A Shares $ 11,714,419 812,396 $14.42 $0.76/(1)/ $15.18
Class B Shares $ 2,180,809 151,289 $14.41 -- $14.41
Class I Shares $301,608,715 20,972,148 $14.38 -- $14.38
Growth Fund
Class A Shares $ 36,843,012 2,509,386 $14.68 $0.77/(1)/ $15.45
Class B Shares $ 1,176,408 80,855 $14.55 -- $14.55
Class I Shares $576,225,740 39,261,984 $14.68 -- $14.68
Mid-Cap Opportunity Fund
Class A Shares $125,492,030 6,250,792 $20.08 $1.06/(1)/ $18.54
Class B Shares $ 1,524,309 140,149 $10.88 -- $10.88
</TABLE>
-26-
<PAGE>
<TABLE>
<CAPTION>
Net Asset Offering
Outstanding Value Per Sales Price to
Fund Net Assets Shares Share Charge Public
- ---- ------------ ----------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
Class I Shares $765,704,397 38,092,445 $20.10 -- $20.10
Small-Cap Opportunity Fund
Class A Shares $ 9,564,303 606,567 $15.77 $0.83/(1)/ $16.60
Class B Shares $ 461,533 29,654 $15.56 $15.56
Class I Shares $166,248,179 10,453,191 $15.90 $15.90
Intrinsic Value Fund
Class A Shares $ 44,498,955 2,886,846 $15.41 $0.81/(1)/ $16.22
Class B Shares $ 1,364,892 119,661 $11.41 -- $11.41
Class I Shares $450,062,827 29,191,142 $15.42 -- $15.42
Growth and Value Fund
Class A Shares $ 97,437,525 5,940,045 $16.40 $0.86/(1)/ $17.26
Class B Shares $ 2,030,045 188,474 $10.77 -- $10.77
Class I Shares $866,101,815 52,778,087 $16.41 -- $16.41
Equity Index Fund
Class A Shares $ 70,272,235 3,515,563 $19.99 $0.62/(3)/ $20.61
Class B Shares $ 813,676 65,423 $12.44 -- $12.44
Class I Shares 34,099,129 $19.99 -- $19.99
$681,619,288
International Equity Fund
Class A Shares $ 19,053,037 1,479,048 $12.88 $0.68/(1)/ $13.56
Class B Shares $ 1,413,445 116,725 $12.11 -- $12.11
Class I Shares $461,228,785 35,744,414 $12.90 -- $12.90
International Bond Fund
Class A Shares $ 21,759,403 2,115,707 $10.28 $0.32/(3)/ $10.60
Class B Shares $ 228,424 22,404 $10.20 -- $10.20
Class I Shares $441,856,468 42,950,934 $10.29 -- $10.29
Bond Fund
Class A Shares $ 68,509,357 6,681,136 $10.25 $0.48/(2)/ $10.73
Class B Shares $ 1,130,761 110,234 $10.26 -- $10.26
</TABLE>
-27-
<PAGE>
<TABLE>
<CAPTION>
Net Asset Offering
Outstanding Value Per Sales Price to
Fund Net Assets Shares Share Charge Public
- ---- ------------ ----------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
Class I Shares $968,909,796 94,476,511 $10.26 -- $10.26
Short Bond Fund
Class A Shares $ 1,474,535 145,970 $10.10 $0.10/(4)/ $10.20
Class B Shares $ 68,581 6,850 $10.01 -- $10.01
Class I Shares $193,121,483 19,119,174 $10.10 -- $10.10
Multi Sector Bond Fund
Class A Shares $ 7,175,410 920,189 $ 7.80 $0.24/(3)/ $ 8.04
Class B Shares $ 409,140 52,425 $ 7.80 -- $ 7.80
Class I Shares $134,588,559 17,237,177 $ 7.81 -- $ 7.81
International Bond Fund
Class A Shares $ 4,081,146 401,019 $10.18 $0.48/(2)/ $10.66
Class B Shares $ 72,439 7,060 $10.26 -- $10.26
Class I Shares $ 70,650,593 6,901,479 $10.24 -- $10.24
Municipal Bond Fund
Class A Shares $ 30,817,584 2,477,600 $12.44 $0.59/(2)/ $13.03
Class B Shares $ 830,413 66,816 $12.43 -- $12.43
Class I Shares $341,314,681 27,458,324 $12.43 -- $12.43
Intermediate Municipal Bond Fund
Class A Shares $ 19,421,055 1,588,746 $12.11 $0.37/(3)/ $12.48
Class B Shares $ 628,542 51,931 $12.10 -- $12.10
Class I Shares $377,747,863 31,176,724 $12.12 -- $12.12
Michigan Municipal Bond Fund
Class A Shares $ 17,507,535 1,657,070 $10.57 $0.50/(2)/ $11.07
Class B Shares $ 246,598 24,072 $10.24 -- $10.24
Class I Shares $ 49,218,416 4,658,809 $10.56 -- $10.56
</TABLE>
- -------------------------
1. The applicable sales charge for this Fund is 5.00% of offering price (5.26%
of net asset value per share).
-28-
<PAGE>
2. The applicable sales charge for this Fund is 4.50% of offering price (4.69%
of net asset value per share).
3. The applicable sales charge for this Fund is 3.00% of offering price (3.01%
of net asset value per share).
4. The applicable sales charge for this Fund is 1.00% of offering price (1.01%
of net asset value per share).
Under the 1940 Act, the Trust may suspend the right of redemption or
postpone the date of payment for shares during any period when: (a) trading on
the New York Stock Exchange is restricted by applicable rules and regulations of
the SEC; (b) the Exchange is closed for other than customary weekend and holiday
closings; (c) the SEC has by order permitted such suspension; or (d) an
emergency exists as determined by the SEC. (The Trust may also suspend or
postpone the recordation of the transfer of shares upon the occurrence of any of
the foregoing conditions.)
In addition to the situations described in the Prospectus under
"Redemption of Shares," the Trust may redeem shares involuntarily to reimburse
the Funds for any loss sustained by reason of the failure of a shareholder to
make full payment for shares purchased by the shareholder or to collect any
charge relating to a transaction effected for the benefit of a shareholder which
is applicable to Fund shares as provided in the Prospectus from time to time.
The Trust normally redeems shares for cash. However, the Board of
Trustees can determine that conditions exist making cash payments undesirable.
If they should so determine, redemption payments could be made in securities
valued at the value used in determining net asset value. There may be brokerage
and other costs incurred by the redeeming shareholder in selling such
securities. The Trust has elected to be covered by Rule 18f-1 under the 1940
Act, pursuant to which the Trust is obligated to redeem shares solely in cash up
to the lesser of $250,000 or 1% of net asset value during any 90-day period for
any one shareholder.
Total sales charges paid by shareholders of the Funds for the fiscal
years or periods ended December 31, 1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1996/(1)/ 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Managed Assets Conservative Fund $13,529 $ 79,374 *
Managed Assets Balanced Fund $ 7,750 $ 37,984 $286,056
Managed Assets Growth Fund $ 1,156 N/A N/A
Equity Income Fund $ 1,355 $ 11,393 N/A
Growth Fund $ 6,351 $ 5,937 N/A
Mid-Cap Opportunity Fund $ 8,203 $122,061 $544,053
</TABLE>
-29-
<PAGE>
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1996(1) 1995 1994
<S> <C> <C> <C>
Small-Cap Opportunity Fund $ 2,068 $ 1,857 N/A
Intrinsic Value Fund $ 3,337 $ 17,964 $ 87,757
Growth and Value Fund $ 9,325 $ 92,788 $431,841
Equity Index Fund $ 1,042 N/A N/A
International Equity Fund $ 5,354 $ 13,659 $ 0
Intermediate Bond Fund $ 2,389 $ 7,877 $ 41,775
Bond Fund $ 5,548 $ 30,433 $203,760
Short Bond Fund $ 1,247 $ 2,848 $ 0
Multi Sector Bond Fund $ 2,411 $ 7,948 *
International Bond Fund $ 1,053 $ 1,551 N/A
Municipal Bond Fund $ 3,698 $ 8,055 *
Intermediate Municipal Bond Fund $ 1,561 $ 15,797 *
Michigan Municipal Bond Fund $ 3,358 $105,322 $151,042
</TABLE>
(1) Includes the Contingent Deferred Sales Charge imposed on Class B Shares and
certain redemptions of Class A Shares.
*Not available
Payment for shares of a Fund may, in the discretion of FCNIMCO, be
made in the form of securities that are permissible investments for the Fund as
described in the Prospectus. For further information about this form of payment,
contact FCNIMCO. In connection with an in-kind securities payment, a Fund will
require, among other things, that the securities be valued on the day of
purchase in accordance with the pricing methods used by the Fund and that the
Fund receive satisfactory assurances that it will have good and marketable title
to the securities received by it; that the securities be in proper form for
transfer to the Fund; and that adequate information be provided concerning the
basis and other tax matters relating to the securities.
The transaction fee described in the Prospectus with respect to the
Market Expansion Index Fund does not apply to in-kind purchases of shares that
are structured to minimize the related brokerage, market impact costs and other
transaction costs as described in the Prospectus.
DESCRIPTION OF SHARES
The Trust is an unincorporated business trust organized under
Massachusetts law on April 21, 1987. The Trust's Declaration of Trust authorizes
the Board of Trustees to divide shares into two or more series, each series
relating to a separate portfolio of investments, and divide the shares of any
series into two or more classes. The number of shares of each series and/or of a
class within each series shall be unlimited. The Trust does not intend to issue
share certificates.
In the event of a liquidation or dissolution of the Trust or an
individual fund, shareholders of a particular fund would be entitled to receive
the assets available for distribution belonging to such fund. If there are any
assets, income, earnings, proceeds, or payments, which are not readily
identifiable as belonging to any particular Fund, the Trustees shall allocate
them among any one or more of the Funds as they, in their sole discretion, deem
fair and equitable.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Trust shall not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each fund affected by the matter. A fund is affected by a matter unless it is
clear that the interests of each fund in the matter are substantially identical
or that the matter does not affect any interest of the fund. Under the Rule, the
approval of an
-30-
<PAGE>
investment advisory agreement or any change in a fundamental investment policy
would be effectively acted upon with respect to a fund only if approved by a
majority of the outstanding shares of such fund. However, the Rule also provides
that the ratification of the appointment of independent accountants, the
approval of principal underwriting contracts and the election of Trustees may be
effectively acted upon by shareholders of the Trust voting together in the
aggregate without regard to particular funds.
When used in the Prospectus or in this Additional Statement, a
"majority" of shareholders means, with respect to the approval of an investment
advisory agreement, a distribution plan or a change in a fundamental investment
policy, the vote of the lesser of (1) 67% of the shares of the Trust, or the
applicable fund, present at a meeting if the holders of more than 50% of the
outstanding shares are present in person or by proxy, or (2) more than 50% of
the outstanding shares of the Trust or the applicable fund.
As of November 7, 1997, the name and address, number and percentage of
class ownership of each person who owned of record 5% or more of any class of
shares is set forth below.
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Fund Name and Address Shares Shares
- ---- ---------------- --------- -------------
<S> <C> <C> <C>
Managed Assets First Chicago NBD TTEE 473,985.599 84.62%
Conservative Fund- First Chicago NBD Svgs & Invsmt
Class I Plan
c/o Putnam Investments
P.O. Box 9740
Providence, RI 02940-9740
Managed Assets Corelink Financial, Inc. 4,876,857.139 45.76%
Balanced Fund- P.O. Box 4054
Class A Concord, CA 94524-4054
First Chicago NBD TTEE 1,333,555.529 12.51%
Clarian Health Partners Inc.
Defined Contribution Plan c/o
Putnam Investments
P.O. Box 9740
Providence, RI 02940-9740
</TABLE>
-31-
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Fund Name and Address Shares Shares
- ---- ---------------- --------------- -------------
<S> <C> <C> <C>
Managed Assets Corelink Financial Inc. 57,205.398 9.27%
Balanced Fund- P.O. Box 4054
Class B Concord, CA 94524-4054
Managed Assets First Chicago NBD TTEE 3,226,030.095 40.59%
Balanced Fund- First Chicago NBD Svgs & Invsmt
Class I P1n
c/o Putnam Investments
P.O. Box 9740
Providence, RI 02940-9740
Managed Assets NBD Bank As TTEE 21,179.818 5.70%
Growth Fund- Flint Mfg Co EE Savings and Ret
Class A Plan
107 N. Cross Street
Suite 2092
Wheaton, IL 60187
Donald, Lufkin & Jenrette 21,937.993 5.90%
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-2052
Managed Assets R. Hugh Elliot 58,537.383 54.52%
Growth Fund 4888 Sider Hill Drive
Class I Rochester, MI 46306
Growth Fund- Corelink Financial, Inc. 732,077.289 20.32%
Class A FBO 26052652
P.O. Box 4054
Concord, CA 94524-4054
Growth Fund- Donaldson, Lufkin & Jenrette 8,073.745 7.34%
Class B Securities Corp. Inc.
P.O. Box 2052
Jersey City, NJ 07303-2052
Mid-Cap Corelink Financial Services 1,976,060.988 19.51%
Opportunity Fund- P.O. Box 4054
Class A Concord, CA 94524-4054
</TABLE>
-32-
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Fund Name and Address Shares Shares
- ---- ---------------- --------------- --------------
<S> <C> <C> <C>
Mac and Company 744,255.092 7.35%
Mutual Funds Operations
P.O. Box 3198
Pittsburgh, PA 15230
NBD Bank TTEE 809,510.303 7.99%
American Axle and Mfg., Inc.
Personal S/P Hourly Rate
Associates
900 Tower DR
Troy, MI 48098
Mid-Cap Donaldson, Lufkin & Jenrette 32,827.834 12.60%
Opportunity Fund- Securities Corporation Inc.
Class B P.O. Box 2052
Jersey City, NJ 07303-2052
Mid-Cap First Chicago NBD TTEE 4,864,538.256 13.45%
Opportunity Fund- First Chicago NBD Svgs & Invsmt
Class I Pln
c/o Putnam Investments
P.O. Box 9740
Providence, RI 02940-9740
Small-Cap Corelink Financial, Inc. 84,643.113 7.20%
Opportunity Fund- P.O. Box 4054
Class A Concord, CA 94524-4054
NBD As Trustee 277,365.312 23.61%
Bankers Systems, Inc.
Employess Profits Sharing Plan
107 N. Cross St., Ste. 2092
Wheaton, IL 60187
Small-Cap Corelink Financial, Inc. 4,400.312 5.67%
Opportunity Fund- P.O. Box 4054
Class B Concord, CA 94524-4054
Intrinsic Value NBD As Trustee 313,108.069 6.78%
Fund-Class A Bankers Systems, Inc.
Employee Profit Sharing Plan
107 N. Cross Street
Suite 2092
Wheaton, IL 60187
Corelink Financial, Inc. 649,095.832 14.07%
P.O. Box 4054
Concord, CA 94524-4054
Growth and Value Corelink Financial, Inc. 1,400,323.920 16.40%
Fund - Class A P.O. Box 4054
Concord, CA 94524-4054
</TABLE>
-33-
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Fund Name and Address Shares Shares
- ---- ---------------- --------- -------------
<S> <C> <C> <C>
Growth and Value Donaldson, Lufkin & Jenrette 18,785.905 5.12%
Fund-Class B Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-2052
Growth and Value First Chicago NBD TTEE 6,129,906.011 12.02%
Fund-Class I First Chicago NBD Svgs & Invsmt
Plan
c/o Putnam Investments
P.O. Box 9740
Providence, RI 02940-9740
Equity Income Fund- Corelink Financial, Inc 72,300.157 8.44%
Class A P.O. Box 4054
Concord, CA 94524-4054
Equity Index Fund- NBD Bank TTEE FBO 532,989.568 6.38%
Class A Reilly Industries, Inc. 401(k)
Deferral Savings Plan U/A DTD
07/24/87
107 N. Cross, Suite 2092
Wheaton, IL 60187
NBD TTEE 752,287.146 9.01%
American Axle & Mfg., Inc.
Personal S/P Hourly Rate
Associates
900 Tower Drive
Troy, MI 46098
First Chicago NBD TTEE 533,937.118 6.39%
Honigman Miller Shwartz & Cohn
Income Deferral Plan and
Profit Sharing Plan
C/P Putnam Investments
P.O. Box 9740
Providence, RI 02940-9740
Corelink Financial, Inc. 2,649,238.004 31.77%
P.O. Box 4054
Concord, CA 94524-9740
Equity Index Fund- Donaldson, Lufkin & Jenrette 7,090.643 6.77%
Class B Securities Corp. Inc.
P.O. Box 2052
Jersey City, NJ 07303-2052
International Corelink Financial, Services 154,939.154 7.82%
Equity Fund- P.O. Box 4054
Class A Concord, CA 94524-4054
</TABLE>
-34-
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Fund Name and Address Shares Shares
- ---- ---------------- -------- -----------
<S> <C> <C> <C>
International Equity Corelink Financial, Inc. 9,115.116 6.32%
Fund-Class B FBD 28052652
P.O. Box 4054
Concord, CA 945424-4054
Intermediate Bond NBD Bank as TTEE 318,705.792 9.91%
Fund-Class A Reilly Industries Inc. 401 (k)
Deferred Savings Plan
U/A DTD 7/24/97 Active
Account
107 N. Cross St. Ste. 2092
Wheaton, IL 60187
FCNBD TTEE 561,088.929 26.72%
Barton Brands Employee Profit
Shrg & Retirement Plan & Trust
107 N. Cross Street
Suite 2092
Wheaton, IL 60187
Corelink Financial Service 620,577.961 19.30%
P.O. Box 4054
Concord, CA 94524-4054
Intermediate Bond Donaldson, Lufkin & Jenrette 16,304.103 59.38%
Fund-Class B Securities Corp. Inc.
P.O. Box 2052
Jersey City, NJ 07303-9998
Corelink Financial Services 6,586.473 23.99%
P.O. Box 4054
Concord, CA 94524-4054
Bond Fund-Class A First Chicago NBD TTEE 620,071.693 6.99%
Honigman Miller Shwartz & Cohn
Profit Sharing Plan
C/P Putnam Investments
P.O. Box 9740
Providence, RI 02940-9740
Corelink Financial Services 592,631.907 6.68%
P.O. Box 4054
Concord, CA 94524-4054
Bond Fund-Class B Donaldson, Lufkin & Jenrette 22,687.196 9.54%
Securities Corp. Inc.
P.O. Box 2052
Jersey City, NJ 07303-9998
</TABLE>
-35-
<PAGE>
<TABLE>
<CAPTION> Percentage of
Number of Outstanding
Fund Name and Address Shares Shares
- ---- ----------------- ----------- -------------
<S> <C> <C> <C>
Short Bond Fund- Donaldson, Lufkin & Jenrette 22,280,314 9.07%
Class A Securities Corp. Inc.
P.O. Box 2052
Jersey City, NJ 07303-9998
Robert W. Baird & Co., Inc. 19,924.138 8.11%
777 East Wisconsin Avenue
Milwaukee, WI 53202-5391
FCNBD As Custodian 60,797.035 24.74%
LMG Family Doctors S.O. P/S
V/A DTD 10/01/91 Active Account
107 N. Cross Street, Suite 2092
Wheaton, IL. 60187-5317
FCNBD TTEE 37,696.713 15.34%
FBO Active Tool & Manufacturing
Money Purchase Pension Plan
Active Account
32901 Grahot
Roseville, MI 48066
Richard L. Foersterling 19,104.335 7.77%
1256 Penniman
Plymouth, MI 48170
Short Bond Fund- Donaldson, Lufkin & Jenrette 14,530.413 91.23%
Class B Securities Corp. Inc.
P.O. Box 2052
Jersey City, NJ 07303-9998
Multi Sector Bond First Chicago As Trustee 81,390.872 8.50%
Fund- Class A FBO Soft Sheen Products Inc.
Retirement and Incentive Savings
Trust
U/A DTD 8/1/96
107 N. Cross
Suite 2092
Wheaton, IL 60187
First Chicago As TTEE 91,609.284 9.56%
McDonough Assoc.
218 E. Wesley Street
Suite 2030
Wheaton, IL 60187-5323
Corelink Financial, Inc. 137,989.879 14.41%
P.O. Box 4054
Concord, CA 94524-4054
</TABLE>
-36-
<PAGE>
<TABLE>
<CAPTION> Percentage of
Number of Outstanding
Fund Name and Address Shares Shares
- ---- ---------------- ---------- -------------
<S> <C> <C> <C>
First Chicago 76,648.420 8.00%
Brambles USA Inc. Pro & Sal Plan
DTD 7/1/96
107 N. Cross
Suite 2092
Wheaton, IL 60187
Multi Sector Bond Donaldson, Lufkin & Jenrette 24,033.357 44.72%
Fund-Class B Securities Corp. Inc.
P.O. Box 2052
Jersey City, NJ 07399
International Bond Employees Retirement Plan of 3,619,112.233 45.20%
Fund-Class I NBD BanCorp
Trust Administration
611 Woodward Avenue
Detroit, MI 48232
International Bond Donaldson, Lufkin & Jenrette 3,513.662 32.57%
Fund-Class B Securities Corp. Inc.
P.O. Box 2052
Jersey City, NJ 07303-9998
High Yield Bond Donaldson, Lufkin & Jenrette 3,490.623 66.82%
Fund - Class A Securities Corp. Inc.
High Yield Bond Donaldson, Lufkin & Jenrette 3,045.769 99.97%
Fund - Class B P.O. Box 2052
Jersey City, NJ 07303-9998
High Yield Bond Employees Retirement Plan of 1,574,491.176 36.89%
Fund - Class I NBD Bancorp
Trust Administration
611 Woodward Ave.
Detroit, MI 48232
Pegasus Managed Assets Balanced 1,407,777.130 32.98%
Fund
NBD Bank
Trust Administration
611 Woodward Ave.
Detroit, MI 48232
Municipal Bond Donaldson, Lufkin & Jenrette 644,964.120 24.32%
Fund-Class A Securities Corp. Inc.
One Pershing Plaza
Jersey City, NJ 07303-9998
Municipal Bond Donaldson, Lufkin & Jenrette 43,030.926 48.89%
Fund-Class B Securities Corp. Inc.
One Pershing Plaza
Jersey City, NJ 07303-9998
</TABLE>
-37-
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Fund Name and Address Shares Shares
- ---- ---------------- ------------ -------------
<S> <C> <C> <C>
Intermediate Municipal Donaldson, Lufkin & Jenrette 188,664.820 12.28%
Bond Fund- Securities Corp. Inc.
Class A P.O. Box 2052
Jersey City, NJ 07399
Leonard Nieder & 77,231.515 5.02%
Mary Nieder JT TEN
6405 N. Kilbourn Ave
Lincolnwood, Il. 60646-3434
Intermediate Donaldson, Lufkin & Jenrette 31,986.264 56.05%
Municipal Bond Securities Corp. Inc.
Fund-Class B P.O. Box 2052
Jersey City, NJ 07303
Michigan James J. Donahey 107,062.962 6.27%
Municipal Bond Pat J. Donahey JT TEN
Fund-Class A 421 Highland
Ann Arbor, MI 48104
Michigan Donaldson, Lufkin & Jenrette 38,282.526 76.43%
Municipal Bond Securities Corp. Inc.
Fund-Class B P.O. Box 2052
Jersey City, NJ 07303-9998
Money Market Corelink Financial Services 222,022.310 97.75%
Fund- P.O. Box 4054
Class B Concord, CA 94524-4054
Money Market First National Bank of Chicago 86,067,504.040 6.65%
Fund- Corporate Trust Administration
Class I 1 F&B Playa
Suite 0216
Chicago, Il. 60670-0001
First Chicago NBD TTEE 154,178,470.480 11.92%
First Chicago NBD Svgs & Invsmt
Plan
c/o Putnam Investments
P.O. Box 9740
Providence, RI 02940-9740
</TABLE>
As of November 7, 1997, Trussal & Co., a nominee of NBD's Trust
Division, 900 Tower Drive, 10th Floor, Troy, Michigan 48098, held of record
17.04%, 16.40%, 46.84%, 62.80%, 30.28%, 77.20%, 70.03%, 76.50%, 61.91%, 72.18%,
69.54%, 94.18%, 71.14%, 94.55%, 25.12%, 69.31% and 33.45%, respectively, of the
outstanding shares of the Managed Assets Balanced, Managed Assets Growth,
Growth, Mid-Cap Opportunity, Small-Cap Opportunity,
-38-
<PAGE>
Intrinsic Value, Growth and Value, Equity Index, International Equity,
Intermediate Bond, Bond, Short Bond, International Bond, High Yield Bond,
Municipal Bond, Michigan Municipal Bond and Money Market Funds, respectively. As
of November 7, 1997, Eagle & Co., a nominee of American National Bank and Trust
Company, 1 North LaSalle Street, 3rd Floor, Chicago, Illinois 60602, held of
record 91.31%, 44.98%, 58.23%, 31.00%, 7.88%, 89.36%, 16.52% 17.87%, 21.19%,
65.43% and 89.07% respectively, of the outstanding shares of the Equity Income,
Growth, Small-Cap Opportunity, International Equity, Intrinsic Value, Multi
Sector Bond, Bond, Intermediate Bond, Intermediate Bond, Municipal Bond and
Intermediate Municipal Bond Funds, respectively.
When issued for payment as described in the Funds' Prospectus and this
Additional Statement, shares of the Funds will be fully paid and non-assessable
by the Trust.
The Declaration of Trust provides that the Trustees, officers,
employees and agents of the Trust will not be liable to the Trust or to a
shareholder, nor will any such person be liable to any third party in connection
with the affairs of the Trust, except as such liability may arise from his or
its own bad faith, willful misfeasance, gross negligence, or reckless disregard
of duties. It also provides that all third parties shall look solely to the
Trust property for satisfaction of claims arising in connection with the affairs
of the Trust. With the exceptions stated, the Declaration of Trust provides that
a Trustee, officer, employee or agent is entitled to be indemnified against all
liability in connection with the affairs of the Trust.
ADDITIONAL INFORMATION CONCERNING TAXES
Taxes In General
- ----------------
The following summarizes certain additional tax considerations
generally affecting the Funds and their shareholders that are not described in
the Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Funds or their shareholders, and the discussion here and in the
Prospectus is not intended as a substitute for careful tax planning and is based
on tax laws and regulations which are in effect on the date hereof; such laws
and regulations may be changed by legislative or administrative action.
Investors are advised to consult their tax advisers with specific reference to
their own tax situations.
Each Fund is treated as a separate corporate entity under the Code and
intends to qualify as a regulated investment company. As a regulated investment
company, each Fund is exempt from Federal income tax on its net investment
income and realized capital gains which it distributes to shareholders, provided
that it distributes an amount equal to at least the sum of (a) 90% of its
investment company taxable income (net investment income and the excess of net
short-term capital gain over net long-term capital loss, if any, for the year)
and (b) 90% of its net tax-exempt interest income, if any, for the year (the
"Distribution Requirement") and satisfies certain other requirements of the Code
that are described below. Distributions of investment company taxable income and
net tax-exempt interest income made
-39-
<PAGE>
during taxable year or, under specified circumstances, within twelve months
after the close of the taxable year will satisfy the Distribution Requirement.
In addition to satisfaction of the Distribution Requirement, each Fund
must satisfy certain requirements with respect to the source of its income for a
taxable year. At least 90% of the gross income of each Fund must be derived from
dividends, interest, payments with respect to securities loans, gains from the
sale or other disposition of stocks, securities or foreign currencies, and other
income (including but not limited to gains from options, futures, or forward
contracts) derived with respect to the Fund's business of investing in such
stock, securities or currencies. The Treasury Department may by regulation
exclude from qualifying income foreign currency gains which are not directly
related to the Fund's principal business of investing in stock or securities, or
options and futures with respect to stock or securities. Any income derived by a
Fund from a partnership or trust is treated as derived with respect to the
Fund's business of investing in stock, securities or currencies only to the
extent that such income is attributable to items of income which would have been
qualifying income if realized by the Fund in the same manner as by the
partnership or trust.
Another requirement for qualification as a regulated investment
company under the Code is that less than 30% of a Fund's gross income for a
taxable year must be derived from gains realized on the sale or other
disposition of the following investments held for less than three months: (1)
stock and securities (as defined in Section 2(a)(36) of the 1940 Act); (2)
options, futures and forward contracts other than those on foreign currencies;
and (3) foreign currencies (and options, futures and forward contracts on
foreign currencies) that are not directly related to a Fund's principal business
of investing in stock and securities (and options and futures with respect to
stocks and securities). Interest (including original issue discount and accrued
market discount) received by a Fund upon maturity or disposition of a security
held for less than three months will not be treated as gross income derived from
the sale or other disposition of such security within the meaning of this
requirement. However, any other income which is attributable to realized market
appreciation will be treated as gross income from the sale or other disposition
of securities for this purpose.
Each Fund will designate any distribution of long term capital gains
as a capital gain dividend in a written notice mailed to shareholders within 60
days after the close of the Fund's taxable year. Upon the sale or exchange of
Fund shares, if a shareholder has not held such shares for at least six months,
any loss on the sale or exchange of those shares will be treated as long term
capital loss to the extent of the capital gain dividends received with respect
to the shares.
-40-
<PAGE>
A 4% nondeductible excise tax is imposed on regulated investment
companies that fail to currently distribute an amount equal to specified
percentages of their ordinary taxable income and capital gain net income (excess
of capital gains over capital losses). Each Fund intends to make sufficient
distributions or deemed distributions of its ordinary taxable income and any
capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax.
If for any taxable year a Fund does not qualify for the special
federal income tax treatment afforded regulated investment companies, all of its
taxable income will be subject to federal income tax at regular corporate rates
(without any deduction for distributions to its shareholders). In such event,
dividend distributions (whether or not derived from interest on Municipal
Obligations) would be taxable as ordinary income to shareholders to the extent
of the Fund's current and accumulated earnings and profits and would be eligible
for the dividends received deduction for corporations.
Each Fund may be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends or gross proceeds realized upon sale
paid to shareholders who have failed to provide a correct tax identification
number in the manner required, who are subject to withholding by the Internal
Revenue Service for failure properly to include on their return payments of
taxable interest or dividends, or who have failed to certify to the Fund that
they are not subject to backup withholding when required to do so or that they
are "exempt recipients."
As of December 31, 1996, the following Funds had capital loss
carryforwards and related expiration dates as follows:
<TABLE>
<CAPTION>
Fund 2002 2003 2004 Total
- -------- ---- ---- ---- -----
<S> <C> <C> <C> <C>
International Equity Fund $ -- $ 97,147 $1,083,369 $ 1,180,516
Intermediate Bond Fund 3,916,956 2,190,497 168,406 6,275,859
Bond Fund 15,659,343 1,041,792 -- 16,701,135
Multi Sector Bond Fund -- -- 30,819 30,819
Municipal Bond Fund 96,878 333,098 1,928,844 2,358,820
Michigan Municipal Bond Fund 29,400 -- 94,571 123,971
</TABLE>
Depending upon the extent of the Funds' activities in states and
localities in which their offices are maintained, in which their agents or
independent contractors are located or in which they are otherwise deemed to be
conducting business, the Funds may be subject to the tax laws of such states or
localities. In addition, in those states and localities which have income tax
laws, the treatment of the Funds and their shareholders under such laws may
differ from their treatment under federal income tax laws.
-41-
<PAGE>
As described above and in the Prospectus, the Municipal Bond Funds are
designed to provide investors with current tax-exempt interest income. The
Funds are not intended to constitute a balanced investment program and are not
designed for investors seeking capital appreciation or maximum tax-exempt income
irrespective of fluctuations in principal. Shares of the Funds would not be
suitable for tax-exempt institutions and may not be suitable for retirement
plans qualified under Section 401 of the Code, H.R. 10 plans and IRAs since such
plans and accounts are generally tax-exempt and, therefore, would not only fail
to gain any additional benefit from the Fund's dividends being tax-exempt, but
such dividends would be ultimately taxable to the beneficiaries when distributed
to them. In addition, the Funds may not be appropriate investments for entities
which are "substantial users" of facilities financed by private activity bonds
or "related persons" thereof. "Substantial user" is defined under U.S. Treasury
Regulations to include a non-exempt person who regularly uses a part of such
facilities in his trade or business and (a) whose gross revenues derived with
respect to the facilities financed by the issuance of bonds are more than 5% of
the total revenues derived by all users of such facilities, (b) who occupies
more than 5% of the usable area of such facilities, or (c) for whom such
facilities or a part thereof were specifically constructed, reconstructed or
acquired. "Related persons" include certain related natural persons, affiliated
corporations, a partnership and its partners and an S corporation and its
shareholders.
Each Municipal Bond Fund's policy is to pay each year as federal
exempt-interest dividends substantially all of its Municipal Obligations
interest income net of certain deductions. In order for the Fund to pay exempt-
interest dividends with respect to any taxable year, at the close of each
quarter of its taxable year at least 50% of the aggregate value of the Fund's
assets must consist of exempt-interest obligations. After the close of its
taxable year, the Fund will notify its shareholders of the portion of the
dividends paid by it which constitutes an exempt-interest dividend with respect
to such taxable year. However, the aggregate amount of dividends so designated
by the Fund cannot exceed the excess of the amount of interest exempt from tax
under Section 103 of the Code received by the Fund during the taxable year over
any amounts disallowed as deductions under Sections 265 and 171(a)(2) of the
Code. The percentage of total dividends paid by the Fund with respect to any
taxable year which qualify as federal exempt-interest dividends will be the same
for all shareholders receiving dividends for such year.
A percentage of the interest on indebtedness incurred by a shareholder
to purchase or carry a Municipal Bond Fund's shares, equal to the percentage of
the total non-capital gain dividends distributed during the shareholder's
taxable year that are exempt-interest dividends, is not deductible for federal
income tax purposes.
Michigan Taxes
- --------------
As stated in the Prospectuses, dividends paid by a Fund that are
derived from interest attributable to tax-exempt Michigan Municipal Obligations
will be exempt from
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<PAGE>
Michigan income tax, Michigan intangibles tax and Michigan single business tax.
Conversely, to the extent that a Fund's dividends are derived from interest on
obligations other than Michigan Municipal Obligations or certain U.S. Government
obligations (or are derived from short-term or long-term gains), such dividends
will be subject to Michigan income tax, Michigan intangibles tax and Michigan
single business tax, even though the dividends may be exempt for federal income
tax purposes.
In particular, gross interest income and dividends derived from
obligations or securities of the State of Michigan and its political
subdivisions, exempt from federal income tax, are exempt from Michigan income
tax under Act No. 281, Public Acts of Michigan, 1967, as amended ("Michigan
Income Tax Act"), from Michigan intangibles tax under Act No. 301, Public Acts
of Michigan, 1939, as amended ("Michigan Intangibles Tax Act") and from Michigan
single business tax under Act. No. 228, Public Acts of Michigan, 1975, as
amended ("Michigan Single Business Tax Act"). The Michigan Income Tax Act
levies a flat rate income tax on individuals, estates and trusts. The Michigan
Intangibles Tax Act levies a tax on the ownership of intangible personal
property of individuals, estates, trusts and certain corporations. The Single
Business Tax Act levies a tax of 2.30% upon the "adjusted tax base" of most
individuals, financial institutions, partnerships, joint ventures, corporations,
estates and trusts engaged in "business activity" as defined in the Act.
The transfer of Fund shares by a shareholder is subject to Michigan
taxes measured by gain on the sale, payment or other disposition thereof. In
addition, the transfer of Fund shares by a shareholder may be subject to
Michigan estate or inheritance tax under Act No. 188, Public Acts of Michigan,
1899, as amended ("Michigan Estate Tax").
The foregoing is only a summary of some of the important Michigan
state tax considerations generally affecting the Michigan Municipal Bond Fund
and its shareholders. No attempt has been made to present a detailed
explanation of the Michigan state tax treatment of the Fund or its shareholders,
and this discussion is not intended as a substitute for careful planning.
Accordingly, potential investors in this Fund should consult their tax advisers
with respect to the application of such taxes to the receipt of Fund dividends
and as to their own Michigan state tax situation, in general.
MANAGEMENT
Trustees and Officers of the Trust
- ----------------------------------
The Trustees and executive officers of the Trust, their ages and their
principal occupations for the last five years are set forth below. Each Trustee
has an address at Pegasus Funds, c/o NBD Bank, 900 Tower Drive, Troy, Michigan
48098. Each Trustee also serves as a trustee of Pegasus Variable Annuity Fund,
a registered investment Company advised by the Investment Adviser.
-43-
<PAGE>
Nicholas J. De Grazia, Trustee
Business Consultant (1997); Consultant, Lionel L.L.C. (1995-1996); President,
Chief Operating Officer and Director, Lionel Trains, Inc. (1990-1995); Vice
President-Finance and Treasurer, University of Detroit (1981-1990); President
(1981-1990) and Director (1986-1995), Polymer Technologies, Inc.; President,
Florence Development Company (1987-1990); Chairman (since 1994) and Director
(1992-1995), Central Macomb County Chamber of Commerce; Vice Chairman, Michigan
Higher Education Facilities Authority (since 1991); Trustee, Pegasus Variable
Annuity Fund. He is 54 years old.
John P. Gould, Trustee, Chairman of the Board
Executive Vice President of Lexecon Inc. (since 1995); Steven G. Rothmeier
Professor (since January, 1996); Distinguished Service Professor of Economics of
the University of Chicago Graduate School of Business (since 1984); Dean of the
University of Chicago Graduate School of Business (1983-1993); Member of
Economic Club of Chicago and Commercial Club of Chicago; Director of Harbor
Capital Advisors and Dimensional Fund Advisors; Trustee, Pegasus Variable
Annuity Fund. He is 58 years old.
Marilyn McCoy, Trustee
Vice President of Administration and Planning of Northwestern University (since
1985); Director of Planning and Policy Development for the University of
Colorado (1981-1985); Member of the Board of Directors of Evanston Hospital,
Mather Foundation and Metropolitan Family Services; Member of Economic Club of
Chicago and Chicago Network; Trustee, Pegasus Variable Annuity Fund. She is 49
years old.
Julius L. Pallone, Trustee
President, J.L. Pallone Associates, Consultants (since 1994); Chairman of the
Board (1974-1993), Maccabees Life Insurance Company; President and Chief
Executive Officer, Royal Financial Services (1991-1993); Director, American
Council of Life Insurance of Washington, D.C. (life insurance industry
association) (1988-1993); Director, Crowley, Milner and Company (department
store) (since 1988); Trustee, Lawrence Technological University (since
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<PAGE>
1982); Director, Oakland Commerce Bank (since 1984) and Michigan Opera Theater
(since 1981); Trustee, Pegasus Variable Annuity Fund. He is 67 years old.
*Donald G. Sutherland, Trustee and President
Partner of the law firm Ice, Miller, Donadio & Ryan, Indianapolis, Indiana;
Trustee, Pegasus Variable Annuity Fund. He is 68 years old.
Donald L. Tuttle, Trustee
Vice President (since 1995), Senior Vice President (1992-1995), Association for
Investment Management and Research; Professor of Finance, Indiana University
(1970-1991); Vice President, Trust & Investment Advisers, Inc. (1990-1991);
Director, Federal Home Loan Bank of Indianapolis (1981-1985); Trustee, Pegasus
Variable Annuity Fund. He is 63 years old.
Alaina Metz, Vice President
An employee of the Distributor since June 1995. Prior to joining the
Distributor Ms. Metz was a supervisor at Alliance Capital Management L.P. in New
York. She is 30 years old and her address is 3435 Stelzer Road, Columbus, Ohio
43219-3035.
D'Ray Moore, Treasurer
An employee of the Distributor. She is 38 years old and her address is 3435
Stelzer Road, Columbus, Ohio 43219-3035.
W. Bruce McConnel, III, Secretary
Partner of the law firm Drinker Biddle & Reath LLP, Philadelphia, Pennsylvania.
He is 54 years old, and his address is 1345 Chestnut Street, Philadelphia,
Pennsylvania 19107
* Denotes Interested Trustee
____________________________
-45-
<PAGE>
For so long as the plan described in the section captioned
"Distribution and Shareholder Services Plans" remains in effect, the Trustees of
the Trust who are not "interested persons" of the Trust, as defined in the 1940
Act, will be selected and nominated by the Trustees who are not "interested
persons" of the Trust.
Each Trustee receives from the Trust and Pegasus Variable Annuity Fund
a total annual fee of $17,000 and a fee of $2,000 for each Board of Trustees
meeting attended. The Chairman is entitled to additional compensation of $4,250
per year for his services to the Trusts in that capacity. These fees are
allocated among the investment portfolios of the Trust and Pegasus Variable
Annuity Fund based on their relative net assets. All Trustees are reimbursed
for out of pocket expenses incurred in connection with attendance at meetings.
Drinker Biddle & Reath LLP, of which Mr. McConnel is a partner, receives legal
fees as counsel to the Trust.
The following table summarizes the compensation for each of the
Trustees for the Trust's fiscal year ended December 31, 1996:
-46-
<PAGE>
<TABLE>
<CAPTION>
(3)
Total
Compensation
(2) From Trust and
Aggregate Fund Complex**
(1) Compensation Paid to Board
Name of Board Member from Trust* Member
-------------------- ----------- ------
<S> <C> <C>
Will M. Caldwell, Trustee +++ $31,000 $31,000(2)+
Nicholas J. DeGrazia, Trustee $24,750 $24,750(2)+
John P. Gould, Trustee and $25,813 $41,313(4)+
Chairman of the Board
Earl I. Heenan, Jr., +++ $26,625 $26,625(2)+
Trustee
Marilyn McCoy, Trustee $22,750 $37,250(4)+
Julius L. Pallone, Trustee ++ $31,000 $31,000(2)+
Donald G. Sutherland, ++ $35,000 $35,000(2)+
Trustee and President
Donald L. Tuttle, Trustee ++ $29,000 $29,000(2)+
Eugene C. Yehle, Trustee +++ $18,500 $18,500(2)+
</TABLE>
______________________
* Amount does not include reimbursed expenses for attending Board meetings.
** The Fund Complex for the fiscal year ended December 31, 1996, consisted of
the Trust, Pegasus Variable Annuity Fund, Prairie Funds, Prairie Institutional
Funds, Prairie Intermediate Bond Fund and Prairie Municipal Bond Fund, Inc.
+ Total number of investment companies in the Fund Complex from which the
Trustee received compensation for serving as a trustee.
+ Deferred compensation in the amounts of $7,313, $24,750, $31,000 and $35,000
accrued during Pegasus Funds' fiscal year ended December 31, 1996 for Messrs.
Heenan, DeGrazia, Pallone and Sutherland, respectively.
+++ Messrs. Heenan and Yehle resigned as Trustees of the Trust and the Pegasus
Variable Annuity Fund as of July 13, 1996. Mr. Caldwell resigned as Trustee of
the Trust and Pegasus Variable Annuity Fund as of December 31, 1997. In
addition, Mr. Heenan had been the Chairman of the Board and President and Mr.
Yehle had been the Treasurer.
______________________
The Trustees and Officers of the Trust, as a group, owned less than
1% of the outstanding shares of each Fund as of November 7, 1997.
Investment Adviser
- ------------------
Information about the Investment Adviser and its duties and
compensation as investment adviser is contained in the Prospectus. In addition,
the Investment Adviser is entitled to 4/10ths of the gross income earned by a
Fund on each loan of securities (excluding capital gains and losses, if any).
The Investment Adviser has informed the Trust's Board of
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<PAGE>
Trustees that since the inception of the Trust neither it nor any of its
affiliates has engaged in and received compensation for any transactions
involving lending of portfolio securities. Furthermore, neither the Investment
Adviser nor any of its affiliates will do so unless permitted by the SEC or SEC
staff.
The Investment Adviser's own investment portfolios may include bank
certificates of deposit, bankers' acceptances, corporate debt obligations,
equity securities and other investments any of which may also be purchased by
the Trust. Joint purchase of investments for the Trust and for the Investment
Adviser's own investment portfolios will not be made. The Investment Adviser's
and its affiliates' respective commercial banking departments may have deposit,
loan and other commercial banking relationships with issuers of securities
purchased by the Trust, including outstanding loans to such issuers which may be
repaid in whole or in part with the proceeds of securities purchased by the
Trust.
From the date of the Reorganization of each Fund and the Money Market
Fund, or September 23, 1996 if the Fund was not involved in a Reorganization, or
December 17, 1996 (commencement of investment operations) in the case of the
Managed Assets Growth Fund, through December 31, 1996, the Trust paid the
Investment Adviser fees for advisory services on behalf of each Fund and the
Money Market Fund, and the Investment Adviser reimbursed each Fund for certain
operating expenses, as follows:
<TABLE>
<CAPTION>
Advisory Fees Paid Expenses Reimbursed
------------------ -------------------
<S> <C> <C>
Managed Assets Conservative Fund $ 189,293 $ 38,616
Managed Assets Balanced Fund $ 294,755 $ 56,597
Managed Assets Growth Fund $ 357 $ 280
Equity Income Fund $ 794,924 $ 66,325
Growth Fund $1,423,281 $ 67,208
Mid-Cap Opportunity Fund $1,467,224 --
Small-Cap Opportunity Fund $ 405,651 $ 56,427
Intrinsic Value Fund $ 691,537 --
Growth and Value Fund $1,531,967 --
Equity Index Fund $ 280,393 $ 26,973
International Equity Fund $1,206,664 $ 26,973
Intermediate Bond Fund $ 675,868 $ 49,186
Bond Fund $1,142,259 $ 49,503
Short Bond Fund $ 200,474 $ 29,453
Multi Sector Bond Fund $ 282,194 $ 16,303
International Bond Fund $ 160,317 $121,072
Municipal Bond Fund $ 640,639 $108,706
Intermediate Municipal Bond Fund $ 784,244 $ 69,264
Michigan Municipal Bond Fund $ 77,238 $ 11,150
Money Market Fund $2,613,801 $180,817
</TABLE>
For the period from January 1, 1996 through the date of each Fund's
Reorganization, or September 23, 1996 in the case of those Funds not involved in
a Reorganization, and for the fiscal years or periods ended December 31, 1995
and 1994, the Trust paid NBD fees for advisory and administrative services under
the previous investment advisory agreement with NBD on behalf of the following
funds:
-48-
<PAGE>
<TABLE>
<CAPTION>
January 1, 1996
through the
Reorganization/ December 31, December 31,
September 23, 1996 1995 1994
------------------ ------------ ------------
<S> <C> <C> <C>
Managed Assets Balanced Fund $ 521,060 $ 570,525 $ 260,903
Mid-Cap Opportunity Fund $3,397,900 $4,490,930 $3,670,337
Intrinsic Value Fund $1,382,039 $1,817,833 $1,615,375
Growth and Value Fund $3,718,231 $4,951,664 $4,032,266
Equity Index Fund $ 444,727 $ 411,792 $ 329,438
International Equity Fund $ 594,989 $ 529,312 $ 20,568
Intermediate Bond Fund $1,539,059 $2,650,418 $2,718,286
Bond Fund $2,021,339 $3,121,267 $3,200,907
Short Bond Fund $ 708,692 $ 650,298 $ 112,091
Michigan Municipal Bond Fund $ 231,258 $ 327,020 $ 286,599
Money Market Fund $5,373,325 $7,225,557 $5,926,507
</TABLE>
For the period from January 1, 1996 through September 23, 1996, and
for the fiscal years ended December 31, 1995 and 1994, NBD reimbursed the Trust
for certain expenses on behalf of the Michigan Municipal Bond Fund as follows:
<TABLE>
<CAPTION>
January 1, 1996
through the
Reorganization/ December 31, December 31,
September 23, 1996 1995 1994
------------------ --------- ------------
<S> <C> <C> <C>
Michigan Municipal Bond Fund $34,535 $119,481 $120,000
</TABLE>
For the period from January 1, 1996 through September 23, 1996, and for the
fiscal years ended December 31, 1995 and 1994, NBD voluntarily waived advisory
fees on behalf of the Michigan Municipal Bond Fund as follows:
<TABLE>
<CAPTION>
January 1, 1996
through the December 31, December 31,
September 23, 1996 1995 1994
------------------ ------------ ------------
<S> <C> <C> <C>
Michigan Municipal Bond Fund N/A N/A $108,612
</TABLE>
Prior to the Managed Assets Conservative, Equity Income, Growth,
Small-Cap Opportunity, Multi Sector Bond, International Bond, Municipal Bond and
Intermediate Municipal Bond Funds' current advisory agreement, FCNIMCO provided
advisory services to such Funds. For the period from January 1, 1996 through the
date of each Fund's Reorganization, and for the fiscal period from January 17,
1995 (effective date of the following Funds' investment advisory agreement with
FCNIMCO) through December 31, 1995, the Funds paid FCNIMCO fees for advisory
services and FCNIMCO voluntarily waived advisory fees as follows:
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<PAGE>
<TABLE>
<CAPTION>
Advisory Advisory
Fees Paid Fees Paid
Annual Fee January 1, January 17,
Payable As a % 1996 Advisory Fees 1995 through Advisory Fees
of Average through the Waived December 31, Waived
Daily Net Assets Reorganization 1996 1995 1995
---------------- -------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Managed Assets Conservative Fund .65% $ 222,625 $ 95,432 $ 142,517 $178,658
Equity Income Fund .50% $ 748,110 $233,127 $ 829,039 $277,716
Growth Fund .65% $1,001,270 $245,346 $1,399,749 $314,740
Small-Cap Opportunity Fund .70% $ 346,745 $147,469 $ 318,920 $168,733
Multi Sector Bond Fund .40% $ 538,380 $183,139 $ 426,638 $185,678
International Bond Fund .70% $ 58,049 $160,438 $ 10,617 $ 68,517
Municipal Bond Fund .40% $ 460,817 $273,829 $ 565,821 $304,953
Intermediate Municipal Bond Fund .40% $ 776,919 $267,210 $ 938,654 $429,888
</TABLE>
Prior to January 17, 1995, FNBC provided management services to the
Managed Assets Conservative, Multi Sector Bond, Municipal Bond and Intermediate
Municipal Bond Funds pursuant to a management agreement (the "Prior Management
Agreement"). Under the terms of the Prior Management Agreement, the Funds agreed
to pay FNBC a monthly fee at the annual rate of .65%, .60%, .40% and .40% of the
value of each respective Fund's average daily net assets. For the fiscal year
ended January 31, 1994 and the period from February 1, 1994 through January 17,
1995, no fees were paid by the Funds to FNBC pursuant to various undertakings by
FNBC.
Investment decisions for the Trust and other fiduciary accounts are
made by FCNIMCO solely from the standpoint of the independent interest of the
Trust and such other fiduciary accounts. FCNIMCO performs independent analyses
of publicly available information, the results of which are not made publicly
available. In making investment decisions for the Trust, FCNIMCO does not obtain
information from any other division or department of the Investment Adviser or
otherwise, which is not publicly available. FCNIMCO executes transactions for
the Trust only with unaffiliated dealers but such dealers may be customers of
the Investment Adviser's affiliates. The Investment Adviser may make bulk
purchases of securities for the Trust and for other customer accounts (but not
for its own investment portfolio), in which case the Trust will be charged a pro
rata share of the transaction costs incurred in making the bulk purchase. See
"Investment Objectives, Policies and Risk Factors - Portfolio Transactions"
above.
FCNIMCO has agreed as Investment Adviser that it will reimburse the
Trust such portions of its fees as may be required to satisfy any expense
limitations imposed by state securities laws or other applicable laws.
Under the terms of the Advisory Agreement, the Investment Adviser is
obligated to manage the investment of each Fund's and the Money Market Fund's
assets in accordance with applicable laws and regulations, including, to the
extent applicable, the regulations and rulings of the various regulatory
governmental bank agencies.
-50-
<PAGE>
The Investment Adviser will not accept Trust shares as collateral for
a loan which is for the purpose of purchasing Trust shares, and will not make
loans to the Trust. Inadvertent overdrafts of the Trust's account with the
Custodian occasioned by clerical error or by failure of a shareholder to provide
available funds in connection with the purchase of shares will not be deemed to
be the making of a loan to the Trust by the Investment Adviser.
Under the Advisory Agreement, the Investment Adviser is not liable for
any error of judgment or mistake of law or for any loss suffered by the Trust in
connection with the performance of such Agreement, except a loss resulting from
a breach of fiduciary duty with respect to the receipt of compensation for
services or a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of the Investment Adviser in the performance of its
duties or from its reckless disregard of its duties and obligations under the
Agreement.
FCNIMCO is authorized by the Advisory Agreement to employ a sub-
adviser(s) to assist it in the performance of its duties under the Advisory
Agreement. Any such sub-adviser(s) are to be paid by FCNIMCO, not by the Funds,
and FCNIMCO shall be fully responsible to the Trust for the acts and omissions
of any such sub-advisers. FCNIMCO has entered into a sub-advisory agreement with
Federated on behalf of the High Yield Bond Fund.
The Sub-Adviser
- ---------------
Information about the Sub-Adviser and its duties and compensation is
contained in the Prospectus. Federated, under the supervision of FCNIMCO, is
obligated to manage the investment of the High Yield Bond Fund's assets in
accordance with applicable laws and regulations, including, to the extent
applicable, the regulations and rulings of the various regulatory governmental
bank agencies.
Under the Sub-Advisory Agreement, the Sub-Adviser is not liable for
any error of judgment or mistake of law or for any loss suffered by the High
Yield Bond Fund in connection with the performance of the Sub-Advisory
Agreement, except a loss resulting from a breach of fiduciary duty with respect
to the receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Sub-Adviser in the
performance of its duties or from its reckless disregard of its duties and
obligations under the Sub-Advisory Agreement.
Administrators
- --------------
Pursuant to an Administration Agreement dated as of April 12, 1996
with the Trust, FCNIMCO and BISYS assist in all aspects of the Trust's
operations, other than providing investment advice, subject to the overall
authority of the Trust's Board in accordance with Massachusetts law. Under the
terms of the Administration Agreement,
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<PAGE>
FCNIMCO and BISYS are entitled jointly to a monthly administration fee at the
annual rate of .15% of each Fund's and the Money Market Funds average daily net
assets.
From the date of the Reorganization of each Fund and the Money Market
Fund, or September 23, 1996 if the Fund was not involved in a Reorganization, or
December 17, 1996 (commencement of investment operations) in the case of the
Managed Assets Growth Fund, through December 31, 1996, FCNIMCO received from the
Trust, as agent for the co-administrators, administration fees as follows:
<TABLE>
<CAPTION>
Fund Fee
- ---- ----------
<S> <C>
Managed Assets Conservative Fund $ 43,683
Managed Assets Balanced Fund $ 68,020
Managed Assets Growth Fund $ 82
Equity Income Fund $ 238,477
Growth Fund $ 382,992
Mid-Cap Opportunity Fund $ 366,806
Small-Cap Opportunity Fund $ 86,925
Intrinsic Value Fund $ 172,884
Growth and Value Fund $ 382,992
Equity Index Fund $ 420,590
International Equity Fund $ 226,250
Intermediate Bond Fund $ 34,354
Bond Fund $ 416,965
Short Bond Fund $ 85,917
Multi Sector Bond Fund $ 105,823
International Bond Fund $ 34,354
Municipal Bond Fund $ 233,974
Intermediate Municipal Bond Fund $ 294,091
Michigan Municipal Bond Fund $ 28,964
Money Market Fund $1,161,735
</TABLE>
Prior to January 17, 1995, the Dreyfus Corporation ("Dreyfus")
provided administrative services to the Managed Assets Conservative, Equity
Income, Growth, Small-Cap Opportunity, Multi Sector Bond, International Bond,
Municipal Bond and Intermediate Municipal Bond Funds pursuant to an
administration agreement between FNBC and Dreyfus. FNBC and not the Funds paid
Dreyfus for Dreyfus' services. On January 17, 1995, FCNIMCO began providing
administrative services to the Managed Assets Conservative, Equity Income,
Growth, Small-Cap Opportunity, Multi Sector Bond, International Bond, Municipal
Bond and Intermediate Municipal Bond Funds. Under the terms of this prior
administration agreement, FCNIMCO was entitled to a fee, paid monthly, at an
annual rate of .15% of each Fund's average daily net assets. For the period
January 17, 1995 through December 31, 1995, each of the Managed Assets
Conservative, Equity Income, Growth, Small-Cap Opportunity, Multi Sector Bond,
International Bond, Municipal Bond and Intermediate Municipal Bond Funds paid
FCNIMCO fees for administrative services, under the Funds' prior administration
agreement, as follows:
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<PAGE>
<TABLE>
<CAPTION>
Administration Administration
Fees Paid Fees Waived
-------------- --------------
<S> <C> <C>
Managed Assets Conservative Fund $ 70,857 $ 0
Equity Income Fund $332,027 $ 0
Growth Fund $395,652 $ 0
Small-Cap Opportunity Fund $104,497 $ 0
Multi Sector Bond Fund $229,619 $ 0
International Bond Fund $ 12,551 $4,407
Municipal Bond Fund $310,972 $ 0
Intermediate Municipal Bond Fund $475,635 $ 0
</TABLE>
The Trust has agreed that neither FCNIMCO nor BISYS will be liable for
any error of judgment or mistake of law or for any loss suffered by the Trust in
connection with the matters to which the agreement with FCNIMCO or BISYS
relates, except for a loss resulting from willful misfeasance, bad faith or
gross negligence on the part of FCNIMCO, or BISYS in the performance of their
obligations or from reckless disregard by any of them of their obligations and
duties under the Administration Agreement.
In addition, the Administration Agreement provides that if, in any
fiscal year, the aggregate expenses of a Fund exceed the expense limitation of
any state having jurisdiction over the Fund, FCNIMCO and BISYS will bear such
excess expense to the extent required by state law.
The aggregate of the fees payable to FCNIMCO and BISYS is not subject
to reduction as the value of the Fund's net assets increases.
Distribution and Shareholder Servicing Plans
- --------------------------------------------
As stated in the Prospectus, the Trust may enter into Servicing
Agreements with Service Agents which may include the Investment Adviser and its
affiliates. The Servicing Agreements provide that the Service Agents will render
shareholder administrative support services to their customers who are the
beneficial owners of Fund shares in consideration for the Funds' payment of up
to .25% (on an annualized basis) of the average daily net asset value of the
shares beneficially owned by such customers and held by the Service Agents and,
at the Trust's option, it may reimburse the Service Agents' out-of-pocket
expenses. Such services may include: (i) processing dividend and distribution
payments from a Fund; (ii) providing information periodically to customers
showing their share positions; (iii) arranging for bank wires; (iv) responding
to customer inquiries; (v) providing subaccounting with respect to shares
beneficially owned by customers or the information necessary for such
subaccounting; (vi) forwarding shareholder communications; (vii) processing
share exchange and redemption requests from customers; (viii) assisting
customers in changing dividend options, account designations and addresses; and
(ix) other similar services requested by the Trust. Banks acting as Service
Agents are prohibited from engaging in any activity primarily intended to
-53-
<PAGE>
result in the sale of Fund shares. However, Service Agents other than banks may
be requested to provide marketing assistance (e.g., forwarding sales literature
and advertising to their customers) in connection with the distribution of Fund
shares.
Rule 12b-1 (the "Rule") adopted by the Securities and Exchange
Commission under the 1940 Act provides, among other things, that an investment
company may bear expenses of distributing its shares only pursuant to a plan
adopted in accordance with the Rule. The Trust's Board of Trustees has adopted
such a plan (the "Plan") with respect to each Fund's Class B Shares, pursuant to
which each Fund pays the Distributor a fee of up to 0.75% of the average daily
net asset value attributable to such Shares for advertising, marketing and
distributing such Shares and for the provision of certain services to the
holders of such Shares. Under the Plan, the Distributor may make payments to
certain financial institutions, securities dealers and other financial industry
professionals (collectively, "Service Agents") in respect of these services. The
Board of Trustees believes that there is a reasonable likelihood that the Plan
will benefit each Fund and the holders of such Shares.
The Board of Trustees reviews, at least quarterly, a written report of
the amounts expended under the Plan and in connection with the Trust's
arrangements with Service Agents and the purposes for which the expenditures
were made. In addition, such arrangements are approved annually by a majority of
the Trustees, including a majority of the Trustees who are not "interested
persons" of the Trust as defined in the 1940 Act and have no direct or indirect
financial interest in such arrangements (the "Disinterested Trustees").
Any material amendment to the Plan and the Trust's arrangements with
Service Agents under the Shareholder Servicing Agreements must be approved by a
majority of the Board of Trustees (including a majority of the Disinterested
Trustees).
As stated in the Prospectus for the Funds, the Trust has implemented
the Servicing Plan described above with respect to Class A and Class B shares of
the Funds only and the Plan with respect to Class B shares of the Funds only.
The Trust will enter into shareholder servicing agreements with Service Agents
pursuant to which services to their customers who beneficially own Class A and
Class B shares of the Funds in consideration for the payment of up to .25% (on
an annualized basis) of the average daily net asset value of such shares. The
Trust has allocated the Servicing Fees which are attributable to the Class A and
Class B shares exclusively to such shares and the Distribution Fees which are
attributable to the Class B shares exclusively to such shares.
Distributor
- -----------
The shares of the Funds are offered on a continuous basis through
BISYS, which acts under the Distribution Agreement as Distributor for the Trust.
As stated in the Prospectus, the Trust will allocate distribution fees which are
attributable to the Class B shares in a Fund exclusively to such shares.
-54-
<PAGE>
The following table shows all sales loads, commissions and other
compensation received by BISYS directly or indirectly from each of the Funds,
and the Money Market Fund, during each Fund's fiscal year or period ended
December 31, 1996.
<TABLE>
<CAPTION>
Brokerage
Commis-
Net Under- sions in
writing Dis- Compensation connection Other
counts and on Redemption with Fund Compen-
Commissions/(1)/ and Repurchase/(2)/ Transactions sation/(3)/
----------- -------------- ------------ ------
<S> <C> <C> <C> <C>
Managed Assets Conservative Fund* $17,318 $ 6,913 $0 $31,043
Managed Assets Balanced Fund $ 3,351 $11,950 $0 $ 3,720
Managed Assets Growth Fund $ 1 $ -- $0 $ 4
Equity Income Fund* $ 5,450 $ 2,246 $0 $ 9,855
Growth Fund* $ 2,921 $ 21 $0 $ 5,631
Mid-Cap Opportunity Fund $ 3,191 $ 59 $0 $ 129
Small-Cap Opportunity Fund* $ 1,566 $ -- $0 $ 363
Intrinsic Value Fund $ 1,184 $ 1 $0 $ 147
Growth and Value Fund $ 1,981 $ 39 $0 $ 160
Equity Index Fund $ 535 $ -- $0 $ 102
International Equity Fund $ 4,109 $ 491 $0 $ 4,944
Intermediate Bond Fund $ 610 $ -- $0 $ 1,542
Bond Fund $ 1,349 $ 1,561 $0 $ 756
Short Bond Fund $ 52 $ -- $0 $ 51
Multi Sector Bond Fund* $ 294 $ 1,405 $0 $ 1,811
International Bond Fund* $ 29 $ -- $0 $ 82
Municipal Bond Fund* $ 2,307 $ -- $0 $ 3,531
Intermediate Municipal Bond Fund* $ 499 $ -- $0 $ 4,204
Michigan Municipal Bond Fund $ 721 $ -- $0 $ 118
Money Market Fund $ 0 $ -- $0 $ 1,274
</TABLE>
______________________
(1) Represents amounts received from front-end sales charge on A Shares.
(2) Represents amounts received from contingent deferred sales charges on B
Shares and certain redemptions of A Shares. The basis on which such sales
charges are paid is described in the Prospectus.
(3) Represents the payments made under the Shareholder Servicing Plans and the
Plan (see "Management -- Distribution and Shareholder Servicing Plans") and
retained by BISYS. In addition, BISYS received $1,825,233 in administration
fees.
* Includes front end sales charges, contingent deferred sales charges,
Shareholder Servicing fees and Distribution fees received by Concord
Financial Group, Inc. an indirect affiliate of BISYS and the distributor of
Prairie Funds, Prairie Intermediate Bond Fund and Prairie Municipal Bond
Fund, Inc.
Prior to August 26, 1996 (September 16, 1996 for the Money Market
Fund), the Funds' shares were offered on a continuous basis through First of
Michigan Corporation ("FoM") and Essex National Securities, Inc. ("Essex") as
co-distributors of the Trust. For the period January 1, 1996 through August 25,
1996 (September 15, 1996 for the Money Market Fund), the Managed Assets
Balanced, Mid-Cap Opportunity, Intrinsic Value, Growth and Value, Equity Index,
International Equity, Intermediate Bond, Bond, Short Bond, Michigan Municipal
Bond and Money Market Funds paid FoM and Essex for their services the following
fees:
-55-
<PAGE>
<TABLE>
<CAPTION>
Fees to FoM Fees to Essex
----------- -------------
<S> <C> <C>
Managed Assets Balanced Fund $ 2,762 $ 6,489
Mid-Cap Opportunity Fund $18,360 $41,964
Intrinsic Value Fund $ 8,248 $11,101
Growth and Value Fund $21,865 $31,051
Equity Index Fund $22,759 $ 2,561
International Equity Fund $ 4,800 $ 935
Intermediate Bond Fund $12,528 $ 7,070
Bond Fund $18,850 $19,632
Short Bond Fund $ 5,632 $ 487
Michigan Municipal Bond Fund $ 160 $12,967
Money Market Fund $76,683 $60,486
</TABLE>
_________________
For the period January 1, 1996 through August 26, 1996 (September 16,
1996 for the Money Market Fund) and for the fiscal years ended December 31, 1995
and 1994, neither FoM nor Essex incurred any expenses with respect to each of
the Funds for the printing and mailing of prospectuses to other than current
shareholders.
Prior to the date of the Reorganization of each of the Managed Assets
Conservative, Equity Income, Growth, Small-Cap Opportunity, Multi Sector Bond,
International Bond, Intermediate Municipal Bond, Growth and Municipal Bond
Funds, were distributed by Concord Financial Group, Inc., an indirect affiliate
of BISYS.
For the fiscal year or period ended December 31, 1996, the Funds made
the following payments under the Plan with respect to Class B shares of the
indicated Fund, all of which was retained by BISYS or Concord:
<TABLE>
<CAPTION>
Amount of Amount of
12b-1 Fees 12b-1 Fees
Paid to Paid to
BISYS Concord
---------- ----------
<S> <C> <C>
Managed Assets Conservative Fund $18,370 $12,104
Managed Assets Balanced Fund $ 3,706 $ 3,903
Managed Assets Growth Fund $ 4 --
Equity Income Fund $ 6,285 $ 3,545
Growth Fund $ 3,447 $ 2,153
Mid-Cap Opportunity Fund -- --
Small-Cap Opportunity Fund $ 248 $ 98
Intrinsic Value Fund $ 140 --
Growth and Value Fund $ 138 --
Equity Index Fund $ 87 --
International Equity Fund $ 2,035 $ 2,128
Intermediate Bond Fund $ 123 $ 1,413
Bond Fund $ 516 $ 211
Short Bond Fund $ 51 --
Multi Sector Bond Fund $ 1,800 --
International Bond Fund $ 53 $ 16
Municipal Bond Fund $ 1,985 $ 1,382
Intermediate Municipal Bond Fund $ 2,114 $ 1,519
Michigan Municipal Bond Fund $ 113 --
Money Market Fund $ 238 $ 457
</TABLE>
-56-
<PAGE>
These amounts were used by BISYS and Concord to finance sales
commissions to brokers selling Class B Shares.
For the fiscal year or period ended December 31, 1996, the fee paid
under the Shareholder Services Plan with respect to Class A and Class B Shares
of the indicated Fund was as follows:
<TABLE>
<CAPTION>
Amount of Fee Paid
------------------
Class A Class B
------- -------
<S> <C> <C>
Managed Assets Conservative Fund $145,108 $10,476
Managed Assets Balanced Fund $ 25,472 $ 1,520
Managed Assets Growth Fund $ 10 $ 5
Equity Income Fund $ 14,428 $ 3,283
Growth Fund $ 23,830 $ 1,869
Mid-Cap Opportunity Fund $ 91,946 $ 31
Small-Cap Opportunity Fund $ 5,663 $ 116
Intrinsic Value Fund $ 22,327 $ 47
Growth and Value Fund $ 62,159 $ 46
Equity Index Fund $ 18,760 $ 29
International Equity Fund $ 9,300 $ 1,253
Intermediate Bond Fund $ 14,337 $ 40
Bond Fund $ 41,642 $ 194
Short Bond Fund $ 951 $ 17
Multi Sector Bond Fund $ 17,824 $ 1,074
International Bond Fund $ 2,168 $ 25
Municipal Bond Fund $ 66,864 $ 1,124
Intermediate Municipal Bond Fund $ 45,383 $ 1,213
Michigan Municipal Bond Fund $ 21,030 $ 38
Money Market Fund $851,719 $ 154
</TABLE>
Custodian
- ---------
As Custodian for the Trust, NBD (i) maintains a separate account or
accounts in the name of each Fund, (ii) collects and makes disbursements of
money on behalf of each Fund, (iii) collects and receives all income and other
payments and distributions on account of the portfolio securities of each Fund,
and (iv) makes periodic reports to the Trust's Board of Trustees concerning the
Trust's operations.
For its services as Custodian, NBD is entitled to receive from the
Funds at the following annual rates based on the aggregate market value of such
Funds' portfolio securities, held as Custodian: .03% of the first $20 million;
.025% of the next $20 million; .02% of the next $20 million; .015% of the next
$40 million; .0125% of the next $200 million; and .01% of the balance over
$300,000,000. NBD will receive an annual account fee of $1,000 and $1.54 per
month per asset held in each of these Funds. In addition, NBD, as Custodian, is
entitled to receive $50 for each cash statement and inventory statement and $13
for each pass-through certificate payment, $35 for each option transaction
requiring escrow receipts and $20 for all other security transactions.
-57-
<PAGE>
INDEPENDENT AUDITORS
Arthur Andersen LLP, independent public accountants, 500 Woodward
Avenue, Detroit, Michigan 48226-3424, serves as auditors for the Trust. Ernst &
Young LLP served as independent auditors for the Prairie Funds, Prairie
Intermediate Bond Fund and Prairie Municipal Bond Fund, Inc. The audited
financial statements and notes thereto for each Fund for the fiscal year or
period ended December 31, 1996 are contained in the Trust's Annual Report to
Shareholders dated December 31, 1996 and the unaudited financial statements and
notes thereto for each Fund for the six-month period ended June 30, 1997 are
contained in the Trust's Semi-Annual Report to Shareholders dated June 30, 1997
and such statements and notes are incorporated by reference into this Statement
of Additional Information. The December 31, 1996 financial statements and notes
thereto have been audited by Arthur Andersen LLP, whose report thereon also
appears in such Annual Report and is also incorporated herein by reference. The
financial statements for periods or years ended December 31, 1995 and prior with
respect to the Managed Assets Conservative, Equity Income, Growth, Small-Cap
Opportunity, Multi Sector Bond, International Bond, Municipal Bond and
Intermediate Municipal Bond Funds were audited by Ernst & Young LLP, such Funds'
prior independent auditors, whose report dated February 23, 1996 expressed an
unqualified opinion on such financial statements. The financial statements for
periods or years prior to December 31, 1995 with respect to the Managed Assets
Balanced, Mid-Cap Opportunity, Intrinsic Value, Growth and Value, Equity Index,
International Equity, Intermediate Bond, Bond, Short Bond and Michigan Municipal
Bond Funds were audited by Arthur Andersen LLP. No other parts of the Annual
Report are incorporated by reference herein. Such financial statements have been
incorporated herein in reliance on the reports of Arthur Andersen LLP and Ernst
& Young LLP, independent auditors, given on the authority of said firms as
experts in auditing and accounting.
COUNSEL
Drinker Biddle & Reath LLP (of which Mr. McConnel, Secretary of the
Trust, is a partner), 1345 Chestnut Street, Philadelphia, Pennsylvania 19107-
3496, is counsel to the Trust.
ADDITIONAL INFORMATION ON PERFORMANCE
From time to time, the total return of each class of shares of each
Fund and the yield of each class of shares of the Asset Allocation, Bond and
Municipal Bond Funds for various periods may be quoted in advertisements,
shareholder reports or other communications to shareholders. Performance
information is generally available by calling (800) 688-3350.
Yield Calculations. A Fund's yield is calculated by dividing the
Fund's net investment income per share (as described below) earned during a 30-
day period by the maximum offering price per share on the last day of the period
and annualizing the result on a
-58-
<PAGE>
semi-annual basis by adding one to the quotient, raising the sum to the power of
six, subtracting one from the result and then doubling the difference. A Fund's
net investment income per share earned during the period is based on the average
daily number of shares outstanding during the period entitled to receive
dividends and includes dividends and interest earned during the period minus
expenses accrued for the period, net of reimbursements. This calculation can be
expressed as follows:
a-b
Yield = 2 [(----- + 1)/6/ - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = maximum offering price per share on the last day of the
period.
For the purpose of determining net investment income earned during the
period (variable "a" in the formula), dividend income on equity securities held
by a Fund is recognized by accruing 1/360 of the stated dividend rate of the
security each day that the security is in the portfolio. Each Fund calculates
interest earned on any debt obligations held in its portfolio by computing the
yield to maturity of each obligation held by it based on the market value of the
obligation (including actual accrued interest) at the close of business on the
last business day of each month, or, with respect to obligations purchased
during the month, the purchase price (plus actual accrued interest), and
dividing the result by 360 and multiplying the quotient by the market value of
the obligation (including actual accrued interest) in order to determine the
interest income on the obligation for each day of the subsequent month that the
obligation is in the portfolio. For purposes of this calculation, it is assumed
that each month contains 30 days. The maturity of an obligation with a call
provision is the next call date on which the obligation reasonably may be
expected to be called or, if none, the maturity date. With respect to debt
obligations purchased at a discount or premium, the formula generally calls for
amortization of the discount or premium. The amortization schedule will be
adjusted monthly to reflect changes in the market values of such debt
obligations.
Undeclared earned income may be subtracted from the maximum offering
price per share (variable "d" in the formula). Undeclared earned income is the
net investment income which, at the end of the 30-day base period, has not been
declared as a dividend, but is reasonably expected to be and is declared as a
dividend shortly thereafter.
-59-
<PAGE>
For the 30-day period ended June 30, 1997, the yields, calculated as
set forth above, for the Funds were as follows:
<TABLE>
<CAPTION>
Class A
-------
With Sales Load Class B Class I
--------------- ------- -------
<S> <C> <C> <C>
Intermediate Bond Fund 5.89% 5.37% 6.32%
Bond Fund 6.05% 5.52% 6.58%
Short Bond Fund 5.36% 4.69% 5.64%
Multi Sector Bond Fund 5.63% 5.13% 6.13%
Municipal Bond Fund 4.37% 3.87% 4.82%
Intermediate Municipal Bond Fund 3.93% 3.30% 4.30%
Michigan Municipal Bond Fund 4.27% 3.74% 4.73%
</TABLE>
* During the periods noted, these Asset Allocation Funds invested
substantially all of their assets directly in portfolio securities rather
than mutual fund shares. Investing in the Underlying Funds through the
Asset Allocation Funds involves certain additional expenses and tax results
that would not be present in a direct investment in the Underlying Funds.
Had these additional expenses and tax results been reflected, performance
would be reduced.
In addition, the Municipal Bond Funds may advertise their standardized
"tax-equivalent yield," which is computed by: (a) dividing the portion of the
yield (as calculated above) that is exempt from income tax by one minus a stated
income tax rate; and (b) adding the figure resulting from (a) above to that
portion, if any, of the yield that is not tax-exempt.
The tax-equivalent yields for the Municipal Bond Funds for the 30-day
period ended June 30, 1997 (assuming a 39.6% federal tax rate for each Fund and
a 4.4% Michigan income tax rate for the Michigan Municipal Bond Fund) were as
follows:
<TABLE>
<CAPTION>
Class A
-------
With Sales Load Class B Class I
--------------- ------- -------
<S> <C> <C> <C>
Municipal Bond Fund 7.24% 6.41% 7.98%
Intermediate Municipal Bond Fund 6.51% 5.46% 7.12%
Michigan Municipal Bond Fund 7.63% 6.68% 8.45%
</TABLE>
Total Return Calculations. Each Fund computes its "average annual
total return" for a class by determining the average annual compounded rates of
return during specified periods that equate the initial amount invested to the
ending redeemable value of such investment. This is done by dividing the ending
redeemable value of a hypothetical $1,000 initial payment by $1,000 and raising
the quotient to a power equal to one divided by the number of years (or
fractional portion thereof) covered by the computation and subtracting one from
the result. This calculation can be expressed as follows:
T = [(ERV 1/N) - 1]
-------
P
Where: T = average annual total return.
-60-
<PAGE>
ERV = ending redeemable value at the end of the period covered
by the computation of a hypothetical $1,000 payment
made at the beginning of the period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in terms
of years.
The Funds compute their aggregate total returns for each class by
determining the aggregate rates of return during specified periods that likewise
equate the initial amount invested to the ending redeemable value of such
investment. The formula for calculating aggregate total return is as follows:
ERV
T = [(------) - 1]
P
The calculations of average annual total return and aggregate total
return assume the reinvestment of all dividends and capital gain distributions
on the reinvestment dates during the period, and include all recurring fees
charged to all shareholder accounts, assuming an account size equal to a Fund's
mean (or median) account size for any fees that vary with the size of the
account. The ending redeemable value (variable "ERV" in each formula) is
determined by assuming complete redemption of the hypothetical investment and
the deduction of all nonrecurring charges at the end of the period covered by
the computation. Each Fund's average annual total return may reflect the
deduction of the maximum sales load imposed on purchases.
The aggregate total returns for the Funds or predecessor funds, as the
case may be, for the period since commencement of operations through the period
ended June 30, 1997 (unaudited) are shown below:
-61-
<PAGE>
<TABLE>
<CAPTION>
Aggregate Total Aggregate Total
Return From Return From
Inception Inception
Through Through
12/31/96 (with 12/31/96 (with-
Deduction of out Deduction
Maximum Sales for Any Sales
Charge) Charge) Inception Date
------------- --------------- --------------
<S> <C> <C> <C>
Managed Assets Conservative Fund*/(1)/
Class A 233.05% 250.56% 01/23/86
Class B 38.45% 41.45% 03/03/95
Class I 44.75% 03/03/95
Managed Assets Balanced Fund*
Class A 40.84% 48.25% 01/01/94
Class B 38.48% 41.48% 01/01/94
Class I 48.78% 01/01/94
Equity Income Fund/(1)/
Class A 1707.41% 1802.48% 03/31/67
Class B 1768.41% 1768.41% 03/31/67
Class I 2120.29% 03/31/67
Growth Fund/(2)/
Class A 883.19% 934.90% 05/31/68
Class B 916.15% 916.15% 05/31/68
Class I 1099.38% 05/31/68
Mid-Cap Opportunity Fund
Class A 524.00% 556.82% 12/31/83
Class B 554.62% 554.62% 12/31/83
Class I 558.73% 12/31/83
Small-Cap Opportunity Fund/(1)/
Class A 889.91% 941.98% 06/30/72
Class B 927.51% 927.51% 06/30/72
Class I 1087.98% 06/30/72
Intrinsic Value Fund
Class A 388.12% 413.79% 12/31/85
Class B 410.23% 410.23% 12/31/85
Class I 414.92% 12/31/85
Growth and Value Fund
Class A 473.96% 504.15% 12/31/83
Class B 494.46% 494.46% 12/31/83
Class I 505.58% 12/31/83
Equity Index Fund
Class A 521.31% 540.53% 06/30/85
Class B 526.62% 526.62% 06/30/85
Class I 541.42% 06/30/85
International Equity Fund
Class A 167.52% 181.60% 04/30/86
Class B 177.48% 177.48% 04/30/86
Class I 182.76% 04/30/86
Intermediate Bond Fund
Class A 203.22% 212.59% 12/31/83
Class B 211.36% 211.36% 12/31/83
Class I 213.52% 12/31/83
Bond Fund
Class A 245.20% 261.46% 12/31/83
Class B 260.46% 260.46% 12/31/83
Class I 262.38% 12/31/83
</TABLE>
-62-
<PAGE>
<TABLE>
<CAPTION>
Aggregate Total Aggregate Total
Return From Return From
Inception Inception
Through Through
12/31/96 (with 12/31/96 (with-
Deduction of out Deduction
Maximum Sales for Any Sales
Charge) Charge) Inception Date
-------------- --------------- --------------
<S> <C> <C> <C>
Short Bond Fund
Class A 174.59% 177.36% 12/31/83
Class B 175.28% 175.28% 12/31/83
Class I 178.04% 12/31/83
Multi Sector Bond Fund/(1)/
Class A 22.86% 26.66% 01/15/93
Class B 23.81% 24.81% 01/15/93
Class I 27.66% 01/15/93
International Bond Fund/(1)/
Class A 97.71% 107.02% 01/27/95
Class B 101.88% 101.88% 01/27/95
Class I 116.09% 01/27/95
Municipal Bond Fund/(3)/
Class A 98.98% 108.35% 03/01/88
Class B 10.28% 14.28% 04/04/95
Class C 113.40% 03/01/88
Intermediate Municipal Bond Fund/(1)/
Class A 86.56% 92.33% 03/01/88
Class B 88.64% 88.64% 03/01/88
Class I 97.58% 03/01/88
Michigan Municipal Bond Fund
Class A 23.94% 29.78% 02/01/93
Class B 25.71% 28.71% 02/01/93
Class I 30.09% 02/01/93
</TABLE>
* During the periods noted, these Asset Allocation Funds invested
substantially all of their assets directly in portfolio securities rather
than mutual fund shares. Investing in the Underlying Funds through the
Asset Allocation Funds involves certain additional expenses and tax results
that would not be present in a direct investment in the Underlying Funds.
Had these additional expenses and tax results been reflected, performance
would be reduced.
/1/ Prior to September 21, 1996, the Managed Assets Conservative, Equity
Income, Small-Cap Opportunity, Multi Sector Bond, International Bond and
Intermediate Municipal Bond Funds had no prior operating history. Except as
noted below, performance for periods prior to such date is represented by
the Performance of the Prairie Managed Assets Income, Prairie Equity
Income, Prairie Special Opportunity, Prairie Intermediate Bond, Prairie
International Bond and Prairie Intermediate Municipal Bond Funds,
respectively. On September 21, 1996, the assets and liabilities of these
Prairie Funds were transferred to the above stated respective Funds of the
Trust. Performance of the Managed Assets Conservative Fund and Intermediate
Municipal Bond Fund for periods prior to March 3, 1995 and March 1, 1988,
respectively, is represented by the performance of the First Prairie
Diversified Assets Fund and the Intermediate Series of the First Prairie
Municipal Bond Fund, respectively. The Prairie Managed Assets Income Fund
and Prairie Intermediate Municipal Bond Fund commenced operations through a
transfer of assets from the First Prairie Diversified Assets Fund and the
Intermediate Series of the First Prairie Municipal Bond Fund, respectively.
/2/ Performance for periods from January 27, 1995 to August 24, 1996 is
represented by the performance of the Prairie Growth Fund. On such date,
the assets and liabilities of the Prairie Growth Fund were transferred to
the Growth Fund.
/3/ Performance for periods prior to September 14, 1996 is represented by the
performance of the Prairie Municipal Bond Fund. On such date, the assets
and liabilities of the Prairie Municipal Bond Fund were transferred to the
Municipal Bond Fund.
The Funds may also from time to time include in advertisements, sales
literature, communications to shareholders and other materials ("Literature")
total return figures that are not calculated according to the formulas set forth
above in order to compare more accurately a Fund's performance with other
measures of investment return. For example, in comparing the Funds' total
returns with data published by Lipper Analytical Services, Inc., Morningstar,
CDA Investment Technologies, Inc. or Weisenberger Investment Company Service, or
with the performance of an index, the Funds may calculate their returns for the
period of time specified in the advertisement or communication by assuming the
-63-
<PAGE>
investment of $10,000 in shares and assuming the reinvestment date. Percentage
increases are determined by subtracting the initial value of the investment from
the ending value and by dividing the remainder by the beginning value. The Funds
do not, for these purposes, deduct from the initial value invested any amount
representing sales charges. The Funds will, however, disclose the maximum sales
charge and will also disclose that the performance data does not reflect sales
charges and that inclusion of sales charges would reduce the performance quoted.
HISTORICAL PERFORMANCE INFORMATION
- ----------------------------------
Composite performance is set forth below for the Funds or predecessor
funds, as the case may be, for various periods ended June 30, 1997, except as
noted (unaudited). Total returns for Class A and Class B shares are set forth at
net asset value ("NAV") and the Fund's public offering price or maximum CDSC, as
applicable.
<TABLE>
<CAPTION>
Average Annual Total Return
---------------------------
Since Inception
---------------
1 Year 5 Years 10 Years (Inception Date)
------ ------- -------- ----------------
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSET ALLOCATION FUNDS:
- -----------------------
Managed Assets Conservative Fund/*(1)/
- --------------------------------------
Class A shares (NAV/public offering price) 13.30%/ 7.63% 10.98%/ 9.85% 11.20%/10.63% 11.59%/11.09% (1/23/86)
Class B shares (NAV/CDSC) 12.46%/ 8.46% N/A N/A 16.05%/14.99% (3/3/95)
Class I shares 13.47% N/A N/A 17.20% (3/3/95)
- ----------------------------------------------------------------------------------------------------------------------------
Managed Assets Balanced Fund/*/
- -------------------------------
Class A shares (NAV/public offering price) 17.78%/11.89% N/A N/A 11.92%/10.29% (1/1/94)
Class B shares (NAV/CDSC) 12.40%/ 8.40% N/A N/A 10.43%/ 9.75% (1/1/94)
Class I shares 18.20% N/A N/A 12.03% (1/1/94)
- ----------------------------------------------------------------------------------------------------------------------------
Managed Assets Growth Fund
- --------------------------
Class A shares (NAV/public offering price) N/A N/A N/A 11.58%/6.01% (12/18/96)
Class B shares (NAV/CDSC) N/A N/A N/A 10.00%/5.00% (12/18/96)
Class I shares N/A N/A N/A 12.11% (12/18/96)
- ----------------------------------------------------------------------------------------------------------------------------
EQUITY FUNDS:
- -------------
Equity Income Fund/(1)(2)/
- -------------------------
Class A shares (NAV/public offering price) 23.97%/17.77% 15.11%/13.94% 11.27%/10.70% 10.23%/10.04% (3/31/67)
Class B shares (NAV/CDSC) 23.00%/19.00% 14.70%/14.58% 11.07%/11.07% 10.16%/10.16% (3/31/67)
Class I shares 24.20% 15.61% 11.81% 10.79% (3/31/67)
- ----------------------------------------------------------------------------------------------------------------------------
Growth Fund/(2)(3)/
- -----------------
Class A shares (NAV/public offering price) 28.37%/21.96% 16.90%/15.71% 13.30%/12.72% 8.37%/8.18% (5/31/68)
Class B shares (NAV/CDSC) 27.45%/23.45% 16.48%/16.37% 13.09%/13.09% 8.30%/8.30% (5/31/68)
Class I shares 28.60% 17.38% 13.83% 8.92% (5/31/68)
- ----------------------------------------------------------------------------------------------------------------------------
Mid-Cap Opportunity Fund/(2)/
- ----------------------------
Class A shares (NAV/public offering price) 28.63%/22.20% 19.96%/18.73% 14.23%/13.64% 14.96%/14.53% (12/31/83)
Class B shares (NAV/CDSC) 28.20%/24.20% 19.88%/19.78% 14.19%/14.19% 14.94%/14.94% (12/31/83)
Class I shares 29.00% 20.03% 14.26% 14.99% (12/31/83)
- ----------------------------------------------------------------------------------------------------------------------------
Small-Cap Opportunity Fund/(1)(2)/
- --------------------------------
Class A shares (NAV/public offering price) 33.34%/26.67% 16.49%/15.30% 14.60%/14.01% 9.83%/ 9.60% (6/30/72)
Class B shares (NAV/CDSC) 32.94%/28.94% 16.16%/16.05% 14.44%/14.44% 9.77%/ 9.77% (6/30/72)
Class I shares 34.30% 17.09% 15.19 10.41% (6/30/72)
- ----------------------------------------------------------------------------------------------------------------------------
Intrinsic Value Fund/(2)/
- ------------------------
Class A shares (NAV/public offering price) 26.93%/20.59% 16.55%/15.37% 13.04%/12.46% 15.30%/14.79% (12/31/85)
Class B shares (NAV/CDSC) 26.05%/22.05% 16.39%/16.28% 12.96%/12.96% 15.23%/15.23% (12/31/85)
Class I shares 27.21% 16.61% 13.06% 15.23% (12/31/85)
- ----------------------------------------------------------------------------------------------------------------------------
Growth and Value Fund/(2)/
- --------------------------
Class A shares (NAV/public offering price) 28.12%/21.72% 16.88%/15.69% 12.13%/11.56% 14.25%/13.82% (12/31/83)
Class B shares (NAV/CDSC) 26.06%/22.06% 16.50%/16.39% 11.95%/11.95% 14.17%/14.17% (12/31/83)
Class I shares 28.42% 16.94% 12.16% 14.26% (12/31/83)
- ----------------------------------------------------------------------------------------------------------------------------
Equity Index Fund/(2)/
- ----------------------
Class A shares (NAV/public offering price) 33.85%/29.84% 19.40%/18.67% 14.27%/13.92% 16.74%/16.44% (6/30/85)
Class B shares (NAV/CDSC) 30.94%/27.94% 18.87%/18.87% 14.01%/14.01% 16.52%/16.52% (6/30/85)
Class I shares 34.06% 19.43% 14.28% 16.75% (6/30/85)
- ----------------------------------------------------------------------------------------------------------------------------
International Equity Fund/(2)/
- -----------------------------
Class A shares (NAV/public offering price) 12.81%/ 7.17% 10.19%/ 9.07% 7.02%/ 6.48% 9.70%/ 9.20% (4/30/86)
Class B shares (NAV/CDSC) 11.16%/ 7.16% 9.87%/ 9.73% 6.87%/ 6.87% 9.62%/ 9.62% (4/30/86)
Class I shares 13.27% 10.28% 7.07% 9.74% (4/30/86)
- ----------------------------------------------------------------------------------------------------------------------------
BOND FUNDS:
- -----------
Intermediate Bond Fund/(2)/
- ---------------------------
Class A shares (NAV/public offering price) 8.68%/ 5.42% 6.38%/ 5.74% 7.98%/ 7.65% 8.80%/ 8.56% (12/31/83)
Class B shares (NAV/CDSC) 8.26%/ 5.26% 6.30%/ 6.30% 7.94%/ 7.94% 8.81%/ 8.81% (12/31/83)
Class I shares 9.01% 6.45% 8.01% 8.83% (12/31/83)
- ----------------------------------------------------------------------------------------------------------------------------
Bond Fund/(2)/
- --------------
Class A shares (NAV/public offering price) 9.33%/ 4.41% 7.62%/ 6.63% 8.86%/ 8.36% 9.99%/ 9.61% (12/31/83)
Class B shares (NAV/CDSC) 9.03%/ 5.03% 7.56%/ 7.41% 8.83%/ 8.83% 9.97%/ 9.97% (12/31/83)
Class I shares 9.61% 7.68% 8.89% 10.01% (12/31/83)
- ----------------------------------------------------------------------------------------------------------------------------
Short Bond Fund/(2)/
- --------------------
Class A shares (NAV/public offering price) 5.84%/ 4.78% 5.05%/ 4.84% 6.93%/ 6.82% 7.85%/ 7.77% (12/31/83)
Class B shares (NAV/CDSC) 5.04%/ 4.05% 4.90%/ 4.90% 6.85%/ 6.85% 7.79%/ 7.79% (12/31/83)
Class I shares 6.10% 5.11% 6.96% 7.87% (12/31/83)
- ----------------------------------------------------------------------------------------------------------------------------
Multi Sector Bond Fund/(1)/
- ---------------------------
Class A shares (NAV/public offering price) 7.07%/(3.86)% N/A N/A 5.62%/ 4.87% (3/5//93)
Class B shares (NAV/CDSC) 6.30%/(3.31)% N/A N/A 5.01%/ 4.10% (5/31/95)
Class I shares 7.33% N/A N/A 5.81% (3/5/93)
- ----------------------------------------------------------------------------------------------------------------------------
International Bond Fund/(1)(2)/
- -------------------------------
Class A shares (NAV/public offering price) 1.96%/(2.63)% 8.56%/ 7.57% N/A 9.84%/ 9.19% (9/30/89)
Class B shares (NAV/CDSC) 1.49%/(2.40)% 8.02%/ 7.87% N/A 9.48%/ 9.48% (9/30/89)
Class I shares 2.15% 9.18% N/A 10.44% (9/30/89)
- ----------------------------------------------------------------------------------------------------------------------------
MUNICIPAL BOND FUNDS:
- ---------------------
Municipal Bond Fund/(4)/
- ------------------------
Class A shares (NAV/public offering price) 7.74%/(2.90)% 7.26%/ 6.28% N/A 8.18%/ 7.64% (3/1/88)
Class B shares (NAV/CDSC) 6.87%/(2.87)% N/A N/A 6.11%/ 4.45% (4/4/95)
Class I shares 7.94% N/A N/A 8.45% (3/1/88)
- ----------------------------------------------------------------------------------------------------------------------------
Short Municipal Bond Fund/(2)/
- ------------------------------
Class A shares (NAV/public offering price) 4.69%/ 3.64% 4.33%/ 4.12% 5.13%/ 5.02% 5.83%/ 5.75% (12/31/83)
Class B shares (NAV/CDSC) 4.69%/ 3.69% 4.33%/ 4.33% 5.13%/ 5.13% 5.83%/ 5.83% (12/31/83)
Class I shares 4.95% 4.59% 5.39% 6.09% (12/31/83)
- ----------------------------------------------------------------------------------------------------------------------------
Intermediate Municipal Bond Fund/(1)/
- ------------------------------------
Class A shares (NAV/public offering price) 6.32%/ 3.14% 5.93%/ 5.29% N/A 7.26%/ 6.91% (3/1/88)
Class B shares (NAV/CDSC) 5.51%/(2.51)% N/A N/A 7.03%/ 7.03% (3/1/88)
Class I shares 6.64% N/A N/A 7.63% (3/1/88)
- ----------------------------------------------------------------------------------------------------------------------------
Michigan Municipal Bond Fund
- ----------------------------
Class A shares (NAV/public offering price) 7.72%/(2.88)% N/A N/A 6.12%/ 5.02% (2/1/93)
Class B shares (NAV/CDSC) 6.84%/(2.84)% N/A N/A 5.90%/ 5.34% (2/1/93)
Class I shares 7.98% N/A N/A 6.15% (2/1/93)
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
/*/ During the periods noted, these Asset Allocation Funds invested
substantially all of their assets directly in portfolio securities rather
than mutual fund shares. Investing in the Underlying Funds through the
Asset Allocation Funds involves certain additional expenses and tax
results that would not be present in a direct investment in the
Underlying Funds. Had these additional expenses and tax results been
reflected, performance would be reduced.
/(1)/ Prior to September 21, 1996, the Managed Assets Conservative, Equity
Income, Small-Cap Opportunity, Multi Sector Bond, International Bond and
Intermediate Municipal Bond Funds had no prior operating history. Except
as noted below, performance for periods prior to such date is represented
by the performance of the Prairie Managed Assets Income, Prairie Equity
Income, Prairie Special Opportunity, Prairie Intermediate Bond, Prairie
International Bond and Prairie Intermediate Municipal Bond Funds,
respectively. On September 21, 1996, the assets and liabilities of these
Prairie Funds were transferred to the above stated respective Funds of
the Trust. Performance of the Managed Assets Conservative Fund and
Intermediate Municipal Bond Fund for periods prior to March 3, 1995 and
March 1, 1998, respectively, is represented by the performance of the
First Prairie Diversified Assets Fund and the Intermediate Series of the
First Prairie Municipal Bond Fund, respectively. The Prairie Managed
Assets Income Fund and Prairie Intermediate Municipal Bond Fund and
Prairie Intermediate Municipal Bond Fund commenced operations through a
transfer of assets from the First Prairie Diversified Assets Fund and
Intermediate Series of the First Prairie Municipal Bond Fund,
respectively.
/(2)/ Performance of the Equity Income, Growth, Small-Cap Opportunity and
International Bond Funds for periods prior to January 27, 1995 is
represented by performance of certain common trust funds managed by FNBC
before the effective date of the registration statement of these Funds.
Performance of the Mid-Cap Opportunity (6/1/91), Intrinsic Value
(6/1/91), Growth and Value (6/1/91), Equity Index (7/10/92),
International Equity (12/3/94), Intermediate Bond (6/1/91), Bond
(6/1/91), Short Bond (9/17/94) and Short Municipal Bond (3/13/98) Funds
for periods prior to the inception dates shown is represented by
performance of certain common trust funds managed by NBD before the
effective date of the registration statement of these Funds. The common
trust funds were not registered under the 1940 Act and were not subject
to certain restrictions that are imposed by the 1940 Act. If the common
trust funds had been registered under the 1940 Act, performance may have
been adversely affected. The common trust funds did not charge any
expenses. Performance of the common trust funds has been restated to
reflect the maximum operating expenses charged by the predecessor
Prairie Funds upon their inception on January 27, 1995 in the case of the
Equity Income, Growth, Small-cap Opportunity and International Bond Funds
or by the other Fund's upon their inception, as the case may be.
/(3)/ Performance for periods from January 27, 1995 to August 24, 1996 is
represented by the performance of the Prairie Growth Fund. On such date,
the assets and liabilities of the Prairie Growth Fund were transferred to
the Growth Fund.
/(4)/ Performance for periods to September 14, 1996 is represented by the
performance of the Prairie Municipal Bond Fund. On such date, the assets
and liabilities of the Prairie Municipal Bond Fund were transferred to
the Municipal Bond Fund.
From time to time, references to the Funds may appear in
advertisements and sales literature for certain products or services, offered by
the Investment Adviser, its affiliates or others, through which it is possible
to invest in one or more of the Funds, such as the Pegasus Architect wrap
account, the Pathmaker variable annuity, and First Choice, First Choice Pegasus
and First Choice Select 401(k) products.
The Funds may also from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on a Fund
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciation of a Fund would increase the value, not only of
the original Fund investment, but also of the additional Fund shares received
through reinvestment. As a result, the value of the Fund investment would
increase more quickly than if dividends or other distributions had been paid in
cash.
The Funds may also include discussions or illustrations of the
potential investment goals of a prospective investor, investment management
strategies, techniques, policies or investment suitability of a Fund (such as
value investing, market timing, dollar cost averaging, asset allocation,
constant ratio transfer, automatic accounting rebalancing, the advantages and
disadvantages of investing in tax-deferred and taxable instruments), economic
conditions, risk and volatility assessments, the relationship between sectors of
the economy and the economy as a whole, various securities markets, the effects
of inflation and historical performance of various asset classes, including but
not limited to, stocks, bonds and Treasury bills. From time to time,
advertisements for each Asset Allocation Fund may include a discussion of the
target asset allocation ranges and of the Underlying Funds and the expected
ranges of investment in each of the Underlying Funds and may include a
discussion of the current and foreseeable investment ranges of the target asset
allocation and the Underlying Funds. From time to time advertisements or
communications to shareholders may summarize the substance of information
contained in shareholder reports (including the investment composition of a
Fund), as well as the view of the Trust as to current market, economy, trade and
interest rate trends, legislative, regulatory and monetary developments,
investment strategies and related matters believed to be of relevance to a Fund.
The Funds may also include in advertisements charts, graphs or drawings which
compare the investment objective, return potential, relative stability and/or
growth possibilities of the Fund and/or other mutual funds, or illustrate the
potential risks and rewards of investment in various investment vehicles,
including but not limited to, stocks, bonds, treasury bills and shares of a
Fund. In addition, advertisements or shareholder communications may include a
discussion of certain attributes or benefits to be derived by an investment in a
Fund and/or other mutual funds,
-64-
<PAGE>
shareholder profiles and hypothetical investor scenarios, timely information on
financial management, tax and retirement planning and investment alternatives to
certificates of deposit and other financial instruments. Such advertisements or
communicators may include symbols, headlines or other material which highlight
or summarize the information discussed in more detail therein.
-65-
<PAGE>
APPENDIX A
----------
Commercial Paper Ratings
- ------------------------
A Standard & Poor's ("S&P") commercial paper rating is a current
assessment of the likelihood of timely payment of debt having an original
maturity of no more than 365 days. The following summarizes the rating
categories used by Standard and Poor's for commercial paper:
"A-1" - The highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+) designation.
"A-2" - Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."
"A-3" - Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
"B" - Issues are regarded as having only a speculative capacity for
timely payment.
"C" - This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
"D" - Issues are in payment default. The "D" rating category is used
when interest payments of principal payments are not made on the date due, even
if the applicable grace period has not expired, unless S&P believes such
payments will be made during such grace period.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually senior debt obligations not having an original
maturity in excess of one year, unless explicitly noted. The following
summarizes the rating categories used by Moody's for commercial paper:
"Prime-1" - Issuers (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well established access
to a range of financial markets and assured sources of alternate liquidity.
"Prime-2" - Issuers or (supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios,
A-1
<PAGE>
while sound, may be more subject to variation. Capitalization characteristics,
while still appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
"Prime-3" - Issuers (or supporting institutions) have an acceptable
ability for repayment of senior short-term debt obligations. The effects of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
"Not Prime" - Issuers do not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment. Short-
term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity and other protection
factors qualify issues as investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
A-2
<PAGE>
Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years. The following
summarizes the rating categories used by Fitch for short-term obligations:
"F-1+" - Securities possess exceptionally strong credit quality.
Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues assigned
this rating reflect an assurance of timely payment only slightly less in degree
than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues assigned this
rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the "F-1+" and "F-1" ratings.
"F-3" - Securities possess fair credit quality. Issues assigned this
rating have characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues assigned this
rating have characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial and
economic conditions.
"D" - Securities are in actual or imminent payment default.
"LOC" - The symbol "LOC" indicates that the rating is based on a
letter of credit issued by a commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely or incomplete payment of principal and interest of debt instruments
with original maturities of one year or less. The following summarizes the
ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation represents Thomson BankWatch's second
highest category and indicates that while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of safety is
not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents Thomson BankWatch's lowest
investment-grade category and indicates that while the obligation is more
susceptible to adverse developments (both internal
A-3
<PAGE>
and external) than those with higher ratings, the capacity to service principal
and interest in a timely fashion is considered adequate.
"TBW-4" - This designation represents Thomson BankWatch's lowest
rating category and indicates that the obligation is regarded as non-investment
grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1" - Obligations are supported by the highest capacity for timely
repayment. Where issues process a particularly strong credit feature, a rating
of "A1+" is assigned.
"A2" - Obligations are supported by a good capacity for timely
repayment although such capacity may be susceptible to adverse changes in
business, economic or financial conditions.
"A3" - Obligations are supported by an adequate capacity for timely
repayment such capacity is more susceptible to adverse changes in business,
economic, or financial conditions than for obligations in higher
categories.
"B" - Obligations for which the capacity for timely repayment is
susceptible to adverse changes in business, economic, or financial
conditions.
"C" - Obligations for which there is a high risk of default or which
are currently in default.
A-4
<PAGE>
Corporate and Municipal Long-Term Debt Ratings
- ----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - This designation represents the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.
"AA" - Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues. An obligation rated
"AA" differs from the highest rated obligation only in small degree. The
obligor's capacity to meet its financial commitment on the obligation is very
strong.
"A" - An obligation rated "A" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher-rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major risk exposures to adverse conditions.
"BB" - Debt is less vulnerable to non-payment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
"B" - Debt is more vulnerable to non-payment than obligations rated
"BB," but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial or economic conditions
will likely impair the obligor's capacity or willingness for the obligor to meet
its financial commitment on the obligation.
"CCC" - Debt is vulnerable to non-payment, and is dependent upon
favorable business, financial and economic conditions for the obligor to meet
its financial commitment on the obligation.
A-5
<PAGE>
"CC" - An obligation rated "CCC" is currently highly vulnerable to
non-payment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been taken, but
payments on this obligation are being continued.
"D" - An obligation rated "D" is in payment default. This rating is
used when payments on an obligation are not made on the date due, even if the
applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. "D" rating is also used upon the
filing of a bankruptcy petition or the taking of similar action if payments on
an obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid, and
certain other obligations that S & P believes may experience high volatility or
high variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities. The absence of an "r" symbol
should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as high-
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be
A-6
<PAGE>
other elements present which make the long-term risks appear somewhat larger
than in "Aaa" securities.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds are considered as medium-grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" are of poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in
default.
Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in 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.
(P)... - When applied to forward delivery bonds, indicates that the
rating is provisional pending delivery of the bonds. The rating may be revised
prior to delivery if changes occur in the legal documents or the underlying
credit quality of the bonds.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols, Aa1, A1, Baa1, Ba1 and B1.
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
A-7
<PAGE>
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt
rated "B" possesses the risk that obligations will not be met when due. Debt
rated "CCC" is well below investment grade and has considerable uncertainty as
to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by Fitch for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated "F-1+."
"A" - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB" - Bonds considered to be speculative. The obligor's ability to
pay interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be indentified, which
could assist the obligor in satisfying its debt service requirements.
"B" - Bonds are considered highly speculative. While securities in
this class are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
"CCC" - Bonds have certain indentifiable characteristics that, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
"CC" - Bonds are minimally protected. Default in payments of
interest and/or principal seems probable over time.
"C" - Bonds are in imminent default in payment of interest or
principal.
"DDD," "DD" and "D" - Bonds are in default on interest and /or
principal payments. Such securities are extremely speculative and should be
valued on the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. "DDD" represents the highest potential for
recovery on these securities, and "D" represents the lowest potential for
recovery.
<PAGE>
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "C" may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is 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 substantially.
"AA" - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or financial
conditions may increase investment risk, albeit not very significantly.
"A" - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions may lead
to increased investment risk.
"BBB" - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial conditions
are more likely to lead to increased investment risk than for obligations in
other categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of
these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree of
speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating below
"AAA" to denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes
the rating categories used by Thomson BankWatch for long-term debt ratings:
A-9
<PAGE>
"AAA" - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis with limited incremental risk compared
to issues rated in the highest category.
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
Municipal Note Ratings
- ----------------------
A Standard and Poor's rating reflects the liquidity concerns and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest, with some vulnerability to adverse
financial and economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
A-10
<PAGE>
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - This designation denotes best quality, enjoying
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high quality with margins
of protection ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality, with
all security elements accounted for but lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - This designation denotes adequate quality, carrying
specific risk but having protection commonly regarded as required of an
investment security and not distinctly or predominantly speculative.
"SG" - This designation denotes speculative quality and lack of
margins of protection.
Fitch and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
A-11
<PAGE>
APPENDIX B
----------
As stated in their Prospectus, each of the Funds may enter into
futures contracts and related options for hedging purposes.
I. Interest Rate Futures Contracts
-------------------------------
Use of Interest Rate Futures Contracts. Bond prices are established in
both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the future
for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, a Fund may use interest rate futures as
a defense, or hedge, against anticipated interest rate changes and not for
speculation. As described below, this would include the use of futures contract
sales to hedge against expected increases in interest rates and futures contract
purchases to offset the impact of interest rate declines.
Description of Interest Rate Futures Contracts. An interest rate
futures contract sale would create an obligation by a Fund, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase would
create an obligation by a Fund, as purchaser, to take delivery of the specific
type of financial instrument at a specific future time at a specific price. The
specific securities delivered or taken, respectively, at settlement date, would
not be determined until at or near that date. The determination would be in
accordance with the rules of the exchange on which the futures contract sale or
purchase was made.
Although interest rate futures contracts by their terms call for
actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract sale is effected by a Fund's
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
in the sale exceeds the price in the offsetting purchase, the Fund is paid the
difference and thus realizes a gain. If the offsetting purchase price exceeds
the sale price, the Fund pays the difference and realizes a loss. Similarly, the
closing out of a futures contract purchase is effected by the Fund's entering
into a futures contract sale. If the offsetting sale price exceeds the purchase
price, the Fund realizes a gain, and if the purchase price exceeds the
offsetting sale price, the Fund realizes a loss.
Interest rate futures contracts are traded in an auction environment
on the floors of several exchanges - principally, the Chicago Board of Trade,
the Chicago Mercantile Exchange and the New York Futures Exchange. The Fund
would deal only in standardized
B-1
<PAGE>
contracts on recognized exchanges. Each exchange guarantees performance under
contract provisions through a clearing corporation, a nonprofit organization
managed by the exchange membership.
A public market now exists in futures contracts covering various
financial instruments including long-term United States Treasury Bonds and
Notes; three-month United States Treasury Bills; and ninety-day commercial
paper. A Fund may trade in any futures contract for which there exists a public
market, including, without limitation, the foregoing instruments.
Examples of Futures Contract Sale. A Fund would engage in an interest
rate futures contract sale to maintain the income advantage from continued
holding of a long-term bond while endeavoring to avoid part or all of the loss
in market value that would otherwise accompany a decline in long-term securities
prices. Assume that the market value of a certain security in a Fund tends to
move in concert with the futures market prices of long-term United States
Treasury bonds ("Treasury bonds"). The Investment Adviser wishes to hedge the
current market value of this portfolio security until some point in the future.
Assume the portfolio security has a market value of 100, and the Investment
Adviser believes that, because of an anticipated rise in interest rates, the
value will decline to 95. The Fund might enter into futures contract sales of
Treasury bonds for an equivalent of 98. If the market value of the portfolio
security does indeed decline from 100 to 95, the equivalent futures market price
for the Treasury bonds might also decline from 98 to 93.
In that case, the five-point loss in the market value of the portfolio
security would be offset by the five-point gain realized by closing out the
futures contract sale. Of course, the futures market price of Treasury bonds
might well decline to more than 93 or to less than 93 because of the imperfect
correlation between cash and futures prices mentioned below.
The Investment Adviser could be wrong in its forecast of interest
rates and the equivalent futures market price could rise above 98. In this case,
the market value of the portfolio securities, including the portfolio security
being hedged, would increase. The benefit of this increase would be reduced by
the loss realized on closing out the futures contract sale.
If interest rate levels did not change, the Fund in the above example
might incur a loss of 2 points (which might be reduced by an offsetting
transaction prior to the settlement date). In each transaction, transaction
expenses would also be incurred.
Examples of Futures Contract Purchase. A Fund might engage in an
interest rate futures contract purchase when it is not fully invested in long-
term bonds but wishes to defer for a time the purchase of long-term bonds in
light of the availability of advantageous interim investments, e.g., shorter-
term securities whose yields are greater than those available on long-term
bonds. A Fund's basic motivation would be to maintain for a time the income
B-2
<PAGE>
advantage from investing in the short-term securities; the Fund would be
endeavoring at the same time to hedge the effect of all or part of an expected
increase in market price of the long-term bonds that the Fund may purchase.
For example, assume that the market price of a long-term bond that the
Fund may purchase, currently yielding 10%, tends to move in concert with futures
market prices of Treasury bonds. The Investment Adviser wishes to hedge the
current market price (and thus 10% yield) of the long-term bond until the time
(four months away in this example) when it may purchase the bond. Assume the
long-term bond has a market price of 100, and the Investment Adviser believes
that, because of an anticipated fall in interest rates, the price will have
risen to 105 (and the yield will have dropped to about 9 1/2%) in four months. A
Fund might enter into futures contracts purchases of Treasury bonds for an
equivalent price of 98. At the same time, the Fund could, for example, assign a
pool of investments in short-term securities that are either maturing in four
months or earmarked for sale in four months, for purchase of the long-term bond
at an assumed market price of 100. Assume these short-term securities are
yielding 15%. If the market price of the long-term bond does indeed rise from
100 to 105, the equivalent futures market price for Treasury bonds might also
rise from 98 to 103. In that case, the 5-point increase in the price that the
Fund pays for the long-term bond would be offset by the 5-point gain realized by
closing out the futures contract purchase.
The Investment Adviser could be wrong in its forecast of interest
rates; long-term interest rates might rise to above 10%; and the equivalent
futures market price could fall below 98. If short-term rates at the same time
fall to 10% or below, it is possible that a Fund would continue with its
purchase program for long-term bonds. The market price of available long-term
bonds would have decreased. The benefit of this price decrease, and thus yield
increase, will be reduced by the loss realized on closing out the futures
contract purchase.
If, however, short-term rates remained above available long-term
rates, it is possible that a Fund would discontinue its purchase program for
long-term bonds. The yield on short-term securities in the portfolio, including
those originally in the pool assigned to the particular long-term bond, would
remain higher than yields on long-term bonds. The benefit of this continued
incremental income will be reduced by the loss realized on closing out the
futures contract purchase.
In each transaction, expenses would also be incurred.
II. Index Futures Contracts
-----------------------
A stock or bond index assigns relative values to the stocks or bonds
included in the index and the index fluctuates with changes in the market values
of the stocks or bonds included. Some stock index futures contracts are based on
broad market indices, such as the Standard & Poor's 500 or the New York Stock
Exchange Composite Index. In contrast, certain exchanges offer futures contracts
on narrower market indices, such as the Standard &
B-3
<PAGE>
Poor's 100 or indices based on an industry or market segment, such as oil and
gas stocks. Futures contracts are traded on organized exchanges regulated by the
Commodity Futures Trading Commission. Transactions on such exchanges are cleared
through a clearing corporation, which guarantees the performance of the parties
to each contract.
The Equity Funds may sell index futures contracts in order to hedge
against a decrease in market value of its portfolio securities that might
otherwise result from a market decline. A Fund may do so either to hedge the
value of its portfolio as a whole, or to hedge against declines, occurring prior
to sales of securities, in the value of the securities to be sold. Conversely,
the Funds may purchase index futures contracts in anticipation of purchases of
securities. In a substantial majority of these transactions, the Funds may
purchase such securities upon termination of the long futures position, but a
long futures position may be terminated without a corresponding purchase of
securities.
In addition, the Funds may utilize index futures contracts in
anticipation of changes in the composition of their portfolio holdings. For
example, in the event that a Fund expects to narrow the range of industry groups
represented in its holdings it may, prior to making purchases of the actual
securities, establish a long futures position based on a more restricted index,
such as an index comprised of securities of a particular industry group. The
Fund may also sell futures contracts in connection with this strategy, in order
to hedge against the possibility that the value of the securities to be sold as
part of the restructuring of the portfolio will decline prior to the time of
sale.
The following are examples of transactions in stock index futures (net
of commissions and premiums, if any).
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
<TABLE>
<CAPTION>
Portfolio Futures
--------- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures
Equity Fund at 125
Value of Futures =
$62,500/Contract
-Day Hedge is Lifted-
Buy Equity Fund with Sell 1 Index Futures at 130
Actual Cost = $65,000 Value of Futures = $65,000/
Increase in Purchase Price = Contract
$2,500 Gain on Futures = $2,500
</TABLE>
B-4
<PAGE>
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Portfolio
Factors:
Value of Stock Portfolio = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Portfolio Beta Relative to the Index = 1.0
<TABLE>
<CAPTION>
Portfolio Futures
- --------- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Equity Portfolio Value of Futures = $1,000,000
-Day Hedge is Lifted-
Equity Portfolio-Own Buy 16 Index Futures at 120
Stock with Value = $960,000 Value of Futures = $960,000
Loss in Portfolio Value = $40,000 Gain on Futures = $40,000
</TABLE>
If, however, the market moved in the opposite direction, that is,
market value decreased and the Fund had entered into an anticipatory purchase
hedge, or market value increased and the Fund had hedged its stock portfolio,
the results of the Fund's transactions in stock index futures would be as set
forth below.
B-5
<PAGE>
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
<TABLE>
<CAPTION>
Portfolio Futures
--------- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures at 125
Equity Portfolio Value of Futures = $62,500/
Contract
-Day Hedge is Lifted-
Buy Equity Portfolio with Sell 1 Index Futures at 120
Actual Cost = $60,000 Value of Futures = $60,000/
Decrease in Purchase Price = $2,500 Contract
Loss on Futures = $2,500
</TABLE>
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Portfolio
Factors:
Value of Stock Portfolio = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Portfolio Beta Relative to the Index = 1.0
<TABLE>
<CAPTION>
Portfolio Futures
- --------- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Equity Portfolio Value of Futures = $1,000,000
-Day Hedge is Lifted-
Equity Portfolio-Own Buy 16 Index Futures at 130
Stock with Value = $1,040,000 Value of Futures = $1,040,000
Gain in Portfolio = $40,000 Loss of Futures = $40,000
</TABLE>
B-6
<PAGE>
III. Margin Payments
---------------
Unlike when a Fund purchases or sells a security, no price is paid or
received by the Fund upon the purchase or sale of a futures contract. Initially,
the Fund will be required to deposit with the broker or in a segregated account
with the Fund's Custodian an amount of cash or cash equivalents, the value of
which may vary but is generally equal to 10% or less of the value of the
contract. This amount is known as initial margin. The nature of initial margin
in futures transactions is different from that of margin in security
transactions in that futures contract margin does not involve the borrowing of
funds by the customer to finance the transactions. Rather, the initial margin is
in the nature of a performance bond or good faith deposit on the contract which
is returned to the Fund upon termination of the futures contract assuming all
contractual obligations have been satisfied. Subsequent payments, called
variation margin, to and from the broker, will be made on a daily basis as the
price of the underlying security or index fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
marking to the market. For example, when a Fund has purchased a futures contract
and the price of the contract has risen in response to a rise in the underlying
instruments, that position will have increased in value and the Fund will be
entitled to receive from the broker a variation margin payment equal to that
increase in value. Conversely, where a Fund has purchased a futures contract and
the price of the future contract has declined in response to a decrease in the
underlying instruments, the position would be less valuable and the Fund would
be required to make a variation margin payment to the broker. At any time prior
to expiration of the futures contract, the Investment Adviser may elect to close
the position by taking an opposite position, subject to the availability of a
secondary market, which will operate to terminate the Fund's position in the
futures contract. A final determination of variation margin is then made,
additional cash is required to be paid by or released to the Fund, and the Fund
realizes a loss or gain.
IV. Risks of Transactions in Futures Contracts
------------------------------------------
There are several risks in connection with the use of futures by a
Fund as a hedging device. One risk arises because of the imperfect correlation
between movements in the price of the future and movements in the price of the
securities which are the subject of the hedge. The price of the future may move
more than or less than the price of the securities being hedged. If the price of
the future moves less than the price of the securities which are the subject of
the hedge, the hedge will not be fully effective but, if the price of the
securities being hedged has moved in an unfavorable direction, the Fund would be
in a better position than if it had not hedged at all. If the price of the
securities being hedged has moved in a favorable direction, this advantage will
be partially offset by the loss on the future. If the price of the future moves
more than the price of the hedged securities, the Fund involved will experience
either a loss or gain on the future which will not be completely offset by
movements in the price of the securities which are the subject of the hedge. To
compensate for the imperfect correlation of movements in the price of securities
being hedged and
B-7
<PAGE>
movements in the price of futures contracts, a Fund may buy or sell futures
contracts in a greater dollar amount than the dollar amount of securities being
hedged if the volatility over a particular time period of the prices of such
securities has been greater than the volatility over such time period of the
future, or if otherwise deemed to be appropriate by the Investment Adviser.
Conversely, a Fund may buy or sell fewer futures contracts if the volatility
over a particular time period of the prices of the securities being hedged is
less than the volatility over such time period of the futures contract being
used, or if otherwise deemed to be appropriate by the Investment Adviser. It is
also possible that, where a Fund has sold futures to hedge its portfolio against
a decline in the market, the market may advance and the value of securities held
by the Fund may decline. If this occurred, the Fund would lose money on the
future and also experience a decline in value in its portfolio securities.
Where futures are purchased to hedge against a possible increase in
the price of securities before a Fund is able to invest its cash (or cash
equivalents) in securities (or options) in an orderly fashion, it is possible
that the market may decline instead; if the Fund then concludes not to invest in
securities or options at that time because of concern as to possible further
market decline or for other reasons, the Fund will realize a loss on the futures
contract that is not offset by a reduction in the price of securities purchased.
In instances involving the purchase of futures contracts by a Fund, an
amount of cash and cash equivalents, equal to the market value of the futures
contracts (or options), will be deposited in a segregated account with the
Fund's Custodian and/or in a margin account with a broker to collateralize the
position and thereby ensure that the use of such futures is unleveraged.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
securities being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through offsetting transactions which could distort the normal
relationship between the cash and futures markets. With respect to financial
futures contracts, the liquidity of the futures market depends on participants
entering into off-setting transactions rather than making or taking delivery. To
the extent participants decide to make or take delivery, liquidity in the
futures market could be reduced thus producing distortions. From the point of
view of speculators, the deposit requirements in the futures market are less
onerous than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may also cause temporary
price distortions. Due to the possibility of price distortion in the futures
market, and because of the imperfect correlation between the movements in the
cash market and movements in the price of futures, a correct forecast of general
market trends or interest rate movements by the Investment Adviser may still not
result in a successful hedging transaction over a short time frame.
B-8
<PAGE>
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although a Fund
intends to purchase or sell futures only on exchanges or boards of trade where
there appear to be active secondary markets, there is no assurance that a liquid
secondary market on any exchange or board of trade will exist for any particular
contract or at any particular time. In such event, it may not be possible to
close a futures investment position, and in the event of adverse price
movements, a Fund would continue to be required to make daily cash payments of
variation margin. However, in the event futures contracts have been used to
hedge portfolio securities, such securities will not be sold until the futures
contract can be terminated. In such circumstances, an increase in the price of
the securities, if any, may partially or completely offset losses on the futures
contract. However, as described above, there is no guarantee that the price of
the securities will in fact correlate with the price movements in the futures
contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary market
in a futures contract may be adversely affected by "daily price fluctuation
limits" established by commodity exchanges which limit the amount of fluctuation
in a futures contract price during a single trading day. Once the daily limit
has been reached in the contract, no trades may be entered into at a price
beyond the limit, thus preventing the liquidation of open futures positions.
Successful use of futures by a Fund is also subject to the Investment
Adviser's ability to predict correctly movements in the direction of the market.
For example, if a Fund has hedged against the possibility of a decline in the
market adversely affecting securities held in its portfolio and securities
prices increase instead, the Fund will lose part or all of the benefit to the
increased value of its securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations, if
the Fund has insufficient cash, it may have to sell securities to meet daily
variation margin requirements. Such sales of securities may be, but will not
necessarily be, at increased prices which reflect the rising market. A Fund may
have to sell securities at a time when it may be disadvantageous to do so.
V. Options on Futures Contracts
----------------------------
Each Fund may purchase options on the futures contracts described
above. A futures option gives the holder, in return for the premium paid, the
right to buy (call) from or sell (put) to the writer of the option a futures
contract at a specified price at any time during the period of the option. Upon
exercise, the writer of the option is obligated to pay the difference between
the cash value of the futures contract and the exercise price. Like the buyer or
seller of a futures contract, the holder, or writer, of an option has the right
to terminate its position prior to the scheduled expiration of the option by
selling, or purchasing, an option of the same series, at which time the person
entering into the closing transaction will realize a gain or loss.
B-9
<PAGE>
Investments in futures options involve some of the same considerations
that are involved in connection with investments in futures contracts (for
example, the existence of a liquid secondary market). In addition, the purchase
of an option also entails the risk that changes in the value of the underlying
futures contract will not be fully reflected in the value of the option
purchased. Depending on the pricing of the option compared to either the futures
contract upon which it is based, or upon the price of the securities being
hedged, an option may or may not be less risky than ownership of the futures
contract or such securities. In general, the market prices of options can be
expected to be more volatile than the market prices on the underlying futures
contract. Compared to the purchase or sale of futures contracts, however, the
purchase of call or put options on futures contracts may frequently involve less
potential risk to a Fund because the maximum amount at risk is the premium paid
for the options (plus transaction costs). Although permitted by their investment
policies, the Funds do not currently intend to write futures options, and will
not do so in the future absent any necessary regulatory approvals.
VI. Accounting and Tax Treatment
----------------------------
Accounting for futures contracts and options will be in accordance
with generally accepted accounting principles.
Generally, futures contracts held by a Fund at the close of the Fund's
taxable year will be treated for federal income tax purposes as sold for their
fair market value on the last business day of such year, a process known as
"marking-to-market." Forty percent of any gain or loss resulting from such
constructive sale will be treated as short-term capital gain or loss and 60% of
such gain or loss will be treated as long-term capital gain or loss without
regard to the length of time the Fund holds the futures contract ("the 40-60
rule"). The amount of any capital gain or loss actually realized by a Fund in a
subsequent sale or other disposition of those futures contracts will be adjusted
to reflect any capital gain or loss taken into account by the Fund in a prior
year as a result of the constructive sale of the contracts. With respect to
futures contracts to sell, which will be regarded as parts of a "mixed straddle"
because their values fluctuate inversely to the values of specific securities
held by the Fund, losses as to such contracts to sell will be subject to certain
loss deferral rules which limit the amount of loss currently deductible on
either part of the straddle to the amount thereof which exceeds the unrecognized
gain, if any, with respect to the other part of the straddle, and to certain
wash sales regulations. Under short sales rules, which will also be applicable,
the holding period of the securities forming part of the straddle will (if they
have not been held for the long-term holding period) be deemed not to begin
prior to termination of the straddle. With respect to certain futures contracts,
deductions for interest and carrying charges will not be allowed.
Notwithstanding the rules described above, with respect to futures contracts to
sell which are properly identified as such, a Fund may make an election which
will exempt (in whole or in part) those identified futures contracts from being
treated for federal income tax purposes as sold on the last business day of the
Fund's taxable year, but gains and losses will be subject to such short sales,
wash sales, loss deferral rules and the requirement to capitalize
B-10
<PAGE>
interest and carrying charges. Under temporary regulations, a Fund would be
allowed (in lieu of the foregoing) to elect either (1) to offset gains or losses
from portions which are part of a mixed straddle by separately identifying each
mixed straddle to which such treatment applies, or (2) to establish a mixed
straddle account for which gains and losses would be recognized and offset on a
periodic basis during the taxable year. Under either election, the 40-60 rule
will apply to the net gain or loss attributable to the futures contracts, but in
the case of a mixed straddle account election, not more than 50% of any net gain
may be treated as long-term and no more than 40% of any net loss may be treated
as short-term. Options on futures generally receive federal tax treatment
similar to that described above.
Certain foreign currency contracts entered into by a Fund may be
subject to the "marking-to-market" process and the 40%-60% rule in a manner
similar to that described in the preceding paragraph for futures contracts. To
receive such federal income tax treatment, a foreign currency contract must meet
the following conditions: (1) the contract must require delivery of a foreign
currency of a type in which regulated futures contracts are traded or upon which
the settlement value of the contract depends; (2) the contract must be entered
into at arm's length at a price determined by reference to the price in the
interbank market; and (3) the contract must be traded in the interbank market.
The Treasury Department has broad authority to issue regulations under the
provisions respecting foreign currency contracts. As of the date of this
Additional Statement, the Treasury Department has not issued any such
regulations. Other foreign currency contracts entered into by a Fund may result
in the creation of one or more straddles for federal income tax purposes, in
which case certain loss deferral, short sales, and wash sales rules and the
requirement to capitalize interest and carrying charges may apply.
Some of the Funds' investments may be subject to special rules which
govern the federal income tax treatment of certain transactions denominated in
terms of a currency other than the U.S. dollar or determined by reference to the
value of one or more currencies other than the U.S. dollar. The types of
transactions covered by the special rules include the following: (1) the
acquisition of, or becoming the obligor under, a bond or other debt instrument
(including, to the extent provided in Treasury regulations, preferred stock);
(2) the accruing of certain trade receivables and payables; and (3) the entering
into or acquisition of any forward contract, futures contract, option or similar
financial instrument. The disposition of a currency other than the U.S. dollar
by a U.S. taxpayer is also treated as a transaction subject to the special
currency rules. However, foreign currency-related regulated futures contracts
and nonequity options are generally not subject to the special currency rules if
they are or would be treated as sold for their fair market value at year-end
under the marking-to-market rules, unless an election is made to have such
currency rules apply. With respect to transactions covered by the special rules,
foreign currency gain or loss is calculated separately from any gain or loss on
the underlying transaction and is normally taxable as ordinary gain or loss. A
taxpayer may elect to treat as capital gain or loss foreign currency gain or
loss arising from certain identified forward contracts, futures contracts and
options that are capital assets in the hands of the taxpayer and which are not a
part of a straddle. In accordance with Treasury
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<PAGE>
regulations, certain transactions that are part of a "section 988 hedging
transaction" (as defined in the Code and the Treasury regulations) may be
integrated and treated as a single transaction or otherwise treated consistently
for purposes of the Code. "Section 988 hedging transactions" are not subject to
the mark-to-market or loss deferral rules under the Code. Gain or loss
attributable to the foreign currency component of transactions engaged in by a
Fund which are not subject to the special currency rules (such as foreign equity
investments other than certain preferred stocks) will be treated as capital gain
or loss and will not be segregated from the gain or loss on the underlying
transaction.
As described more fully in "Additional Information Concerning Taxes,"
a regulated investment company must derive less than 30% of its gross income
from gains realized on the sale or other disposition of securities and certain
other investments held for less than three months. With respect to futures
contracts and other financial instruments subject to the marking-to-market
rules, the Internal Revenue Service has ruled in private letter rulings that a
gain realized from such a futures contract or financial instrument will be
treated as being derived from a security held for three months or more
(regardless of the actual period for which the contract or instrument is held)
if the gain arises as a result of a constructive sale under the marking-to-
market rules, and will be treated as being derived from a security held for less
than three months only if the contract or instrument is terminated (or
transferred) during the taxable year (other than by reason of marking-to-market)
and less than three months have elapsed between the date the contract or
instrument is acquired and the termination date. In determining whether the 30%
test is met for a taxable year, increases and decreases in the value of each
Fund's futures contracts and other investments that qualify as part of a
"designated hedge," as defined in the Code, may be netted.
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<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
---------------------------------
(a) Financial Statements:
(1) Included in Part A hereof:
Financial Highlights for:
- Managed Assets Conservative Fund
- Managed Assets Balanced Fund
- Managed Assets Growth Fund
- Equity Income Fund
- Growth Fund
- Mid-Cap Opportunity Fund
- Small-Cap Opportunity Fund
- Intrinsic Value Fund
- Growth and Value Fund
- Equity Index Fund
- International Equity Fund
- Intermediate Bond Fund
- Bond Fund
- Short Bond Fund
- Multi Sector Bond Fund
- International Bond Fund
- Municipal Bond Fund
- Intermediate Municipal Bond Fund
- Michigan Municipal Bond Fund
(2) Incorporated by reference in Part B hereof:
The audited financial statements and related notes thereto as well
as the auditor's reports thereon included as a part of the Annual
Report to Shareholders for the year or period ended December 31,
1996 with respect to each of the Managed Assets Conservative
Fund, Managed Assets Balanced Fund, Managed Assets Growth Fund,
Equity Income Fund, Growth Fund, Mid-Cap Opportunity Fund, Small-
Cap Opportunity Fund, Intrinsic Value Fund, Growth and Value Fund,
Equity Index Fund, International Equity Fund, Intermediate Bond
Fund, Bond Fund, Short Bond Fund, Multi Sector Bond Fund,
International Bond Fund, Municipal Bond Fund, Intermediate
Municipal Bond Fund and Michigan Municipal Bond Fund are
incorporated herein by reference to such Annual Report as filed
with the Securities and Exchange Commission on March
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<PAGE>
7, 1997 pursuant to Rule 30b2-1 of the Investment Company Act of
1940 (Nos. 33-13990/811-5148).
The unaudited financial statements and related notes thereto included as a
part of the Semi-Annual Report to Shareholders for the year or period ended
June 30, 1997 with respect to each of the Managed Assets Conservative Fund,
Managed Assets Balanced Fund, Managed Assets Growth Fund, Equity Income
Fund, Growth Fund, Mid-Cap Opportunity Fund, Small-Cap Opportunity Fund,
Intrinsic Value Fund, Growth and Value Fund, Equity Index Fund,
International Equity Fund, Bond Fund, Intermediate Bond Fund, Short Bond
Fund, Multi Sector Bond Fund, International Bond Fund, Municipal Bond Fund,
Intermediate Municipal Bond Fund and Michigan Municipal Bond Fund are
incorporated herein by reference to such Semi-Annual Report as filed with
the Securities and Exchange Commission on August 28, 1997 pursuant to Rule
30b2-1 of the Investment Company Act of 1940 (Nos. 33-13990/811-5148).
(b) Exhibits:
(1) (a) Amended and Restated Declaration of Trust dated as of May 1, 1992
is incorporated herein by reference to exhibit (1)(b) of Post-
Effective Amendment No. 10 to Registrant's Registration Statement
on Form N-1A filed with the Commission on September 8, 1992.
(b) Amendment No. 1 to the Amended and Restated Declaration of
Trust dated as of September 12, 1996 is incorporated herein by
reference to exhibit 1(b) of Post-Effective Amendment No. 39 to
Registrant's Registration Statement on Form N-1A filed with the
Commission on December 30, 1996.
(2) Bylaws of Registrant is incorporated herein by reference to
exhibit (2) of Pre-Effective Amendment No. 1 to the Registrant's
Registration Statement on Form N-1A filed with the Commission on
July 24, 1987.
(3) None.
(4) None.
(5) (a) Co-Advisory Agreement among Registrant, NBD Bank ("NBD") and
First Chicago Investment Management Company ("FCIMCO") dated as
of April 12, 1996 is incorporated herein by
C-2
<PAGE>
reference to exhibit 5(a) of Post-Effective Amendment No. 39
to Registrant's Registration Statement on Form N-1A filed
with the Commission on December 30, 1996.
(b) Addendum No. 1 dated June 27, 1997, to Advisory Agreement
between Registrant and First Chicago NBD Investment
Management Company ("FCNIMCO") relating to the Pegasus
Treasury Cash Management and High Yield Bond Funds (Series
CC and DD) is incorporated herein by reference to exhibit
5(b) of Post-Effective Amendment No. 43 to Registrant's
Registration Statement or Form N-1A filed with the
Commission on June 30, 1997.
(c) Sub-Advisory Agreement dated June 30, 1997, between FCNIMCO
and Federated Investment Counseling relating to Pegasus High
Yield Bond Fund is incorporated herein by reference to
exhibit 5(c) of Post-Effective Amendment No. 43 to
Registrant's Registration Statement on Form N-1A filed with
the Commission on June 30, 1997.
(d) Addendum No. 2 dated July 30, 1997, to Advisory Agreement
between Registrant and FCNIMCO relating to the Pegasus
Municipal Cash Management Fund (Series EE).
(e) Form of Addendum No. 3 to Advisory Agreement between
Registrant and FCNIMCO relating to the modification of
language regarding new portfolios.
(6) (a) Distribution Agreement between Registrant and BISYS Fund
Services ("BISYS") dated as of June 11, 1996 is incorporated
herein by reference to exhibit 6(a) of Post-Effective
Amendment No. 39 to Registrant's Registration Statement on
Form N-1A filed with the Commission on December 30, 1996.
(b) Addendum No. 1 dated June 27, 1997, to Distribution
Agreement between Registrant and BISYS relating to the
Pegasus Treasury Cash Management and High Yield Bond Funds
(Series CC and DD) is incorporated herein by reference to
exhibit 6(b) of Post-Effective Amendment No. 43 to
Registrant's Registration Statement on Form N-1A filed with
the Commission on June 30, 1997.
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<PAGE>
(c) Addendum No. 2 dated July 30, 1997, to Distribution Agreement
between Registrant and BISYS relating to the Pegasus Municipal
Cash Management Fund (Series EE).
(d) Form of Addendum No. 3 to Distribution Agreement between
Registrant and BISYS relating to the Pegasus Short Municipal
Bond and Market Expansion Index Funds (Series FF and GG).
(7) Deferred Compensation Plan is incorporated herein by reference
to exhibit (7) of Post-Effective Amendment No. 30 to the
Registrant's Registration Statement on Form N-1A filed with the
Commission on April 15, 1996.
(8) (a) Amended and Restated Custodian Agreement dated May 16, 1989
between Registrant and National Bank of Detroit for Series A, B,
C, H, I, J, K and L of the Registrant is incorporated herein by
reference to exhibit (8)(b) of Post-Effective Amendment No. 3 to
the Registrant's Registration Statement on Form N-1A filed with
the Commission on April 30, 1990.
(b) Addendum No. 1 dated January 23, 1991 to the Amended and Restated
Custodian Agreement between Registrant and NBD relating to the
Woodward Michigan Tax-Exempt Money Market Fund (Series M) is
incorporated herein by reference to exhibit (8)(c) of Post-
Effective Amendment No. 5 to the Registrant's Registration
Statement on Form N-1A filed with the Commission on February 28,
1991.
(c) Addendum No. 2 dated April 28, 1992 to the Amended and Restated
Custodian Agreement between Registrant and NBD relating to the
Woodward Equity Index Fund (Series N) is incorporated herein by
reference to exhibit (8)(d) of Post-Effective Amendment No. 10 to
the Registrant's Registration Statement on Form N-1A filed with
the Commission on September 8, 1992.
(d) Addendum No. 3 dated January 1, 1993 to the Amended and Restated
Custodian Agreement between Registrant and NBD relating to the
Woodward Treasury Money Market Fund (Series O) is incorporated
herein by reference to exhibit (8)(e) of Post-Effective Amendment
No. 14 to
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<PAGE>
the Registrant's Registration Statement on Form N-1A filed with
the Commission on April 29, 1993.
(e) Addendum No. 4 dated February 1, 1993 to the Amended and
Restated Custodian Agreement between Registrant and NBD relating
to the Woodward Municipal Bond Fund (Series P) and the Woodward
Michigan Municipal Bond Fund (Series Q) is incorporated herein by
reference to exhibit (8)(f) of Post-Effective Amendment No. 14 to
the Registrant's Registration Statement on Form N-1A filed with
the Commission on April 29, 1993.
(f) Addendum No. 5 dated January 1, 1994 to the Amended and Restated
Custodian Agreement between Registrant and NBD relating to the
Woodward Balanced Fund (Series R) is incorporated herein by
reference to exhibit (8)(g) of Post-Effective Amendment No. 22 to
the Registrant's Registration Statement on Form N-1A filed with
the Commission on July 29, 1994.
(g) Addendum No. 6 dated July 1, 1994 to the Amended and Restated
Custodian Agreement between Registrant and NBD relating to the
Woodward Capital Growth and Short Bond Funds (Series S and U) is
incorporated herein by reference to exhibit (8)(h) of Post-
Effective Amendment No. 23 to the Registrant's Registration
Statement on Form N-1A filed with the Commission on January 27,
1995.
(h) Addendum No. 7 dated November 30, 1994 to the Amended and
Restated Custodian Agreement between Registrant and NBD relating
to the Woodward International Equity Fund (Series T) is
incorporated herein by reference to exhibit (8)(i) of Post-
Effective Amendment No. 25 to the Registrant's Registration
Statement on Form N-1A filed with the Commission on July 28,
1995.
(i) Addendum No. 8 to the Amended and Restated Custodian Agreement
between Registrant and NBD relating to the Woodward Cash
Management, U.S. Government Securities Cash Management, Treasury
Prime Cash Management, Equity Income, Small Cap Opportunity,
Intermediate Municipal Bond, Multi Sector Bond, International
Bond,
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<PAGE>
Managed Assets Conservative and Managed Assets Growth Funds is
incorporated herein by reference to exhibit (8)(i) of Post-
Effective Amendment No. 28 to the Registrant's Registration
Statement on Form N-1A filed with the Commission on April 5,
1996.
(j) Addendum No. 9 dated June 27, 1997, to the Amended and Restated
Custodian Agreement between Registrant and NBD relating to the
Pegasus Treasury Cash Management and High Yield Bond Funds
(Series CC and DD) is incorporated herein by reference to exhibit
8(j) of Post-Effective Amendment No. 43 to the Registrant's
Registration Statement on Form N-1A filed with the Commission on
June 30, 1997.
(k) Addendum No. 10 dated July 30, 1997, to Amended and Restated
Custodian Agreement between Registrant and NBD relating to the
Pegasus Municipal Cash Management Fund (Series EE).
(l) Form of Addendum No. 11 to Amended and Restated Custodian
Agreement between Registrant and NBD relating to the Pegasus
Short Municipal Bond and Market Expansion Index Funds (Series FF
and GG).
(9) (a) Co-Administration Agreement among the Registrant, NBD, FCIMCO
and BISYS dated as of June 11, 1996 is incorporated herein by
reference to exhibit 9(a) of Post-Effective Amendment No. 39 to
the Registrant's Registration Statement on Form N-1A filed with
the Commission on December 30, 1996.
(b) Addendum No. 1 dated June 27, 1997 to the Co-Administration
Agreement among Registrant, FCNIMCO and BISYS relating to the
Pegasus Treasury Cash Management and High Yield Bond Funds
(Series CC and DD) is incorporated herein by reference to exhibit
9(b) of Post-Effective Amendment No. 43 to the Registrant's
Registration Statement on Form N-1A filed with the Commission on
June 30, 1997.
(c) Addendum No. 2 dated July 30, 1997, to the Co-Administration
Agreement among Registrant, FCNIMCO and BISYS relating to the
Pegasus Municipal Cash Management Fund (Series EE).
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<PAGE>
(d) Form of Addendum No. 3 to the Co-Administration Agreement
among Registrant, FCNIMCO and BISYS.
(e) Transfer Agency and Services Agreement between the
Registrant and First Data Investor Services Group, Inc.
("FDISG") dated August 5, 1996 is incorporated herein by
reference to exhibit (9)(a) of Post-Effective Amendment No.
39 to the Registrant's Registration Statement on Form N-1A
filed with the Commission on December 30, 1996.
(f) Addendum No. 1 dated June 27, 1997 to the Transfer Agency
and Services Agreement between Registrant and FDISG relating
to the Pegasus Treasury Cash Management and High Yield Bond
Funds (Series CC and DD) is incorporated herein by reference
to exhibit 9(d) of Post-Effective Amendment No. 43 to the
Registrant's Registration Statement on Form N-1A filed with
the Commission on June 30, 1997.
(g) Addendum No. 2 dated July 30, 1997, to Transfer Agency and
Services Agreement between Registrant and FDISG relating to
Pegasus Municipal Cash Management Fund (Series EE).
(h) Form of Addendum No. 3 to Transfer Agency and Services
Agreement between Registrant and FDISG relating to the
Pegasus Short Municipal Bond and Market Expansion Index
Funds (Series FF and GG).
(i) Shareholder Services Plan including form of Service
Agreement with respect to Class A Shares is incorporated
herein by reference to exhibit (9)(p) of Post-Effective
Amendment No. 30 to the Registrant's Registration Statement
on Form N-1A filed with the Commission on April 15, 1996.
(j) Shareholder Administrative Services Plan including form of
Service Agreement is incorporated herein by reference to
Exhibit (9)(f) of Post-Effective Amendment No. 42 to the
Registrant's Registration Statement on Form N-1A filed with
the Commission on May 28, 1997.
(k) Agency Agreement between Registrant and NBD dated March 11,
1996 is incorporated herein by
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<PAGE>
reference to exhibit 9(e) of Post-Effective Amendment No. 40
to the Registrant's Registration Statement on Form N-1A
filed with the Commission on April 30, 1997.
(l) Agency Agreement between Registrant and Putnam Fiduciary
Trust Company dated November 11, 1996 is incorporated herein
by reference to exhibit 9(h) of Post-Effective Amendment No.
41 to Registrant's Registration Statement on Form N-1A filed
with the Commission on May 16, 1997.
(m) Agency Agreement between Registrant and BISYS dated March
18, 1997 is incorporated herein by reference to exhibit 9(i)
of Post-Effective Amendment No. 41 to Registrant's
Registration Statement on Form N-1A filed with the
Commission on May 16, 1997.
(10)/*/ Opinion of Drinker Biddle & Reath LLP, counsel for the
Registrant.
(11) (a) Consent of Arthur Andersen LLP.
(b) Consent of Ernst & Young LLP.
(c) Consent of Drinker Biddle & Reath LLP.
(12) None.
(13) None.
(14) None.
(15) (a) Distribution Plan for Class B Shares is incorporated herein
by reference to exhibit 15(a) of Post-Effective Amendment
No. 42 to the Registrant's Registration Statement on Form
N-1A filed with the Commission on May 28, 1997.
(b) Distribution and Services Plan including form of Agreement
(relating to the Cash Management Funds) is incorporated
herein by reference to exhibit 15(b) of Post-Effective
Amendment No. 42 to the Registrant's Registration Statement
- ----------------------
/*/ Filed with the Commission on March 3, 1997 under Rule 24f-2 as part of
Registrant's 24f-2 Notice.
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<PAGE>
on Form N-1A filed with the Commission on May 28, 1997.
(16) (a) Schedules of Performance Computations with regard to the
Money Market, Government and Municipal Money Market Funds
are incorporated herein by reference to exhibit (16) of
Post-Effective Amendment No. 5 to the Registrant's
Registration Statement on Form N-1A filed with the
Commission on February 28, 1991.
(b) Schedules of Performance Computations with respect to the
Michigan Municipal Money Market, Growth and Value, Mid-
Cap Opportunity, Intrinsic Value, Intermediate Bond
and Bond Funds are incorporated herein by reference to
Exhibit (16)(b) of Post-Effective Amendment No. 7 to the
Registrant's Registration Statement on Form N-1A filed with
the Commission on December 3, 1991.
(c) Schedules of Performance Computations with respect to the
Equity Index and Treasury Money Market Funds are
incorporated herein by reference to Exhibit 16(c) of Post-
Effective Amendment No. 14 to the Registrant's Registration
Statement on Form N-1A filed with the Commission on April
29, 1993.
(d) Schedules of Performance Computations with respect to the
Municipal Bond and Michigan Municipal Bond Funds are
incorporated herein by reference to Exhibit 16(d) of Post-
Effective Amendment No. 15 to the Registrant's Registration
Statement on Form N-1A filed with the Commission on July 30,
1993.
(e) Schedules of Performance Computations with respect to the
Managed Assets Balanced Fund are incorporated herein by
reference to Exhibit 16(e) of Post-Effective Amendment No.
22 to the Registrant's Registration Statement on Form N-1A
filed with the Commission on July 29, 1994.
(f) Schedules of Performance Computations with respect to the
Growth and Short Bond Funds are incorporated herein by
reference to
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<PAGE>
exhibit (16)(f) of Post-Effective Amendment No. 23 to the
Registrant's Registration Statement on Form N-1A filed with
the Commission on January 27, 1995.
(g) Schedules of Performance Computations with respect to the
International Equity Fund is incorporated herein by
reference to exhibit (16)(g) of Post-Effective Amendment No.
25 to the Registrant's Registration Statement on Form N-1A
filed with the Commission on July 28, 1995.
(h) Schedules of Performance Computations with respect to the
Cash Management, Treasury Prime Cash Management and U.S.
Government Securities Cash Management Funds are incorporated
herein by reference to exhibit (16)(h) of Post-Effective
Amendment No. 34 to the Registrant's Registration Statement
on Form N-1A filed with the Commission on July 24,
1996.
(i) Schedules of Performance Calculations with respect to
Managed Assets Growth Fund are incorporated herein by
reference to exhibit (16)(i) of Post-Effective Amendment No.
42 to the Registrant's Registration Statement on Form N-1A
filed with the Commission on May 28, 1997.
(j) Schedules of Performance Calculations with respect to Equity
Income, Short Bond, Small-Cap Opportunity, Intermediate
Municipal Bond, Managed Assets Conservative, Multi Sector
Bond, Treasury Cash Management, Municipal Cash Management
and High Yield Bond Funds.
(17) None.
(18) Amended and Restated Rule 18f-3 Plan is incorporated herein
by reference to exhibit 18 of Post-Effective Amendment No.
42 to the Registrant's Registration Statement on Form N-1A
filed with the Commission on May 28, 1997.
(27) Financial Data Schedules.
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ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
-------------------------------------------------------------
Registrant is controlled by its Board of Trustees. However, under the
Investment Company Act of 1940, NBD Bank may be deemed a controlling person of
the Registrant because such entity possesses or shares investment or voting
power with respect to more than 25% of the outstanding shares of the Registrant.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
-------------------------------
The following table sets forth information as to all record holders of
Registrant's securities as of September 30, 1997:
<TABLE>
<CAPTION>
Number
of
Record
Title of Class Holders
-------------- -------
<S> <C>
Growth and Value Fund -- Class A 5,695
Growth and Value Fund -- Class B 266
Growth and Value Fund -- Class I 10
Small-Cap Opportunity Fund -- Class A 1,632
Small-Cap Opportunity Fund -- Class B 139
Small-Cap Opportunity Fund -- Class I 9
Mid-Cap Opportunity Fund -- Class A 8,591
Mid-Cap Opportunity Fund -- Class B 241
Mid-Cap Opportunity Fund -- Class I 12
Intrinsic Value Fund -- Class A 3,226
Intrinsic Value Fund -- Class B 235
Intrinsic Value Fund -- Class I 9
Equity Index Fund -- Class A 833
Equity Index Fund -- Class B 111
Equity Index Fund -- Class I 9
Equity Income Fund -- Class A 512
Equity Income Fund -- Class B 176
Equity Income Fund -- Class I 10
Growth Fund -- Class A 2,287
Growth Fund -- Class B 170
Growth Fund -- Class I 9
International Equity Fund -- Class A 1,844
International Equity Fund -- Class B 204
International Equity Fund -- Class I 10
Managed Assets Conservative Fund -- Class A 2,453
Managed Assets Conservative Fund -- Class B 488
Managed Assets Conservative Fund -- Class I 6
Managed Assets Balanced Fund -- Class A 1,266
Managed Assets Balanced Fund -- Class B 391
Managed Assets Balanced Fund -- Class I 5
Managed Assets Growth Fund -- Class A 203
</TABLE>
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<PAGE>
Number
of
Record
Title of Class Holders
-------------- -------
Managed Assets Growth Fund -- Class B 210
Managed Assets Growth Fund -- Class I 2
Bond Fund -- Class A 2,746
Bond Fund -- Class B 98
Bond Fund -- Class I 9
Intermediate Bond Fund -- Class A 761
Intermediate Bond Fund -- Class B 18
Intermediate Bond Fund -- Class I 8
Multi Sector Bond Fund -- Class A 157
Multi Sector Bond Fund -- Class B 38
Multi Sector Bond Fund -- Class I 7
Short Bond Fund -- Class A 48
Short Bond Fund -- Class B 8
Short Bond Fund -- Class I 8
Municipal Bond Fund -- Class A 722
Municipal Bond Fund -- Class B 34
Municipal Bond Fund -- Class I 8
Michigan Municipal Bond Fund -- Class A 560
Michigan Municipal Bond Fund -- Class B 16
Michigan Municipal Bond Fund -- Class I 6
Intermediate Municipal Bond Fund -- Class A 307
Intermediate Municipal Bond Fund -- Class B 24
Intermediate Municipal Bond Fund -- Class I 7
International Bond Fund -- Class A 1,213
International Bond Fund -- Class B 26
International Bond Fund -- Class I 5
High Yield Bond Fund -- Class A 2
High Yield Bond Fund -- Class B 1
High Yield Bond Fund -- Class I 3
ITEM 27. INDEMNIFICATION
Indemnification of Registrant's Distributor against certain losses is provided
for in Section 10 of the Distribution Agreement incorporated herein by reference
as Exhibit (6)(a). Indemnification of Registrant's Custodian is provided for in
Article XII of the Amended and Restated Custodian Agreement incorporated herein
by reference as Exhibit (8)(a). Indemnification of Registrant's Transfer Agent
and Dividend Disbursing Agent is provided for in Article 10 of the Transfer
Agency and Services Agreement incorporated herein by reference as Exhibit
(9)(b).
Registrant has obtained from a major insurance carrier a trustees' and officers'
liability policy covering certain types of errors and omissions.
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<PAGE>
Section 5.1 of the Registrant's Amended and Restated Declaration of Trust,
incorporated herein by reference as Exhibit (1)(a), provides for the
indemnification of the Registrant's shareholders.
Section 5.4 of the Registrant's Amended and Restated Declaration of Trust,
incorporated herein by reference as Exhibit (1)(a), provides for the
indemnification of the Registrant's trustees and officers:
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to trustees, officers and controlling persons of
Registrant pursuant to the foregoing provisions, or otherwise, Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses incurred or
paid by a trustee, officer or controlling person of Registrant in the successful
defense of any action, suit or proceeding) is asserted by such trustee, officer
or controlling person in connection with the securities being registered,
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISERS
The Registrant's investment adviser, First Chicago NBD Investment
Management Company ("FCNIMCO"), is a registered investment adviser and wholly-
owned subsidiary of The First National Bank of Chicago ("FNBC"), which in turn
is a wholly-owned subsidiary of First Chicago NBD Corporation, a registered bank
holding company.
Registrant is fulfilling the requirement of this Item 28 to provide a
list of the officers and directors of FCNIMCO, together with information as to
any other business, profession, vocation or employment of a substantial nature
engaged in by FCNIMCO or those of its officers and directors during the past two
years, by incorporating by reference the information contained in the Form ADV
filed with the SEC pursuant to the Investment Advisers Act of 1940 by FCNIMCO
(SEC File No. 801-47947).
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<PAGE>
ITEM 29. PRINCIPAL UNDERWRITER
(a) BISYS Fund Services acts as distributor and co-administrator for the
Registrant. BISYS Fund Services also distributes the securities of American
Performance Funds, AmSouth Mutual Funds, The ARCH Fund, Inc., BB&T Mutual Funds
Group, The Coventry Group, First Choice Funds Trust, Fountain Square Funds,
Hirtle Callaghan Trust, HSBC Funds Trust, HSBC Mutual Funds Trust, The Infinity
Mutual Funds, Inc., Intrust Funds, The Kent Funds, MarketWatch Funds, Meyers
Sheppard Investment Trust, Minerva Funds, MMA Praxis Mutual Funds, The M.S.D & T
Funds, Inc., Pacific Capital Funds, The Parkstone Advantage Funds, The Parkstone
Group of Funds, Qualivest Funds, The Republic Advisors Funds Trust, The Republic
Funds Trust, The Riverfront Funds, Inc., SBSF Funds, Inc. dba Key Mutual Funds,
Sefton Funds, The Sessions Group Summit Investment Trust and The Victory
Portfolios, each of which is an open-end management investment company.
(b) The information required by this Item 29 with respect to each
director, officer or partner of BISYS Fund Services is incorporated by reference
to their Form BD (File No. 8-32480) filed by BISYS Fund Services with the
Securities and Exchange Commission pursuant to the Securities Exchange Act of
1934.
(c) None.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
(a) NBD Bank, 900 Tower Drive, Troy, Michigan 48098 (records relating to
its function as former adviser, custodian and transfer and dividend disbursing
agent).
(b) First of Chicago NBD Investment Management Company, Three First
National Plaza, 70 West Madison, Chicago, Illinois 60670 (records relating to
its functions as advisor and co-administrator).
(c) BISYS Fund Services, 3435 Stelzer Road, Columbus, Ohio 43219 (records
relating to its functions as distributor and co-administrator).
(d) Drinker Biddle & Reath LLP, 1345 Chestnut Street, Philadelphia,
Pennsylvania 19107-3496 (Registrant's Declaration of Trust, By-Laws and Minute
Books).
(e) First Data Investor Services Group, Inc., 4400 Computer Drive,
Westborough, Massachusetts 01581-5120 (records relating to its function as
transfer agent and dividend disbursing agent).
C-14
<PAGE>
ITEM 31. MANAGEMENT SERVICES
-------------------
Inapplicable.
ITEM 32. UNDERTAKINGS
------------
Registrant undertakes to call a meeting of shareholders for the
purpose of voting upon the question of removal of a trustee or trustees if
requested to do so by the holders of at least 10% of Registrant's outstanding
shares. Registrant will stand ready to assist shareholder communications in
connection with any meeting of shareholders as prescribed in Section 16(c) of
the Investment Company Act of 1940.
Registrant undertakes to furnish each person to whom a prospectus is
delivered a copy of the Registrant's most recent annual report to shareholders,
upon request and without charge.
Registrant undertakes to file a post-effective amendment with respect
to the Short Municipal Bond and Market Expansion Index Funds, containing
financial statements that need not be certified, within four to six months from
the effective date of this Post-Effective Amendment.
C-15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Amendment
to its Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Detroit, State of Michigan, on the
25th day of November, 1997.
PEGASUS FUNDS
Registrant
/s/ Donald G. Sutherland
-------------------------
Donald G. Sutherland
President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ Donald G. Sutherland President and November 25, 1997
- -------------------------- Trustee
Donald G. Sutherland
/s/ John P. Gould Chairman and November 25, 1997
- -------------------------- Trustee
John P. Gould
/s/ D'Ray Moore Treasurer November 25, 1997
- -------------------------- (Chief
D'Ray Moore Financial
Officer)
- -------------------------- Trustee
Will M. Caldwell
/s/ Nicholas De Grazia Trustee November 25, 1997
- --------------------------
Nicholas J. De Grazia
/s/ Marilyn McCoy Trustee November 25, 1997
- --------------------------
Marilyn McCoy
/s/ Julius L. Pallone Trustee November 25, 1997
- --------------------------
Julius L. Pallone
/s/ Donald L. Tuttle Trustee November 25, 1997
- --------------------------
Donald L. Tuttle
</TABLE>
<PAGE>
EXHIBIT INDEX
-------------
Exhibit No. Exhibit
----------- -------
(5) (d) Addendum No. 2 dated July 30, 1997 to the Advisory
Agreement between Registrant and FCNIMCO relating to the
Pegasus Municipal Cash Management Fund.
(5) (e) Form of Addendum No. 3 to the Advisory Agreement between
Registrant and FCNIMCO relating to the Pegasus Short
Municipal Bond and Market Expansion Index Funds.
(6) (c) Addendum No. 2 dated July 30, 1997 to the Distribution
Agreement between Registrant and BISYS relating to the
Pegasus Municipal Cash Management Fund.
(6) (d) Form of Addendum No. 3 to the Distribution Agreement between
Registrant and BISYS relating to the Pegasus Short Municipal
Bond and Market Expansion Index Funds.
(8) (k) Addendum No. 10 dated July 30, 1997 to the Amended and
Restated Custodian Agreement between Registrant and NBD
relating to the Pegasus Municipal Cash Management Fund.
(8) (l) Form of Addendum No. 11 to the Amended and Restated Custodian
Agreement between Registrant and NBD relating to the Pegasus
Short Municipal Bond and Market Expansion Index Funds.
(9) (c) Addendum No. 2 dated July 30, 1997 to the Co-Administration
Agreement among Registrant, FCNIMCO and BISYS relating to the
Pegasus Municipal Cash Management Fund.
(9) (d) Form of Addendum No. 3 to the Co-Administration Agreement
among Registrant, FCNIMCO and BISYS relating to the
modification of language regarding new portfolios.
(9) (g) Addendum No. 2 dated July 30, 1997 to the Transfer Agency and
Services Agreement between Registrant and FDISG relating to
the Pegasus Municipal Cash Management Fund.
<PAGE>
(9) (h) Form of Addendum No. 3 to the Transfer Agency and Services
Agreement between Registrant and FDISG relating to the
Pegasus Short Municipal Bond and Market Expansion Index
Funds.
(11)(a) Consent of Arthur Andersen LLP.
(11)(b) Consent of Ernst & Young LLP.
(11)(c) Consent of Drinker Biddle & Reath LLP.
(11)(j) Schedules of Performance Calculations for the Equity Income,
Short Bond, Small-Cap Opportunity, Intermediate Municipal
Bond, Managed Assets Conservative, Multi Sector Bond,
Treasury Cash Management, Municipal Cash Management and High
Yield Bond Funds.
(27) Financial Data Schedules
<PAGE>
Exhibit 5(d)
ADDENDUM NO. 2 TO ADVISORY AGREEMENT
------------------------------------
This Addendum, dated as of the 30th day of July, 1997, is entered into
between PEGASUS FUNDS (the "Trust"), a Massachusetts business trust, and FIRST
CHICAGO NBD INVESTMENT MANAGEMENT COMPANY ("FCNIMCO"), a registered investment
adviser.
WHEREAS, the Trust, and FCNIMCO have entered into an Advisory
Agreement dated April 12, 1996 and Addendum No. 1 ("Advisory Agreement"),
pursuant to which the Trust appointed FCNIMCO to act as investment adviser
("Adviser") to the Trust's Money Market, Treasury Money Market, Municipal Money
Market, Michigan Municipal Money Market, Cash Management, U.S. Government
Securities Cash Management, Treasury Cash Management, Treasury Prime Cash
Management, Growth, International Equity, Equity Index, Growth and Value,
Intrinsic Value, Mid-Cap Opportunity, Equity Income, Small-Cap Opportunity,
Bond, High Yield Bond, Short Bond, Michigan Municipal Bond, Intermediate
Municipal Bond, Municipal Bond, Income, Intermediate Bond, International Bond,
Managed Assets Balanced, Managed Assets Conservative and Managed Assets Growth
Funds (each a "Fund");
WHEREAS, Article 1(b) of the Advisory Agreement provides that in the
event the Trust establishes one or more additional portfolios with respect to
which it desires to retain FCNIMCO to act as the Adviser under the Advisory
Agreement, the Trust shall so notify FCNIMCO in writing and if FCNIMCO is
willing to render such services it shall notify the Trust in writing, and the
compensation to be paid to FCNIMCO pursuant to Article 5 of the Advisory
Agreement;
WHEREAS, pursuant to Article 1(b) of the Advisory Agreement, the Trust
has notified FCNIMCO that it has established the Municipal Cash Management Fund
and that it desires to retain FCNIMCO to act as the Adviser therefor, and
FCNIMCO has notified the Trust that it is willing to serve as Adviser for such
Funds.
NOW THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. Appointment. The Trust hereby appoints FCNIMCO to act as Adviser
to the Trust for the Municipal Cash Management Fund for the period and on the
terms set forth in the Advisory Agreement. FCNIMCO hereby accepts such
appointment and agrees to render the services set forth in the Advisory
Agreement for the compensation herein provided.
<PAGE>
2. Compensation. For the services provided and the expenses assumed
pursuant to the Advisory Agreement, the Trust will pay the Adviser, and the
Adviser will accept as full compensation therefor, a fee, computed daily and
payable monthly, at the annual rate of .20% of the Municipal Cash Management
Fund's average daily net assets.
3. Capitalized Terms. From and after the date hereof, the term
"Fund" as used in the Advisory Agreement shall be deemed to include the
Municipal Cash Management Fund. Capitalized terms used herein and not otherwise
defined shall have the meanings ascribed to them in the Advisory Agreement.
4. Miscellaneous. Except to the extent supplemented hereby, the
Advisory Agreement shall remain unchanged and in full force and effect and is
hereby ratified and confirmed in all respects as supplemented hereby.
IN WITNESS WHEREOF, the undersigned have executed this Addendum as of
the date and year first above written.
PEGASUS FUNDS
By: /s/ Donald G. Sutherland
--------------------------------
Donald G. Sutherland
President and Trustee
FIRST CHICAGO NBD INVESTMENT
MANAGEMENT COMPANY
By: /s/ Marco Hanig
--------------------------------
Marco Hanig
Managing Director
<PAGE>
Exhibit 5(e)
ADDENDUM NO. 3 TO ADVISORY AGREEMENT
------------------------------------
This Addendum, dated as of the _____ day of __________, 199_, is
entered into between PEGASUS FUNDS (the "Trust"), a Massachusetts business
trust, and FIRST CHICAGO NBD INVESTMENT MANAGEMENT COMPANY ("FCNIMCO"), a
registered investment adviser.
WHEREAS, the Trust, and FCNIMCO have entered into an Advisory
Agreement dated April 12, 1996 ("Advisory Agreement"), pursuant to which the
Trust appointed FCNIMCO to act as investment adviser ("Adviser") to the Trust's
Money Market, Treasury Money Market, Municipal Money Market, Michigan Municipal
Money Market, Cash Management, U.S. Government Securities Cash Management,
Treasury Prime Cash Management, Treasury Cash Management, Municipal Cash
Management, Growth, International Equity, Equity Index, Growth and Value,
Intrinsic Value, Mid-Cap Opportunity, Equity Income, Small-Cap Opportunity,
Bond, High Yield Bond, Short Bond, Michigan Municipal Bond, Intermediate
Municipal Bond, Municipal Bond, Income, Intermediate Bond, International Bond,
Managed Assets Balanced, Managed Assets Conservative and Managed Assets Growth
Funds (each a "Fund");
WHEREAS, Article 1(b) of the Advisory Agreement provides that in the
event the Trust establishes one or more additional portfolios with respect to
which it desires to retain FCNIMCO to act as the Adviser under the Advisory
Agreement, the Trust shall so notify FCNIMCO in writing and if FCNIMCO is
willing to render such services it shall notify the Trust in writing, and the
compensation to be paid to FCNIMCO pursuant to Article 5 of the Advisory
Agreement;
WHEREAS, pursuant to Article 1(b) of the Advisory Agreement, the Trust
has notified FCNIMCO that it has established the Market Expansion Index and
Short Municipal Bond Funds and that it desires to retain FCNIMCO to act as the
Adviser therefor, and FCNIMCO has notified the Trust that it is willing to serve
as Adviser for such Funds.
NOW THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. Appointment. The Trust hereby appoints FCNIMCO to act as Adviser
to the Trust for the Market Expansion Index Fund and Short Municipal Fund for
the period and on the terms set forth in the Advisory Agreement. FCNIMCO hereby
accepts such appointment and agrees to render the services set forth in the
Advisory Agreement for the compensation herein provided.
<PAGE>
2. Compensation. For the services provided and the expenses assumed
pursuant to the Advisory Agreement, the Trust will pay the Adviser, and the
Adviser will accept as full compensation therefor, a fee, computed daily and
payable monthly, at the annual rate of .25% and .40% of the Market Expansion
Index and Short Municipal Bond Funds' average daily net assets, respectively.
3. Capitalized Terms. From and after the date hereof, the term
"Fund" as used in the Advisory Agreement shall be deemed to include the Market
Expansion Index Fund and Short Municipal Bond Fund. Capitalized terms used
herein and not otherwise defined shall have the meanings ascribed to them in the
Advisory Agreement.
4. Miscellaneous. Except to the extent supplemented hereby, the
Advisory Agreement shall remain unchanged and in full force and effect and is
hereby ratified and confirmed in all respects as supplemented hereby.
IN WITNESS WHEREOF, the undersigned have executed this Addendum as of
the date and year first above written.
PEGASUS FUNDS
By:________________________________
D'Ray Moore
Treasurer
FIRST CHICAGO NBD INVESTMENT
MANAGEMENT COMPANY
By:________________________________
Marco Hanig
Managing Director
-2-
<PAGE>
Exhibit 6(c)
ADDENDUM NO. 2 TO DISTRIBUTION AGREEMENT
----------------------------------------
This Addendum, dated as of the 30th day of July, 1997, is entered into
between PEGASUS FUNDS (the "Trust"), a Massachusetts business trust, and BISYS
FUND SERVICES LIMITED PARTNERSHIP, d/b/a/ BISYS FUND SERVICES ("BISYS").
WHEREAS, BISYS and the Trust have entered into the Distribution
Agreement dated June 11, 1996 and Addendum No. 1, (the "Distribution Agreement")
with respect to shares of beneficial interest in the Trust's Money Market,
Treasury Money Market, Municipal Money Market, Michigan Municipal Money Market,
Cash Management, U.S. Government Securities Cash Management, Treasury Cash
Management, Treasury Prime Cash Management, Growth, International Equity, Equity
Index, Growth and Value, Intrinsic Value, Mid-Cap Opportunity, Equity Income,
Small-Cap Opportunity, High Yield Bond, Bond, Short Bond, Michigan Municipal
Bond, Intermediate Municipal Bond, Municipal Bond, Income, Intermediate Bond,
International Bond, Managed Assets Balanced, Managed Assets Conservative and
Managed Assets Growth Funds (each a "Series");
WHEREAS, Section 1(d) of the Distribution Agreement provides that in
the event the Trust establishes one or more additional portfolios with respect
to which it desires to retain BISYS to act as the exclusive distributor and
representative under the Distribution Agreement, the Trust shall so notify BISYS
in writing and if BISYS is willing to render such services it shall notify the
Trust in writing, subject to such approval as may be required pursuant to
Section 12 of the Distribution Agreement and any necessary regulatory and
shareholder approvals, and the compensation to be paid to BISYS shall be that
which is agreed to in writing by the Trust and BISYS;
WHEREAS, pursuant to Section 1(d) of the Distribution Agreement, the
Trust has notified BISYS that it has established the Municipal Cash Management
Fund and that it desires to retain BISYS to act as the exclusive distributor and
representative therefor, and BISYS has notified the Trust that it is willing to
serve as exclusive distributor and representative for such Funds.
NOW, THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. Appointment. The Trust hereby appoints BISYS to act as exclusive
distributor and representative to the Trust for the Municipal Cash Management
Fund for the period and on the terms set forth in the Distribution Agreement.
BISYS hereby accepts such appointment and agrees to render the services set
forth in the Distribution Agreement.
<PAGE>
2. Capitalized Terms. From and after the date hereof, the term
"Series" as used in the Distribution Agreement shall be deemed to include the
Municipal Cash Management Fund. Capitalized terms used herein and not otherwise
defined shall have the meanings ascribed to them in the Distribution Agreement.
3. Miscellaneous. Except to the extent supplemented hereby, the
Distribution Agreement shall remain unchanged and in full force and effect and
is hereby ratified and confirmed in all respects as supplemented hereby.
IN WITNESS WHEREOF, the undersigned have executed this Addendum as of
the date and year first above written.
PEGASUS FUNDS
By: /s/ Donald G. Sutherland
--------------------------------------
Donald G. Sutherland
President and Trustee
BISYS FUND SERVICES LIMITED PARTNERSHIP
By: BISYS FUND SERVICES, INC.,
its general partner
By: /s/ J. David Huber
---------------------------------
Name: J. David Huber
Title: President
<PAGE>
Exhibit 6(d)
ADDENDUM NO. 3 TO DISTRIBUTION AGREEMENT
----------------------------------------
This Addendum, dated as of the _____ day of __________, 199_, is
entered into between PEGASUS FUNDS (the "Trust"), a Massachusetts business
trust, and BISYS FUND SERVICES LIMITED PARTNERSHIP, d/b/a/ BISYS FUND SERVICES
("BISYS").
WHEREAS, BISYS and the Trust have entered into the Distribution
Agreement dated June 11, 1996 and Addenda Nos. 1 and 2 (the "Distribution
Agreement"), with respect to shares of beneficial interest in the Trust's Money
Market, Treasury Money Market, Municipal Money Market, Michigan Municipal Money
Market, Cash Management, U.S. Government Securities Cash Management, Treasury
Cash Management, Treasury Prime Cash Management, Municipal Cash Management,
Growth, International Equity, Equity Index, Growth and Value, Intrinsic Value,
Mid-Cap Opportunity, Equity Income, Small-Cap Opportunity, Bond, Short Bond,
High Yield Bond, Michigan Municipal Bond, Intermediate Municipal Bond, Municipal
Bond, Income, Intermediate Bond, International Bond, Managed Assets Balanced,
Managed Assets Conservative and Managed Assets Growth Funds (each a "Series");
WHEREAS, Section 1(d) of the Distribution Agreement provides that in
the event the Trust establishes one or more additional portfolios with respect
to which it desires to retain BISYS to act as the exclusive distributor and
representative under the Distribution Agreement, the Trust shall so notify BISYS
in writing and if BISYS is willing to render such services it shall notify the
Trust in writing, subject to such approval as may be required pursuant to
Section 12 of the Distribution Agreement and any necessary regulatory and
shareholder approvals, and the compensation to be paid to BISYS shall be that
which is agreed to in writing by the Trust and BISYS;
WHEREAS, pursuant to Section 1(d) of the Distribution Agreement, the
Trust has notified BISYS that it has established the Short Municipal Bond and
Market Expansion Index Funds and that it desires to retain BISYS to act as the
exclusive distributor and representative therefor, and BISYS has notified the
Trust that it is willing to serve as exclusive distributor and representative
for such Funds.
NOW, THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. Appointment. The Trust hereby appoints BISYS to act as exclusive
distributor and representative to the Trust for the Short Municipal Bond and
Market Expansion Index Funds for the period and on the terms set forth in the
Distribution Agreement.
<PAGE>
BISYS hereby accepts such appointment and agrees to render the services set
forth in the Distribution Agreement.
2. Capitalized Terms. From and after the date hereof, the term
"Series" as used in the Distribution Agreement shall be deemed to include the
Short Municipal Bond and Market Expansion Index Funds. Capitalized terms used
herein and not otherwise defined shall have the meanings ascribed to them in the
Distribution Agreement.
3. Miscellaneous. Except to the extent supplemented hereby, the
Distribution Agreement shall remain unchanged and in full force and effect and
is hereby ratified and confirmed in all respects as supplemented hereby.
IN WITNESS WHEREOF, the undersigned have executed this Addendum as of
the date and year first above written.
PEGASUS FUNDS
By:_______________________________
D'Ray Moore
Treasurer
BISYS FUND SERVICES LIMITED PARTNERSHIP
By: BISYS FUND SERVICES, INC.,
its general partner
By:__________________________
Name: J. David Huber
Title: President
<PAGE>
Exhibit 8(k)
ADDENDUM NO. 10 TO
AMENDED AND RESTATED
CUSTODIAN AGREEMENT
--------------------
This Addendum, dated as of the 30th day of July, 1997, is entered into
between PEGASUS FUNDS (the "Trust"), a Massachusetts business trust, and NBD
BANK ("NBD" or the "Custodian"), a state-chartered bank incorporated under the
laws of Michigan.
WHEREAS, the Trust and NBD have entered into an Amended and Restated
Custodian Agreement dated May 16, 1989 and Addenda Nos. 1, 2, 3, 4, 5, 6, 7, 8
and 9 (the "Custodian Agreement"), pursuant to which the Trust appointed NBD to
act as Custodian to the Trust's Money Market Fund, Municipal Money Market Fund,
Growth and Value Fund, Mid-Cap Opportunity Fund, Intrinsic Value Fund,
Intermediate Bond Fund, Bond Fund, High Yield Bond, Michigan Municipal Money
Market Fund, Equity Index Fund, Treasury Money Market Fund, Municipal Bond Fund,
Michian Municipal Bond Fund, Managed Assets Balanced Fund, Growth Fund, Short
Bond Fund, U.S. Government Income Fund, International Equity Fund, Cash
Management Fund, U.S. Government Securities Cash Management Fund, Treasury Cash
Management, Treasury Prime Cash Management Fund, Equity Income Fund, Small-Cap
Opportunity Fund, Intermediate Municipal Bond Fund, Income Fund, International
Bond Fund, Managed Assets Conservative Fund and Managed Assets Growth Fund;
WHEREAS, Article XIV, Paragraph 9 of the Custodian Agreement provides
that in the event the Trust establishes one or more additional portfolios with
respect to which it desires to retain NBD to act as the custodian under the
Custodian Agreement, the Trust shall so notify NBD in writing and if NBD is
willing to render such services it shall notify the Trust in writing, and the
compensation to be paid to NBD shall be that which is agreed to in writing by
the Trust and NBD pursuant to Article XII, Paragraph 7 of the Custodian
Agreement;
WHEREAS, pursuant to Article XIV, Paragraph 9 of the Custodian
Agreement, the Trust has notified NBD that it intends to establish the
Municipal Cash Management Fund and that it desires to retain NBD to act as the
custodian therefor, and NBD has notified the Trust that it is willing to serve
as custodian for such Funds.
NOW THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. Appointment. The Trust hereby appoints NBD to act as Custodian to
the Trust for the Municipal Cash Management Fund for the period and on the terms
set forth in the Custodian
<PAGE>
Agreement. NBD hereby accepts such appointment and agrees to render the services
set forth in the Custodian Agreement, for the compensation provided in Appendix
A hereto.
2. Capitalized Terms. From and after the date hereof, the terms
"Fund" and "Series" as used in the Custodian Agreement shall be deemed to
include the Municipal Cash Management Fund. Capitalized terms used herein and
not otherwise defined shall have the meanings ascribed to them in the Custodian
Agreement.
3. Miscellaneous. Except to the extent supplemented hereby, the
Custodian Agreement shall remain unchanged and in full force and effect and is
hereby ratified and confirmed in all respects as supplemented hereby.
IN WITNESS WHEREOF, the undersigned have executed this Addendum as of
the date and year first above written.
PEGASUS FUNDS
By: /s/ Donald G. Sutherland
-------------------------
Donald G. Sutherland
President and Trustee
NBD BANK
By: /s/ Frank J. Simonds
-------------------------
Frank J. Simonds
Vice President
-2-
<PAGE>
APPENDIX A
----------
For the services provided pursuant to the Custodian Agreement with
respect to the Municipal Cash Management Fund the Custodian will accept the
following fees:
<TABLE>
<CAPTION>
Unit Price
----------
<S> <C>
Clearing and settlement transaction $ 11.00
Accounting entry and vault/safekeeping
transactions $ 12.00
</TABLE>
Out-of-Pocket Expenses:
In addition to the service fees above, the Trust will reimburse the
Custodian for its out-of-pocket expenses including, but not limited to,
postage, telephone, telex, facsimile, Federal Express and Federal Reserve
wire fees, incurred on behalf of the Trust.
<PAGE>
Exhibit 8(l)
ADDENDUM NO. 11 TO
AMENDED AND RESTATED
CUSTODIAN AGREEMENT
--------------------
This Addendum, dated as of the ____ day of _______, 199_, is entered
into between PEGASUS FUNDS (the "Trust"), a Massachusetts business trust, and
NBD BANK ("NBD" or the "Custodian"), a state-chartered bank incorporated under
the laws of Michigan.
WHEREAS, the Trust and NBD have entered into an Amended and Restated
Custodian Agreement dated May 16, 1989 and Addenda Nos. 1, 2, 3, 4, 5, 6, 7, 8,
9, and 10 (the "Custodian Agreement"), pursuant to which the Trust appointed NBD
to act as Custodian to the Trust's Money Market Fund, Municipal Money Market
Fund, Michigan Municipal Money Market Fund, Treasury Money Market Fund, Equity
Income Fund, Growth Fund, Mid-Cap Opportunity Fund, Small-Cap Opportunity Fund,
Intrinsic Value Fund, Growth and Value Fund, Equity Index Fund, International
Equity Fund, Intermediate Bond Fund, Bond Fund, Short Bond Fund, Income Fund,
International Bond Fund, High Yield Bond Fund, Municipal Bond Fund, Intermediate
Municipal Bond Fund, Michigan Municipal Bond Fund, U.S. Government Income Fund,
Cash Management Fund, U.S. Government Securities Cash Management Fund, Treasury
Cash Management, Treasury Prime Cash Management Fund, Municipal Cash Management
Fund, Managed Assets Balanced Fund, Managed Assets Conservative Fund and Managed
Assets Growth Fund;
WHEREAS, Article XIV, Paragraph 9 of the Custodian Agreement provides
that in the event the Trust establishes one or more additional portfolios with
respect to which it desires to retain NBD to act as the custodian under the
Custodian Agreement, the Trust shall so notify NBD in writing and if NBD is
willing to render such services it shall notify the Trust in writing, and the
compensation to be paid to NBD shall be that which is agreed to in writing by
the Trust and NBD pursuant to Article XII, Paragraph 7 of the Custodian
Agreement;
WHEREAS, pursuant to Article XIV, Paragraph 9 of the Custodian
Agreement, the Trust has notified NBD that it intends to establish the Short
Municipal Bond and Market Expansion Index Funds and that it desires to retain
NBD to act as the custodian therefor, and NBD has notified the Trust that it is
willing to serve as custodian for such Funds.
NOW THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. Appointment. The Trust hereby appoints NBD to act as Custodian
to the Trust for the Short Municipal Bond and Market
<PAGE>
Expansion Index Funds for the period and on the terms set forth in the Custodian
Agreement. NBD hereby accepts such appointment and agrees to render the
services set forth in the Custodian Agreement, for the compensation provided in
Appendix A hereto.
2. Capitalized Terms. From and after the date hereof, the terms
"Fund" and "Series" as used in the Custodian Agreement shall be deemed to
include the Short Municipal Bond and Market Expansion Index Funds. Capitalized
terms used herein and not otherwise defined shall have the meanings ascribed to
them in the Custodian Agreement.
3. Miscellaneous. Except to the extent supplemented hereby, the
Custodian Agreement shall remain unchanged and in full force and effect and is
hereby ratified and confirmed in all respects as supplemented hereby.
IN WITNESS WHEREOF, the undersigned have executed this Addendum as of
the date and year first above written.
PEGASUS FUNDS
By: ________________________
D'Ray Moore
Treasurer
NBD BANK
By: _________________________
Jeffrey M. Boncher
Vice President
-2-
<PAGE>
APPENDIX A
----------
For the services provided pursuant to the Custodian Agreement with
respect to the Short Municipal Bond and Market Expansion Index Funds, the
Custodian will accept the following fees:
Basic Annual Account Charge $ 1,000
Annual Security Fee
First $20,000,000 = .0003
Next $20,000,000 = .00025
Next $20,000,000 = .0002
Next $40,000,000 = .00015
Next $200,000,000 = .000125
Balance over $300,000,000 = .0001
Asset Fee $1.541 per security held at end of month.
Security Transactions:
$13.00 for each Pass-Through Certificate Payment
$35.00 for Option Transactions requiring Escrow Receipts
$20.00 for all other security transactions
Accounting Statements:
Cash Statement - $50 per statement
Inventories - $50 per inventory
In addition to the service fees above, the Trust will reimburse the
Custodian for its out-of-pocket expenses including, but not limited to,
postage, telephone, telex, facsimile, Federal Express and Federal Reserve
wire fees, incurred on behalf of the Trust.
<PAGE>
Exhibit 9(c)
ADDENDUM NO. 2 TO CO-ADMINISTRATION AGREEMENT
---------------------------------------------
This Addendum, dated as of the 30th day of July, 1997, is entered into
between PEGASUS FUNDS (the "Trust"), a Massachusetts business trust, FIRST
CHICAGO NBD INVESTMENT MANAGEMENT COMPANY ("FCNIMCO"), a registered investment
adviser, and BISYS FUND SERVICES LIMITED PARTNERSHIP, d/b/a, BISYS FUND SERVICES
("BISYS") (each an "Administrator" and collectively, the Administrators").
WHEREAS, the Trust, FCNIMCO and BISYS have entered into a Co-
Administration Agreement dated June 11, 1996 and Addendum No. 1 ("Co-
Administration Agreement"), pursuant to which the Trust appointed FCNIMCO and
BISYS to act as Administrators to the Trust's Money Market, Treasury Money
Market, Municipal Money Market, Michigan Municipal Money Market, Cash
Management, Treasury Cash Management, U.S. Government Securities Cash
Management, Treasury Prime Cash Management, Growth, International Equity, Equity
Index, Growth and Value, Intrinsic Value, Mid-Cap Opportunity, Equity Income,
Small-Cap Opportunity, Bond, High Yield Bond, Short Bond, Michigan Municipal
Bond, Intermediate Municipal Bond, Municipal Bond, Income, Intermediate Bond,
International Bond, Managed Assets Balanced, Managed Assets Conservative and
Managed Assets Growth Funds (each a "Fund");
NOW THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. Appointment. The Trust hereby appoints FCNIMCO and BISYS to act
as Administrators to the Trust for the Municipal Cash Management Fund for the
period and on the terms set forth in the Co-Administration Agreement. FCNIMCO
and BISYS hereby accept such appointment and agree to render the services set
forth in the Co-Administration Agreement for the compensation herein provided.
2. Compensation. For the services provided and the expenses assumed
pursuant to the Co-Administration Agreement, the Trust will pay the
Administrators, and the Administrators will accept as full compensation
therefor, a fee, computed daily and payable monthly, at the annual rate of .15%
of the Municipal Cash Management Fund's average daily net assets.
3. Capitalized Terms. From and after the date hereof, the term
"Fund" as used in the Co-Administration Agreement shall be deemed to include the
Municipal Cash Management Fund. Capitalized terms used herein and not otherwise
defined shall have the meanings ascribed to them in the Co-Administration
Agreement.
<PAGE>
4. Miscellaneous. Except to the extent supplemented hereby, the Co-
Administration Agreement shall remain unchanged and in full force and effect and
is hereby ratified and confirmed in all respects as supplemented hereby.
IN WITNESS WHEREOF, the undersigned have executed this Addendum as of
the date and year first above written.
PEGASUS FUNDS
By: /s/ Donald G. Sutherland
-------------------------------
Donald G. Sutherland
President and Trustee
FIRST CHICAGO NBD INVESTMENT
MANAGEMENT COMPANY
By: /s/ Marco Hanig
-------------------------------
Marco Hanig
Managing Director
BISYS FUND SERVICES LIMITED
PARTNERSHIP
By: BISYS FUND SERVICES, INC.,
its general partner
By: /s/ J. David Huber
--------------------------
Name: J. David Huber
Title: President
-2-
<PAGE>
Exhibit 9(d)
ADDENDUM NO. 3 TO CO-ADMINISTRATION AGREEMENT
---------------------------------------------
This Addendum, dated as of the _____ day of _________, 199_, is
entered into between PEGASUS FUNDS (the "Trust"), a Massachusetts business
trust, FIRST CHICAGO NBD INVESTMENT MANAGEMENT COMPANY ("FCNIMCO"), a registered
investment adviser, and BISYS FUND SERVICES LIMITED PARTNERSHIP, d/b/a, BISYS
FUND SERVICES ("BISYS") (each an "Administrator" and collectively, the
Administrators").
WHEREAS, the Trust, FCNIMCO and BISYS have entered into a Co-
Administration Agreement dated June 11, 1996 and Addenda Nos. 1 and 2 ("Co-
Administration Agreement"), pursuant to which the Trust appointed FCNIMCO and
BISYS to act as Administrators to the Trust's Money Market, Treasury Money
Market, Municipal Money Market, Michigan Municipal Money Market, Cash
Management, Municipal Cash Management, Treasury Cash Management, U.S. Government
Securities Cash Management, Treasury Prime Cash Management, Growth,
International Equity, Equity Index, Growth and Value, Intrinsic Value, Mid-Cap
Opportunity, Equity Income, Small-Cap Opportunity, Bond, High Yield Bond, Short
Bond, Michigan Municipal Bond, Intermediate Municipal Bond, Municipal Bond,
Income, Intermediate Bond, International Bond, Managed Assets Balanced, Managed
Assets Conservative and Managed Assets Growth Funds (each a "Fund");
NOW THEREFORE, the parties hereto, intending to be legally bound,
hereby amend the Co-Administration Agreement as follows:
The following sentence shall be added to the end of the paragraph in
Article 10 - Amendment to this Agreement:
"However, the parties may from time to time amend Schedule 1, with a
copy to all parties, to add a new portfolio or delete a portfolio for which the
Administrators no longer provide administration services."
Except to the extent supplemented hereby, the Co-Administration
Agreement shall remain unchanged and in full force and effect and is hereby
ratified and confirmed in all respects as supplemented hereby.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Addendum as of
the date and year first above written.
PEGASUS FUNDS
By:________________________________
D'Ray Moore
Treasurer
FIRST CHICAGO NBD INVESTMENT
MANAGEMENT COMPANY
By:________________________________
Marco Hanig
Managing Director
BISYS FUND SERVICES LIMITED
PARTNERSHIP
By: BISYS FUND SERVICES, INC.,
its general partner
By:____________________________
J. David Huber
President
<PAGE>
Exhibit 9(g)
ADDENDUM NO. 2 TO TRANSFER AGENCY AND SERVICES AGREEMENT
--------------------------------------------------------
This Addendum, dated as of the 30th day of July, 1997, is entered into
between PEGASUS FUNDS (the "Trust"), a Massachusetts business trust, and FIRST
DATA INVESTOR SERVICES GROUP, INC. ("FDISG"), a Massachusetts Corporation.
WHEREAS, the Trust and FDISG have entered into a Transfer Agency and
Services Agreement dated August 5, 1996 and Addendum No. 1 (the "Transfer Agency
Agreement"), pursuant to which the Trust appointed FDISG to act as transfer
agent (the "Transfer Agent") to the Trust's Growth Fund, International Equity
Fund, Equity Index Fund, Growth and Value Fund, Intrinsic Value Fund, Mid-Cap
Opportunity Fund, Equity Income Fund, Small-Cap Opportunity Fund, Bond Fund,
High Yield Bond, Short Bond Fund, Intermediate Bond Fund, Municipal Bond Fund,
Michigan Municipal Bond Fund, Intermediate Municipal Bond Fund, Income Fund,
International Bond Fund, Money Market Fund, Treasury Money Market Fund,
Municipal Money Market Fund, Michigan Municipal Money Market Fund, Cash
Management Fund, Treasury Cash Management, U.S. Government Securities Cash
Management Fund, Treasury Prime Cash Management Fund, Managed Assets Balanced
Fund, Managed Assets Conservative Fund and Managed Assets Growth Fund (each, a
"Fund");
WHEREAS, Article 14 of the Transfer Agency Agreement provides that in
the event the Trust establishes one or more additional portfolios with respect
to which it desires to retain FDISG to act as the Transfer Agent under the
Transfer Agency Agreement, the Trust shall so notify FDISG in writing, and if
FDISG is willing to render such services in accordance with the fees set forth
in Schedule B of the Transfer Agency Agreement, the parties shall amend the
Schedule of Portfolios to include such additional portfolios;
WHEREAS, pursuant to Article 14 of the Transfer Agency Agreement, the
Trust has notified FDISG that it has established the Municipal Cash Management
Fund and that it desires to retain FDISG to act as the Transfer Agent therefor,
and FDISG has notified the Trust that it is willing to serve as Transfer Agent
for such Funds.
NOW, THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. Appointment. The Trust hereby appoints FDISG to act as Transfer
Agent to the Trust for the Municipal Cash Management Fund for the period and on
the terms set forth in the
<PAGE>
Transfer Agency Agreement. FDISG hereby accepts such appointment and agrees to
render the services set forth in the Transfer Agency Agreement, for the
compensation set forth in Schedule B of the Transfer Agency Agreement.
2. Capitalized Terms. From and after the date hereof, the terms
"Fund" and "Funds" as used in the Transfer Agency Agreement, as amended shall be
deemed to include the Municipal Cash Management Fund. Capitalized terms used
herein and not otherwise defined shall have the meanings ascribed to them in the
Transfer Agency Agreement.
3. Miscellaneous. Except to the extent supplemented hereby, the
Transfer Agency Agreement shall remain unchanged and in full force and effect
and is hereby ratified and confirmed in all respects as supplemented hereby.
IN WITNESS WHEREOF, the undersigned have executed this Addendum as of
the date and year first above written.
PEGASUS FUNDS
By: /s/ Donald G. Sutherland
------------------------------------
Donald G. Sutherland
President and Trustee
FIRST DATA INVESTOR SERVICES GROUP, INC.
By: /s/ Gerald G. Kokos
------------------------------------
Gerald G. Kokos
Executive Vice President
-2-
<PAGE>
Exhibit 9(h)
ADDENDUM NO. 3 TO TRANSFER AGENCY AND SERVICES AGREEMENT
--------------------------------------------------------
This Addendum, dated as of the ____ day of _______, 199_, is entered
into between PEGASUS FUNDS (the "Trust"), a Massachusetts business trust, and
FIRST DATA INVESTOR SERVICES GROUP, INC. ("FDISG"), a Massachusetts Corporation.
WHEREAS, the Trust and FDISG have entered into a Transfer Agency and
Services Agreement dated August 5, 1996 and Addenda Nos. 1 and 2 (the "Transfer
Agency Agreement"), pursuant to which the Trust appointed FDISG to act as
transfer agent (the "Transfer Agent") to the Trust's Growth Fund, International
Equity Fund, Equity Index Fund, Growth and Value Fund, Intrinsic Value Fund,
Mid-Cap Opportunity Fund, Equity Income Fund, Small-Cap Opportunity Fund, Bond
Fund, High Yield Bond, Short Bond Fund, Intermediate Bond Fund, Municipal Bond
Fund, Michigan Municipal Bond Fund, Intermediate Municipal Bond Fund, Income
Fund, International Bond Fund, Money Market Fund, Treasury Money Market Fund,
Municipal Money Market Fund, Michigan Municipal Money Market Fund, Cash
Management Fund, Treasury Cash Management, U.S. Government Securities Cash
Management Fund, Treasury Prime Cash Management Fund, Municipal Cash Management
Fund, Managed Assets Balanced Fund, Managed Assets Conservative Fund and Managed
Assets Growth Fund (each, a "Fund");
WHEREAS, Article 14 of the Transfer Agency Agreement provides that in
the event the Trust establishes one or more additional portfolios with respect
to which it desires to retain FDISG to act as the Transfer Agent under the
Transfer Agency Agreement, the Trust shall so notify FDISG in writing, and if
FDISG is willing to render such services in accordance with the fees set forth
in Schedule B of the Transfer Agency Agreement, the parties shall amend the
Schedule of Portfolios to include such additional portfolios;
WHEREAS, pursuant to Article 14 of the Transfer Agency Agreement, the
Trust has notified FDISG that it has established the Short Municipal Bond and
Market Expansion Index Funds and that it desires to retain FDISG to act as the
Transfer Agent therefor, and FDISG has notified the Trust that it is willing to
serve as Transfer Agent for such Funds.
NOW, THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. Appointment. The Trust hereby appoints FDISG to act as Transfer
Agent to the Trust for the Short Municipal Bond
<PAGE>
and Market Expansion Index Funds for the period and on the terms set forth in
the Transfer Agency Agreement. FDISG hereby accepts such appointment and agrees
to render the services set forth in the Transfer Agency Agreement, for the
compensation set forth in Schedule B of the Transfer Agency Agreement.
2. Capitalized Terms. From and after the date hereof, the terms
"Fund" and "Funds" as used in the Transfer Agency Agreement, as amended shall be
deemed to include the Short Municipal Bond and Market Expansion Index Funds.
Capitalized terms used herein and not otherwise defined shall have the meanings
ascribed to them in the Transfer Agency Agreement.
3. Miscellaneous. Except to the extent supplemented hereby, the
Transfer Agency Agreement shall remain unchanged and in full force and effect
and is hereby ratified and confirmed in all respects as supplemented hereby.
IN WITNESS WHEREOF, the undersigned have executed this Addendum as of
the date and year first above written.
PEGASUS FUNDS
By:____________________________________
D'Ray Moore
Treasurer
FIRST DATA INVESTOR SERVICES GROUP, INC.
By:_____________________________________
Gerald G. Kokos
Executive Vice President
-2-
<PAGE>
Exhibit 11(a)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
dated February 24, 1997 included in Pegasus Funds' Annual Report to Shareholders
for the year ended December 31, 1996 (and to all references to our Firm)
included in or made a part of this registration statement on Form N-1A (Post-
Effective Amendment No. 45 to Pegasus Funds' registration statement under the
Securities Act of 1933).
/s/Arthur Andersen LLP
----------------------
ARTHUR ANDERSEN LLP
Detroit, Michigan
December 3, 1997
<PAGE>
Exhibit 11(b)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights" in the Prospectus and "Independent Auditors" in the Statement of
Additional Information, and to the incorporation by reference of our report on
the Statement of Changes in Net Assets and Financial Highlights of the Prairie
Funds, Prairie Municipal Bond Fund, Inc. and Prairie Intermediate Bond Fund
dated February 23, 1996 in this Registration Statement (Form N-1A) of Pegasus
Funds.
/s/ Ernst & Young LLP
---------------------
ERNST & YOUNG LLP
New York, New York
December 3, 1997
<PAGE>
Exhibit 11(c)
CONSENT OF COUNSEL
We hereby consent to the use of our name and to the reference to our
Firm under the caption "Counsel" in the Statement of Additional Information that
is included in Post-Effective Amendment No. 45 to the Registration Statement on
Form N-1A under the Securities Act of 1933 and the Investment Company Act of
1940, as amended. This consent does not constitute a consent under section 7 of
the Securities Act of 1933, and in consenting to the use of our name and the
references to our Firm under such caption we have not certified any part of this
Registration Statement and do not otherwise come under the categories of persons
whose consent is required under said section 7 or the rules and regulations of
the Securities and Exchange Commission thereunder.
/s/ Drinker Biddle & Reath LLP
------------------------------
DRINKER BIDDLE & REATH LLP
Philadelphia, Pennsylvania
December 3, 1997
<PAGE>
Fund: Pegasus Short Bond Fund
Formula: YIELD = 2[ (a-b +1) -1]
----
cd
Where: a= income for the period as defined by SEC rules
b= expenses accrued for the period
c= the average daily numbers of shares outstanding
during the period that were entitled to receive
dividends
d= the maximum offering price per share on the last
day of the period
Total Fund: Income Earned (30 Days) 1,159,066
Expenses accrued (30 Days) 108,161
Average # Shares (30 Days) 22,618,174
For the period ended November 20, 1997. These factors were:
<TABLE>
<S> <C>
a= Class I $ 1,146,071
Class A $ 12,265
Class B $ 730
b= Class I $ 106,331
Class A $ 1,637
Class B $ 192
c= Class I 22,364,580
Class A 239,341
Class B 14,253
d= Class I $ 10.13
Class A $ 10.23
Class B $ 10.04
Yield= Class I 5.75%
Class A 5.27%
Class B 4.55%
</TABLE>
<PAGE>
Total Return Calculations
Fund: Pegasus Short Bond Fund
Aggregate Total Return
Formula: T = (ERV/P)-1
Where: T = aggregate total return
erv = redeemable value at the end of the period of a
hypothetical $1,000 investment made at the beginning
of the period.
p = initial investment of $1,000
Since inception: 12/31/83 through 6/30/97
No sales Load (2,773.58/1000)-1 = 177.36%
1% Sales Load (2,745.84/1000)-1 = 174.59%
Average Annual Total Return
Formula: ERV 1/n
T = [(---------) - 1]
P
Where: T = average annual total return
erv = redeemable value at the end of the period of a
hypothetical $1,000 investment made at the beginning
of the period.
p = initial investment of $1,000
n = period covered by the computation, expresses in terms of
years
Since inception: 12/31/83 through 6/30/97
No sales Load (2,773.58/1000)circumflex(365/4930)-1 = 7.85%
1% Sales Load (2,745.84/1000)circumflex(365/4930)-1 = 7.77%
<PAGE>
Fund: Pegasus High Yield Bond Fund
Formula: YIELD = 2[ (a-b +1) -1]
---
cd
Where: a= income for the period as defined by SEC rules
b= expenses accrued for the period
c= the average daily numbers of shares outstanding
during the period that were entitled to receive
dividends
d= the maximum offering price per share on the last
day of the period
Total Fund: Income Earned (30 Days) 320,224
Expenses accrued (30 Days) 34,715
Average # Shares (30 Days) 4,243,231
For the period ended November 20, 1997. These factors were:
<TABLE>
<S> <C>
a= Class I $ 319,644
Class A $ 350
Class B $ 229
b= Class I $ 34,618
Class A $ 47
Class B $ 50
c= Class I 4,235,706
Class A 4,489
Class B 3,035
d= Class I $ 10.20
Class A $ 10.61
Class B $ 10.12
Yield= Class I 8.05%
Class A 7.75%
Class B 7.11%
</TABLE>
<PAGE>
Total Return Calculations
Fund: Pegasus High Yield Bond Fund
Aggregate Total Return
Formula: ERV
Where: T = aggregate total return
erv = redeemable value at the end of the period of a
hypothetical $1,000 investment made at the beginning
of the period.
p = initial investment of $1,000
Since inception: 07/01/97 through 10/31/97
No sales Load (1,017.85/1000)-1 = 1.79%
4.5% Sales Load (972.05/1000)-1 = 2.79%
Average Annual Total Return
Formula: ERV 1/n
T = [(---------) - 1]
P
Where: T = average annual total return
erv = redeemable value at the end of the period of a
hypothetical $1,000 investment made at the beginning
of the period.
p = initial investment of $1,000
n = period covered by the computation, expresses in terms of
years
Since inception: 07/01/97 through 10/31/97
No sales Load (1,017.89/1000)circumflex(365/123)-1 = 1.79%
4.5% Sales Load (972.05/1000)circumflex(365/123)-1 = -2.79%
<PAGE>
Fund: Pegasus Intermediate Municipal Bond Fund
Formula: YIELD = 2[(a-b+1)-1]
------------
cd
Where: a= income for the period as defined by SEC rules
b= expenses accrued for the period
c= the average daily numbers of shares outstanding
during the period that were entitled to receive
dividends
d= the maximum offering price per share on the last
day of the period
Total Fund: Income Earned (30 Days) 1,582,010
Expenses accrued (30 Days) 196,075
Average # Shares (30 Days) 32,228,965
For the period ended November 20, 1997. These factors were:
<TABLE>
<S> <C>
a= Class I $ 1,503,872
Class A $ 75,342
Class B $ 2,796
b= Class I $ 182,173
Class A $ 12,989
Class B $ 913
c= Class I 30,638,457
Class A 1,533,487
Class B 57,021
d= Class I $ 12.26
Class A $ 12.63
Class B $ 12.24
Yield= Class I 4.26%
Class A 3.89%
Class B 3.26%
</TABLE>
<PAGE>
Total Return Calculations
Fund: Pegasus Intermediate Municipal Bond Fund
Aggregate Total Return
Formula: T = (ERV/P)-1
Where: T = aggregate total return
erv = redeemable value at the end of the period of a
hypothetical $1,000 investment made at the beginning
of the period.
p = initial investment of $1,000
Since inception: 03/01/88 through 6/30/97
No sales Load (1,923.28/1000)-1 = 92.33%
3% Sales Load (1,865.58/1000)-1 = 86.56%
Average Annual Total Return
Formula: ERV 1/n
T = [(---------) - 1]
P
Where: T = average annual total return
erv = redeemable value at the end of the period of a
hypothetical $1,000 investment made at the beginning
of the period.
p = initial investment of $1,000
n = period covered by the computation, expresses in terms of
years
Since inception: 03/01/88 through 6/30/97
No sales Load (1,923.28/1000)circumflex(365/3410)-1 = 7.26%
3% Sales Load (1,865.58/1000)circumflex(365/3410)-1 = 6.91%
<PAGE>
Fund: Pegasus Multi Sector Bond Fund
Formula: YIELD = 2[ (a-b +1) -1]
---
cd
Where: a= income for the period as defined by SEC rules
b= expenses accrued for the period
c= the average daily numbers of shares outstanding
during the period that were entitled to receive
dividends
d= the maximum offering price per share on the last
day of the period
Total Fund: Income Earned (30 Days) 561,539
Expenses accrued (30 Days) 56,572
Average # Shares (30 Days) 13,259,533
For the period ended November 20, 1997. These factors were:
<TABLE>
<S> <C>
a= Class I $ 518,828
Class A $ 40,414
Class B $ 2,297
b= Class I $ 50,499
Class A $ 5,497
Class B $ 576
c= Class I 12,250,005
Class A 956,019
Class B 56,510
d= Class I $ 8.00
Class A $ 8.23
Class B $ 7.99
Yield= Class I 5.80%
Class A 5.38%
Class B 4.88%
</TABLE>
<PAGE>
Total Return Calculations
Fund: Pegasus Multi Sector Bond Fund
Aggregate Total Return
Formula: T = (ERV/P)-1
Where: T = aggregate total return
erv = redeemable value at the end of the period of a
hypothetical $1,000 investment made at the beginning
of the period.
p = initial investment of $1,000
Since inception: 03/05/93 through 6/30/97
No sales Load (1,266.61/1000)-1 = 26.66%
3% Sales Load (1,228.61/1000)-1 = 22.86%
Average Annual Total Return
Formula: ERV 1/n
T = [(---------) - 1]
P
Where: T = average annual total return
erv = redeemable value at the end of the period of a
hypothetical $1,000 investment made at the beginning
of the period.
p = initial investment of $1,000
n = period covered by the computation, expresses in terms of
years
Since inception: 03/05/93 through 6/30/97
No sales Load (1,266.61/1000)circumflex(365/1579)-1 = 5.62%
3% Sales Load (1,228.61/1000)circumflex(365/1579)-1 = 4.87%
<PAGE>
Total Return Calculations
Fund: Pegasus Managed Asset Conservative Fund
Aggregate Total Return
Formula: T = (ERV/P)-1
Where: T = aggregate total return
erv = redeemable value at the end of the period of a
hypothetical $1,000 investment made at the beginning
of the period.
p = initial investment of $1,000
Since inception: 1/23/86 through 6/30/97
No sales Load (3,505.63/1000)-1 = 250.56%
5% Sales Load (3,330.50/1000)-1 = 233.05%
Average Annual Total Return
Formula: ERV 1/n
T = [(---------) - 1]
P
Where: T = average annual total return
erv = redeemable value at the end of the period of a
hypothetical $1,000 investment made at the beginning
of the period.
p = initial investment of $1,000
n = period covered by the computation, expresses in terms of
years
Since inception: 1/23/86 through 6/30/97
No sales Load (3,505.63/1000)circumflex(365/4177)-1 = 11.59%
5% Sales Load (3,330.50/1000)circumflex(365/4177)-1 = 11.09%
<PAGE>
Total Return Calculations
Fund: Pegasus International Bond Fund
Aggregate Total Return
Formula: T = (ERV/P)-1
Where: T = aggregate total return
erv = redeemable value at the end of the period of a
hypothetical $1,000 investment made at the beginning
of the period.
p = initial investment of $1,000
Since inception: 09/30/89 through 6/30/97
No sales Load (2,070.22/1000)-1 = 107.02%
4.5% Sales Load (1,977.06/1000)-1 = 97.71%
Average Annual Total Return
Formula: ERV 1/n
T = [(---------) - 1]
P
Where: T = average annual total return
erv = redeemable value at the end of the period of a
hypothetical $1,000 investment made at the beginning
of the period.
p = initial investment of $1,000
n = period covered by the computation, expresses in terms of
years
Since inception: 09/30/89 through 6/30/97
No sales Load (2,070.22/1000)circumflex(365/2831)-1 = 9.84%
4.5% Sales Load (1,977.06/1000)circumflex(365/2831)-1 = 9.19%
<PAGE>
Total Return Calculations
Fund: Pegasus Small Cap Opportunity Fund
Aggregate Total Return
Formula: T = (ERV/P)-1
Where: T = aggregate total return
erv = redeemable value at the end of the period of a
hypothetical $1,000 investment made at the beginning
of the period.
p = initial investment of $1,000
Since inception: 06/30/72 through 6/30/97
No sales Load (10,419.76/1000)-1 = 941.98%
5% Sales Load (9,898.99/1000)-1 = 889.91%
Average Annual Total Return
Formula: ERV 1/n
T = [(---------) - 1]
P
Where: T = average annual total return
erv = redeemable value at the end of the period of a
hypothetical $1,000 investment made at the beginning
of the period.
p = initial investment of $1,000
n = period covered by the computation, expresses in terms of
years
Since inception: 06/30/72 through 6/30/97
No sales Load (10,419.76/1000)circumflex(365/9131)-1 = 9.83%
5% Sales Load (9,898.99/1000)circumflex(365/9131)-1 = 9.60%
<PAGE>
Total Return Calculations
Fund: Pegasus Equity Income Fund
Aggregate Total Return
Formula: T = (ERV/P)-1
Where: T = aggregate total return
erv = redeemable value at the end of the period of a
hypothetical $1,000 investment made at the beginning
of the period.
p = initial investment of $1,000
Since inception: 03/31/67 through 6/30/97
No sales Load (19,024.79/1000)-1 = 1802.48%
5% Sales Load (18,073.55/1000)-1 = 1707.41%
Average Annual Total Return
Formula: ERV 1/n
T = [(---------) - 1]
P
Where: T = average annual total return
erv = redeemable value at the end of the period of a
hypothetical $1,000 investment made at the beginning
of the period.
p = initial investment of $1,000
n = period covered by the computation, expresses in terms of
years
Since inception: 03/31/67 through 6/30/97
No sales Load (19,024.79/1000)circumflex(365/1579)-1 = 10.23%
5% Sales Load (18,073.55/1000)circumflex(365/1579)-1 = 10.04%
<PAGE>
Pegasus Municipal Cash Management Fund
Class I
The seven-day period ended November 30, 1997
Day 1: 0.00009541500
Day 2: 0.00009549300
Day 3: 0.00009575900
Day 4: 0.00009576000
Day 5: 0.00000630100
Day 6: 0.00009646700
Day 7: 0.00009646700
0.00067166200 = Base period Return (bpr)
Annualized Yield = (bpr/1) x 365/7
Annualized Yield = 3.502%
Annualized Yield = (bpr+1) x 365/7-1
Annualized Yield = 3.563%
Pegasus Municipal Cash Management Fund
Class S
The seven-day period ended November 30, 1997
Day 1: 0.00008856600
Day 2: 0.00008864400
Day 3: 0.00008891000
Day 4: 0.00008891000
Day 5: 0.00008945200
Day 6: 0.00008961800
Day 7: 0.00008961800
0.00062371800 = Base period Return (bpr)
Annualized Yield = (bpr/1) x 365/7
Annualized Yield = 3.252%
Annualized Yield = (bpr+1) x 365/7-1
Annualized Yield = 3.305%
<PAGE>
Pegasus Treasury Cash Management Fund
Class I
The seven-day period ended November 30, 1997
Day 1: 0.00014278700
Day 2: 0.00014285900
Day 3: 0.00014497600
Day 4: 0.00014497600
Day 5: 0.00014880500
Day 6: 0.00014880500
Day 7: 0.00014884700
0.00102205500 = Base period Return (bpr)
Annualized Yield = (bpr/1) x 365/7
Annualized Yield = 5.329%
Annualized Yield = (bpr+1) x 365/7-1
Annualized Yield = 5.471%
Pegasus Treasury Cash Management Fund
Class S
The seven-day period ended November 30, 1997
Day 1: 0.00013594300
Day 2: 0.00013600000
Day 3: 0.00013811200
Day 4: 0.00013811200
Day 5: 0.00014195900
Day 6: 0.00014195900
Day 7: 0.00014195900
0.00097404400 = Base period Return (bpr)
Annualized Yield = (bpr/1) x 365/7
Annualized Yield = 5.079%
Annualized Yield = (bpr+1) x 365/7-1
Annualized Yield = 5.208%
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