[Prospectus Cover]
[logo] Pegasus Funds
Strength in Investing
P R O S P E C T U S
June 30, 1997
Pegasus
Funds
<PAGE>
PROSPECTUS June 30, 1997
- -----------------------------------------------------------------------------
PEGASUS FUNDS
P.O. Box 5142
Westborough, Massachusetts 01581
24 Hour yield and performance information
Purchase and Redemption orders:
(800) 688-3350
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Pegasus Funds (the "Trust") is offering in this Prospectus
Class A shares, Class B shares and Class I shares in the following twenty
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
The Income Fund
The International Bond Fund
EQUITY FUNDS The High Yield Bond Fund
The Equity Income Fund MUNICIPAL BOND FUNDS
The Growth Fund
The Mid-Cap Opportunity Fund The Municipal Bond Fund
The Small-Cap Opportunity Fund The Intermediate Municipal Bond Fund
The Intrinsic Value Fund The Michigan Municipal Bond Fund
The Growth and Value Fund
The Equity Index 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.
<PAGE>
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
HIGHLIGHTS............................................................... i
FUND EXPENSES............................................................ iii
BACKGROUND............................................................... 3
FINANCIAL HIGHLIGHTS..................................................... 3
DESCRIPTION OF THE FUNDS................................................. 26
HOW TO BUY SHARES........................................................ 36
SHAREHOLDER SERVICES..................................................... 43
HOW TO REDEEM SHARES..................................................... 45
MANAGEMENT OF THE TRUST.................................................. 48
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS.............................. 52
DIVIDENDS AND DISTRIBUTIONS.............................................. 53
TAXES.................................................................... 53
PERFORMANCE INFORMATION.................................................. 55
GENERAL INFORMATION...................................................... 60
SUPPLEMENTAL INFORMATION................................................. A-1
DEBT RATINGS............................................................. B-1
<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
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,
financial institutions that have established omnibus accounts on behalf of
investors participating in a "mutual fund supermarket" or similar program,
and the Asset Allocation Funds.
See "How to Buy Shares" on page 36 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").
i
<PAGE>
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.
The minimum initial investment is $1,000. All subsequent
investments must be at least $100.
See "How to Buy Shares" on page 36 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 40 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 42 of this Prospectus.
ii
<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 Class I
- -----------------------------------------------------------------------------------------------------------------------
Bond,
International
Bond, High Equity
Equity Index, Yield Bond, Index,
Income, Municipal Income,
Intermediate Bond and Intermediate
Bond and Michigan Bond and
Intermediate Municipal All Intermediate All
Shareholder Transaction Short Bond Municipal Bond Other Short Bond Municipal Other All
Expenses Fund Bond Funds Funds Funds Fund Bond Funds Funds Funds
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Maximum Sales Charge
(as a percentage of
offering price) 1.00% 3.00% 4.50% 5.00% None None None None
Sales Charge on Reinvested
Dividends None 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% None
Redemption Fees None None None None None None None None
Exchange Fees None None None None None None None None
<FN>
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* 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.
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
Annual Fund Operating Expenses
(as a percentage of average daily net assets)
Class A Shares
Management Total
Fees Other Operating
After Waivers 12b-1 Fees Expenses(1) Expenses(1)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSET ALLOCATION FUNDS:
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 0.44% 1.04%
Mid-Cap Opportunity Fund 0.60% None 0.50% 1.10%
Small-Cap Opportunity Fund 0.70% None 0.47% 1.17%
Intrinsic Value Fund 0.60% None 0.46% 1.06%
Growth and Value Fund 0.59%(3) None 0.51%(3) 1.10%(3)
Equity Index Fund 0.10% None 0.47% 0.57%
International Equity Fund 0.80% None 0.57% 1.37%
BOND FUNDS:
Intermediate Bond Fund 0.40% None 0.46% 0.86%
Bond Fund 0.40% None 0.46% 0.86%
Short Bond Fund 0.33%(3) None 0.49%(3) 0.82%(3)
Income Fund 0.40% None 0.47% 0.87%
International Bond Fund 0.44%(3) None 0.65%(3) 1.09%(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%
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)
<FN>
- ---------
(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, Short
Bond, International Bond, High Yield Bond and Michigan Municipal
Bond Funds would have been 1.26%, 1.36%, 1.71%, 1.11%, 0.84%, 1.35%, 1.67% and
0.97%, respectively.
</TABLE>
iv
<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 N/A N/A
EQUITY FUNDS:
Equity Income Fund $59 $79 $100 $161
Growth Fund $60 $82 $105 $171
Mid-Cap Opportunity Fund $61 $83 $108 $178
Small-Cap Opportunity Fund $61 $85 $111 $186
Intrinsic Value Fund $60 $82 $106 $173
Growth and Value Fund $61 $83 $108 $178
Equity Index Fund $36 $48 $ 61 $ 99
International Equity Fund $63 $91 $122 $207
BOND FUNDS:
Intermediate Bond Fund $39 $57 $ 76 $133
Bond Fund $53 $71 $ 91 $146
Short Bond Fund $18 $36 $ 55 $111
Income Fund $39 $57 $ 77 $134
International Bond Fund $56 $78 $103 $172
High Yield Bond Fund $57 $82 N/A N/A
MUNICIPAL BOND FUNDS:
Municipal Bond Fund $53 $71 $ 90 $145
Intermediate Municipal Bond Fund $38 $56 $ 75 $131
Michigan Municipal Bond Fund $54 $73 $ 93 $152
</TABLE>
v
<PAGE>
<TABLE>
<CAPTION>
Annual Fund Operating Expenses
(as a percentage of average daily net assets)
Class B Shares
Management Fees Total Operating
After Waivers 12b-1 Fees Other Expenses(1) Expenses(1)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSET ALLOCATION FUNDS:
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% 0.44% 1.79%
Mid-Cap Opportunity Fund 0.60% 0.75% 0.50% 1.85%
Small-Cap Opportunity Fund 0.70% 0.75% 0.47% 1.92%
Intrinsic Value Fund 0.60% 0.75% 0.46% 1.81%
Growth and Value Fund 0.59%(3) 0.75% 0.51%(3) 1.85%(3)
Equity Index Fund 0.10% 0.75% 0.47% 1.32%
International Equity Fund 0.80% 0.75% 0.57% 2.12%
BOND FUNDS:
Intermediate Bond Fund 0.40% 0.75% 0.46% 1.61%
Bond Fund 0.40% 0.75% 0.46% 1.61%
Short Bond Fund 0.33%(3) 0.75% 0.49%(3) 1.57%(3)
Income Fund 0.40% 0.75% 0.47% 1.62%
International Bond Fund 0.44%(3) 0.75% 0.65%(3) 1.84%(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%
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)
<FN>
- ---------
(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, Short
Bond, International Bond, High Yield Bond and Michigan Municipal Bond
Funds would have been 2.01% ,2.11%, 2.46%, 1.86%, 1.59%, 2.10%, 2.42%
and 1.72% , respectively.
</TABLE>
vi
<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 $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* N/A N/A
EQUITY FUNDS:
Equity Income Fund $67/$17* $84/$54* $113/$93* $173+
Growth Fund $68/$18* $81/$57* $118/$98* $183+
Mid-Cap Opportunity Fund $69/$19* $89/$59* $121/$101* $189+
Small-Cap Opportunity Fund $70/$20* $91/$61* $125/$105* $197+
Intrinsic Value Fund $69/$19* $87/$57* $119/$99* $185+
Growth and Value Fund $69/$19* $89/$59* $121/$101* $189+
Equity Index Fund $44/$14* $62/$42* $83/$73* $120+
International Equity Fund $72/$22* $97/$67* $135/$115* $218+
BOND FUNDS:
Intermediate Bond Fund $46/$16* $71/$51* $98/$88* $153+
Bond Fund $66/$16* $81/$51* $108/$88* $162+
Short Bond Fund $26/$16* $42+ $61+ $116+
Income Fund $47/$17* $71/$51* $99/$89* $155+
International Bond Fund $69/$19* $88/$58* $120/$100* $188+
High Yield Bond Fund $70/$20* $92/$62* N/A N/A
MUNICIPAL BOND FUNDS:
Municipal Bond Fund $66/$16* $81/$51* $108/$88* $161+
Intermediate Municipal Bond Fund $46/$16* $71/$51* $97/$87* $151+
Michigan Municipal Bond Fund $67/$17* $83/$53* $111/$91* $168+
<FN>
- ---------
* Assuming no redemption of Class B shares.
+ Assumes conversion to Class A shares.
</TABLE>
vii
<PAGE>
<TABLE>
<CAPTION>
Annual Fund Operating Expenses
(as a percentage of average daily net assets)
Class I Shares
Management Fees Total Operating
After Waivers 12b-1 Fees Other Expenses(1) Expenses(1)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSET ALLOCATION FUNDS:
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 0.19% 0.79%
Mid-Cap Opportunity Fund 0.60% None 0.25% 0.85%
Small-Cap Opportunity Fund 0.70% None 0.22% 0.92%
Intrinsic Value Fund 0.60% None 0.21% 0.81%
Growth and Value Fund 0.59%(3) None 0.26%(3) 0.85%(3)
Equity Index Fund 0.10% None 0.22% 0.32%
International Equity Fund 0.80% None 0.32% 1.12%
BOND FUNDS:
Intermediate Bond Fund 0.40% None 0.21% 0.61%
Bond Fund 0.40% None 0.21% 0.61%
Short Bond Fund 0.33%(3) None 0.34%(3) 0.57%(3)
Income Fund 0.40% None 0.22% 0.62%
International Bond Fund 0.44%(3) None 0.40%(3) 0.84%(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% .60%
Intermediate Municipal Bond Fund 0.40% None 0.19% .59%
Michigan Municipal Bond Fund 0.34%(3) None 0.32%(3) .66%(3)
<FN>
- ---------
(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, Short
Bond, International Bond, High Yield Bond and Michigan Municipal Bond
Funds would have been 1.01%, 1.11%, 1.46%, 0.86%, 0.59%, 1.10%, 1.42%
and 0.72% respectively.
</TABLE>
viii
<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 N/A N/A
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 $ 3 $10 $18 $ 41
International Equity Fund $11 $36 $62 $137
BOND FUNDS:
Intermediate Bond Fund $ 6 $20 $34 $ 76
Bond Fund $ 6 $20 $34 $ 76
Short Bond Fund $ 6 $18 $32 $ 72
Income Fund $ 6 $20 $35 $ 78
International Bond Fund $ 9 $27 $47 $104
High Yield Bond Fund $10 $31 N/A N/A
MUNICIPAL BOND FUNDS:
Municipal Bond Fund $ 6 $19 $34 $ 75
Intermediate Municipal Bond Fund $ 6 $19 $33 $ 74
Michigan Municipal Bond Fund $ 7 $21 $37 $ 82
</TABLE>
ix
<PAGE>
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 AND HIGH YIELD BOND
FUND ARE NEW AND THE ABOVE FIGURES 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.
x
<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 Composite Stock Price Index (the "S&P 500 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.
1
<PAGE>
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 Income 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 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 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.
2
<PAGE>
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 periods prior to December 31, 1995 with
respect to the Managed Assets Conservative, Equity Income, Growth, Small-Cap
Opportunity, Income, 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
table for the Managed Assets Growth Fund for the period ended March 31, 1997
is unaudited and has been derived from the financial statements and notes
thereto included in the Statement of Additional Information. Further
information about the performance of the Funds is available in the annual
report 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.
-3-
<PAGE>
<TABLE>
<CAPTION>
For a Share Outstanding Throughout the Period
Net
Realized Distri- Distri-
Net Asset and Unreal- butions butions
Value Net ized Gains from Net from Total Conversion
Beginning Investment (Losses) on Investment Realized Distri- to Class A
of Period Income Investments Income Gains butions Shares
--------- ------ ----------- ------ ----- ------- ------
Managed Assets Conservative Fund
Class A Shares
<S> <C> <C> <C> <C> <C> <C> <C>
1996 $14.54 0.56 0.89 (0.56) (0.09) (0.65) ---
1995 $12.13 0.64 2.48 (0.68) (0.03) (0.71) ---
1994 $13.11 0.73 (0.98) (0.72) (0.01) (0.73) ---
1993 $12.68 0.72 0.61 (0.72) (0.18) (0.90) ---
1992 $12.56 0.79 0.26 (0.77) (0.16) (0.93) ---
1991 $10.79 0.83 1.77 (0.83) --- (0.83) ---
1990 $11.54 0.86 (0.54) (0.88) (0.19) (1.07) ---
1989 $10.66 0.88 1.10 (0.89) (0.21) (1.10) ---
1988 $ 9.73 0.78 0.92 (0.74) (0.03) (0.77) ---
1987 $10.75 0.70 (0.85) (0.77) (0.10) (0.87) ---
<CAPTION>
Ratio
of Net
Ratio of Investment
Ratio of Expenses Income
Net to Average to Average
Net Assets Ratio of Investment Net Assets Net Assets
Net Asset End of Expenses Income (Excluding Fee (Excluding Fee Portfolio Average
Value End Total Period to Average to Average Waivers and Waivers and Turnover Commission
of Period Return(a) (000) Net Assets Net Assets Reimbursements) Reimbursements) Rate Rate
- --------- --------- ----- ---------- ---------- --------------- --------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$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% ---
<FN>
- ---------
(a) Total returns as presented do not include any applicable sales load or
redemption charges.
</TABLE>
-4-
<PAGE>
<TABLE>
<CAPTION>
Net Real-
ized and Distri- Distri-
Net Asset Unrealized butions butions
Value Net Gains from Net from Total Conversion Net Asset
Beginning Investment (Losses) on Investment Realized Distri- to Class A Value End
of Period Income Investments Income Gains butions Shares of Period
--------- ---------- ----------- ------ -------- ------- ---------- ---------
Managed Assets Conservative Fund (continued)
Class B Shares
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $14.56 0.44 0.89 (0.44) (0.09) (0.53) --- $15.36
1995(a) $12.42 0.45 2.17 (0.45) (0.03) (0.48) --- $14.56
1994(b) $13.05 0.51 (0.91) (0.54) (0.01) (0.55) (12.10)(c) ---
<CAPTION>
Class I Shares
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $14.57 0.60 0.89 (0.59) (0.09) (0.68) --- $15.38
1995(d) $12.42 0.57 2.18 (0.57) (0.03) (0.60) --- $14.57
<CAPTION>
Ratio
of Net
Ratio of Investment
Expenses Income
Ratio of to Average to Average
Net Assets Ratio of Net Invest- Net Assets Net Assets
End of Expenses ment Income (Excluding Fee (Excluding Fee Portfolio Average
Total Period to Average to Average Waivers and Waivers and Turnover Commission
Return(e) (000) Net Assets Net Assets Reimbursements) Reimbursements) Rate Rate
--------- ----- ---------- ---------- --------------- --------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
9.26% $5,736 1.93% 2.89% 2.07% 2.75% 63.41% $0.05
21.42%++ $2,175 1.92%+ 3.89%+ 2.12%+ 3.70%+ 8.23%++ ---
(3.13)%++ --- 1.21%+ 4.10%+ 2.17%+ 3.14%+ 28.69%++ ---
10.43% $1,501 0.93% 3.89% 1.19% 3.63% 63.41% $0.05
22.55%++ $1,294 0.77%+ 5.12%+ 1.22%+ 4.66%+ 8.23%++ ---
<FN>
- ---------
(a) For the period March 3, 1995 (re-offering date of Class B Shares)
through December 31, 1995.
(b) 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 under the then-current sales
load schedule and such shares converted to Class A Shares.
(c) 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.
(d) For the period March 3, 1995 (initial offering date of Class I Shares)
through December 31, 1995.
(e) Total returns as presented to not include any applicable sales load or
redemption charges.
+ Annualized.
++ Not annualized.
</TABLE>
-5-
<PAGE>
<TABLE>
<CAPTION>
Net Real-
ized and Distri- Distri-
Net Asset Unrealized butions butions
Value Net Gains from Net from Total Net Asset
Beginning Investment (Losses) on Investment Realized Distri- Value End Total
of Period Income Investments Income Gains butions of Period Return(b)
--------- ------ ----------- ---------- -------- ------- --------- ---------
Managed Assets Balanced Fund
Class A Shares
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $11.24 0.35 1.06 (0.34) (0.68) (1.02) $11.63 12.99%
1995 $ 9.53 0.35 1.83 (0.35) (0.12) (0.47) $11.24 23.18%
1994 $10.00 0.28 (0.48) (0.27) ---- (0.27) $ 9.53 (1.95)%
<CAPTION>
Class B Shares
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996(a) $12.16 0.08 0.81 (0.07) (0.17) (0.24) $12.81 7.30%++
<CAPTION>
Class I Shares
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $11.24 0.39 1.02 (0.38) (0.68) (1.06) $11.59 13.04%
1995 $ 9.53 0.35 1.83 (0.35) (0.12) (0.47) $11.24 23.18%
1994 $10.00 0.28 (0.48) (0.27) ---- (0.27) $ 9.53 (1.95)%
<CAPTION>
Ratio
of Net
Ratio of Investment
Ratio of Expenses Income
Net to Average to Average
Net Assets Ratio of Investment Net Assets Net Assets
End of Expenses Income (Excluding Fee (Excluding Fee Portfolio Average
Period to Average to Average Waivers and Waivers and Turnover Commission
(000) Net Assets Net Assets Reimbursements) Reimbursements) Rate Rate
----- ---------- ---------- --------------- --------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
$ 26,775 1.09% 3.13% 1.16% 3.06% 50.50% $0.07
$ 9,986 0.91% 3.40% 1.09% 3.22% 31.76% ----
$ 8,168 0.85% 3.41% 1.56% 2.70% 37.49% ----
$ 1,890 1.96%+ 1.35%+ 2.03%+ 1.28%+ 50.50% $0.07+
$101,596 0.94% 3.28% 1.01% 3.21% 50.05% $0.07
$ 83,638 0.91% 3.40% 1.09% 3.22% 31.76% ----
$ 45,999 0.85% 3.41% 1.56% 2.70% 37.49% ----
<FN>
- ---------
(a) For the period August 24, 1996 (initial offering date of Class B
Shares) through December 31, 1996.
(b) Total returns as presented do not include any applicable sales load
or redemption charges.
+ Annualized.
++ Not annualized.
</TABLE>
-6-
<PAGE>
<TABLE>
<CAPTION>
Net Real-
ized and Distri- Distri-
Net Asset Unrealized butions butions
Value Net Gains from Net from Total Net Asset
Beginning Investment (Losses) on Investment Realized Distri- Value End Total
of Period Income Investments Income Gains butions of Period Return(c)
--------- ---------- ----------- ---------- -------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Managed Assets Growth Fund
Class A Shares
1997(a) $10.08 0.05 (0.10) (0.05) -- (0.05) $ 9.97 (2.12)%+
1996(b) $10.00 -- 0.08 -- -- -- $10.08 0.80%++
<CAPTION>
Class B Shares
<S> <C> <C> <C> <C> <C> <C> <C>
1997(a) $ 9.99 0.03 (0.12) (0.05) -- (0.05) $ 9.86 (3.40)%+
1996(b) $10.00 -- (0.01) -- -- -- $ 9.99 (0.10)%++
<CAPTION>
Class I Shares
<S> <C> <C> <C> <C> <C> <C> <C>
1997(a) $10.13 0.09 (0.15) (0.06) -- (0.06) $10.01 (2.40)%+
1996(b) $10.00 -- 0.13 -- -- -- $10.13 1.30%++
<CAPTION>
Ratio
of Net
Ratio of Investment
Ratio of Expenses Income
Net to Average to Average
Net Assets Ratio of Investment Net Assets Net Assets
End of Expenses Income (Excluding Fee (Excluding Fee Portfolio Average
Period to Average to Average Waivers and Waivers and Turnover Commission
(000) Net Assets Net Assets Reimbursements) Reimbursements) Rate Rate
----- ---------- ---------- --------------- --------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
$825 1.20%+ 4.31%+ 1.71%+ 3.80%+ 0.00% $0.00
$ 75 1.20%+ (0.45)%+ (3.50)%+ (2.75)%+ 0.00% $0.00
$736 1.95%+ 4.33%+ 2.46%+ 3.82%+ 0.00% $0.00
$ 17 1.95%+ (1.20)%+ (4.25)%+ (3.50)%+ 0.00% $0.00
$622 0.95%+ 4.33%+ 1.46%+ 3.82%+ 0.00% $0.00
$594 0.95%+ 0.20%+ (3.25)%+ (2.50)%+ 0.00% $0.00
<FN>
- ---------
(a) For the period January 1, 1997 through March 31, 1997 (unaudited).
(b) For the period December 17, 1996 (commencement of operations) through
December 31, 1996.
(c) Total returns as presented do not include any applicable sales load
or redemption charges.
+ Annualized.
++ Not annualized.
</TABLE>
-7-
<PAGE>
<TABLE>
<CAPTION>
Net Distri-
Realized and Distri- butions Distri-
Net Asset Unrealized butions in Excess butions
Value Net Gains from Net of Net from Total Net Asset
Beginning Investment (Losses) on Investment Investment Realized Distri- Value End
of Period Income Investments Income Income Gains butions of Period
--------- ---------- ------------ ---------- ---------- -------- ------- ---------
Equity Income Fund
Class A Shares
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $12.22 0.39 1.90 (0.38) -- (0.84) (1.22) $13.29
1995(a) $10.00 0.36 2.57 (0.36) (0.01) (0.34) (0.71) $12.22
<CAPTION>
Class B Shares
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $12.22 0.30 1.88 (0.28) -- (0.84) (1.12) $13.28
1995(a) $10.00 0.29 2.56 (0.29) -- (0.34) (0.63) $12.22
<CAPTION>
Class I Shares
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $12.21 0.45 1.87 (0.44) -- (0.84) (1.28) $13.25
1995(a) $10.00 0.42 2.55 (0.42) -- (0.34) (0.76) $12.21
<CAPTION>
Ratio
of Net
Ratio of Investment
Ratio of Expenses Income
Net to Average to Average
Net Assets Ratio of Investment Net Assets Net Assets
End of Expenses Income (Excluding Fee (Excluding Fee Portfolio Average
Total Period to Average to Average Waivers and Waivers and Turnover Commission
Return(b) (000) Net Assets Net Assets Reimbursements) Reimbursements) Rate Rate
- --------- ---------- ---------- ---------- --------------- --------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
19.29% $ 12,936 0.91% 3.29% 0.95% 3.25% 61.41% $0.04
29.78%++ $ 2,873 1.11%+ 3.33%+ 1.44%+ 2.99%+ 44.07%++ --
18.28% $ 1,885 1.66% 2.54% 1.81% 2.39% 61.41% $0.04
28.97%++ $ 593 1.90%+ 2.65%+ 2.65%+ 1.90%+ 44.07%++ --
19.58% $314,649 0.66% 3.54% 0.74% 3.46% 61.41% $0.04
30.27%++ $283,927 0.65%+ 4.08%+ 0.77%+ 3.96%+ 44.07%++ --
<FN>
- ---------
(a) For the period January 27, 1995 (commencement of operations) through
December 31, 1995.
(b) Total returns as presented do not include any applicable sales load
or redemption charges.
+ Annualized.
++ Not annualized.
</TABLE>
-8-
<PAGE>
<TABLE>
<CAPTION>
Net Real-
ized and Distri- Distri-
Net Asset Unrealized butions butions
Value Net Gains from Net from Total Net Asset
Beginning Investment (Losses) on Investment Realized Distri- Value End Total
of Period Income Investments Income Gains butions of Period Return(b)
--------- ------ ----------- ---------- -------- ------- --------- ---------
Growth Fund
Class A Shares
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $11.97 0.05 1.04 (0.06) (0.36) (0.42) $12.64 20.10%
1995(a) $10.00 0.11 2.86 (0.11) (0.89) (1.00) $11.97 29.98%++
<CAPTION>
Class B Shares
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $11.95 (0.02) 0.99 -- (0.36) (0.36) $12.56 19.04%
1995(a) $10.00 0.06 2.84 (0.06) (0.89) (0.95) $11.95 29.15%++
<CAPTION>
Class I Shares
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $11.97 0.09 1.02 (0.09) (0.36) (0.45) $12.63 20.36%
1995(a) $10.00 0.15 2.86 (0.15) (0.89) (1.04) $11.97 30.38%++
<CAPTION>
Ratio
of Net
Ratio of Investment
Ratio of Expenses Income
Net to Average to Average
Net Assets Ratio of Investment Net Assets Net Assets
End of Expenses Income (Excluding Fee (Excluding Fee Portfolio Average
Period to Average to Average Waivers and Waivers and Turnover Commission
(000) Net Assets Net Assets Reimbursements) Reimbursements) Rate Rate
--------- ---------- ---------- --------------- --------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
$ 23,273 1.04% 0.43% 1.07% 0.40% 61.95% $0.02
$ 4,329 1.21%+ 0.86%+ 1.39%+ 0.68%+ 106.02%++ --
$ 1,094 1.79% (0.32)% 1.89% (0.42)% 61.95% $0.02
$ 268 2.04%+ 0.02%+ 2.60%+ (0.54)%+ 106.02%++ --
$ 533,406 0.79% 0.68% 0.85% 0.62% 61.95% $0.02
$ 293,944 0.80%+ 1.46%+ 0.92%+ 1.34%+ 106.02%++ --
<FN>
- ---------
(a) For the period January 27, 1995 (commencement of operations) through
December 31, 1995.
(b) Total returns as presented do not include any applicable sales load
or redemption charges.
+ Annualized.
++ Not annualized.
</TABLE>
-9-
<PAGE>
<TABLE>
<CAPTION>
Net Distri-
Realized and Distri- butions Distri-
Net Asset Unrealized butions in Excess butions
Value Net Gains from Net of Net from Total Net Asset
Beginning Investment (Losses) on Investment Investment Realized Distri- Value End
of Period Income Investments Income Income Gains butions of Period
--------- ---------- ----------- ---------- ---------- -------- ------- ---------
Small-Cap Opportunity Fund
Class A Shares
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $12.20 (0.02) 3.02 -- -- (1.50) (1.50) $13.70
1995(a) $10.00 0.02 2.45 (0.02) -- (0.25) (0.27) $12.20
<CAPTION>
Class B Shares
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $12.12 (0.04) 3.00 -- -- (1.50) (1.50) $13.58
1995(a) $10.00 (0.03) 2.40 -- -- (0.25) (0.25) $12.12
<CAPTION>
Class I Shares
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $12.19 (0.01) 3.13 -- (0.01) (1.50) (1.51) $13.80
1995(a) $10.00 0.06 2.44 (0.06) -- (0.25) (0.31) $12.19
<CAPTION>
Ratio
of Net
Ratio of Investment
Ratio of Expenses Income
Net to Average to Average
Net Assets Ratio of Investment Net Assets Net Assets
End of Expenses Income (Excluding Fee (Excluding Fee Portfolio Average
Total Period to Average to Average Waivers and Waivers and Turnover Commission
Return(b) (000) Net Assets Net Assets Reimbursements) Reimbursements) Rate Rate
- --------- ---------- ---------- ---------- --------------- --------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
24.59% $ 6,697 1.13% (0.29)% 1.24% (0.40)% 93.82% $0.05
24.80%++ $ 672 1.25%+ 0.19%+ 2.56%+ (1.12)%+ 38.89%++ --
24.42% $ 110 1.88% (1.04)% 3.04% (2.20)% 93.82% $0.05
23.76%++ $ 15 2.00%+ (0.51)% 9.52%+ (8.04)%+ 38.89%++ --
25.63% $125,840 0.88% (0.04)% 1.02% (0.18)% 93.82% $0.05
25.08%++ $ 92,926 0.85%+ 0.59%+ 1.09%+ 0.36%+ 38.89%++ --
<FN>
- ---------
(a) For the period January 27, 1995 (commencement of operations) through
December 31, 1995.
(b) Total returns as presented do not include any applicable sales load
or redemption charges.
+ Annualized.
++ Not annualized.
</TABLE>
-10-
<PAGE>
<TABLE>
<CAPTION>
Net Real-
ized and Distri- Distri- Distribu-
Net Asset Unrealized butions butions tions in
Value Net Gains from Net from Excess of Tax
Beginning Investment (Losses) on Investment Realized Realized Return of
of Period Income Investments Income Gains Gains Capital
--------- ---------- ----------- ---------- -------- -------- ---------
Mid-Cap Opportunity Fund
Class A Shares
<S> <C> <C> <C> <C> <C> <C> <C>
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(a) $10.95 0.08 1.88 (0.08) (0.46) -- --
<CAPTION>
Class B Shares
<S> <C> <C> <C> <C> <C> <C> <C>
1996(b) $10.00 -- 0.79 (0.01) (1.21) -- --
<CAPTION>
Class I Shares
<S> <C> <C> <C> <C> <C> <C> <C>
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(c) $10.00 0.09 0.43 (0.09) (0.03) -- --
<CAPTION>
Ratio of
Net
Net Assets Ratio of Investment
Total Net Asset End of Expenses Income Portfolio Average
Distri- Value End Total Period to Average to Average Turnover Commission
butions of Period Return(d) (000) Net Assets Net Assets Rate Rate
------- --------- --------- ---------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(1.30) $17.61 24.91% $ 91,516 0.93% 0.12% 34.87% $0.04
(0.82) $15.15 19.88% $ 71,858 0.89% 0.37% 53.55% --
(0.68) $13.34 (3.27)% $ 64,326 0.90% 0.53% 37.51% --
(0.85) $14.49 24.01% $ 53,977 0.86% 0.71% 33.99% --
(0.54) $12.37 27.93% $ 5,111 0.85%+ 1.05%+ 34.44%+ --
(1.22) $ 9.57 7.94%++ $ 154 1.81%+ (0.59)%+ 34.87% $0.04
(1.32) $17.61 25.03% $677,608 0.81% 0.24% 34.87% $0.04
(0.82) $15.15 19.88% $579,094 0.89% 0.37% 53.55% --
(0.68) $13.34 (3.27)% $460,673 0.90% 0.53% 37.51% --
(0.85) $14.49 24.01% $311,688 0.86% 0.71% 33.99% --
(0.57) $12.37 24.56% $161,312 0.84% 1.09% 34.44% --
(0.12) $10.40 8.92%+ $108,046 0.84%+ 1.56%+ 2.92% --
<FN>
- ---------
(a) For the period May 1, 1992 (initial offering date of Class A Shares)
through December 31, 1992.
(b) For the period September 23, 1996 (initial offering date of Class B
Shares) through December 31, 1996.
(c) For the period June 1, 1991 (commencement of operations) to December
31, 1991.
(d) Total returns as presented do not include any applicable sales load
or redemption charges.
+ Annualized.
++ Not annualized.
</TABLE>
-11-
<PAGE>
<TABLE>
<CAPTION>
Net Real-
ized and Distri- Distri-
Net Asset Unrealized butions butions
Value Net Gains from Net from Total
Beginning Investment (Losses) on Investment Realized Distri-
of Period Income Investments Income Gains butions
--------- ---------- ----------- ---------- -------- -------
Intrinsic Value Fund
Class A Shares
<S> <C> <C> <C> <C> <C> <C>
1996 $11.89 0.28 2.50 (0.28) (0.69) (0.97)
1995 $10.48 0.29 2.24 (0.30) (0.82) (1.12)
1994 $11.05 0.31 (0.38) (0.30) (0.20) (0.50)
1993 $10.40 0.29 1.23 (0.28) (0.59) (0.87)
1992(a) $10.70 0.22 0.33 (0.21) (0.64) (0.85)
<CAPTION>
Class B Shares
<S> <C> <C> <C> <C> <C> <C>
1996(b) $10.00 0.04 0.79 (0.06) (0.59) (0.65)
<CAPTION>
Class I Shares
<S> <C> <C> <C> <C> <C> <C>
1996 $11.89 0.29 2.51 (0.29) (0.69) (0.98)
1995 $10.48 0.29 2.24 (0.30) (0.82) (1.12)
1994 $11.05 0.31 (0.38) (0.30) (0.20) (0.50)
1993 $10.40 0.29 1.23 (0.28) (0.59) (0.87)
1992 $ 9.89 0.29 1.14 (0.28) (0.64) (0.92)
1991(c) $10.00 0.17 (0.02) (0.17) (0.09) (0.26)
<CAPTION>
Ratio of
Net
Net Assets Ratio of Investment
Net Asset End of Expenses Income Portfolio Average
Value End Total Period to Average to Average Turnover Commission
of Period Return(d) (000) Net Assets Net Assets Rate Rate
--------- --------- ---------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
$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%+ --
$10.18 8.31%++ $ 182 1.81%+ 0.25%+ 34.24%+ $0.04
$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% --
<FN>
- ---------
(a) For the period May 1, 1992 (initial offering date of Class A Shares)
through December 31, 1992.
(b) For the period September 23, 1996 (initial offering date of Class B
Shares) through December 31, 1996.
(c) For the period June 1, 1991 (commencement of operations) through
December 31, 1991.
(d) Total returns as presented do not include any applicable sales load
or redemption charges.
+ Annualized.
++ Not annualized.
</TABLE>
-12-
<PAGE>
<TABLE>
<CAPTION>
Net Real-
ized and Distri- Distri- Distribu-
Net Asset Unrealized butions butions tions in
Value Net Gains from Net from Excess of Tax
Beginning Investment (Losses) on Investment Realized Realized Return of
of Period Income Investments Income Gains Gains Capital
--------- ---------- ----------- ---------- -------- -------- ---------
Growth and Value Fund
Class A Shares
<S> <C> <C> <C> <C> <C> <C> <C>
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(a) $10.16 0.17 0.45 (0.17) (0.10) -- --
<CAPTION>
Class B Shares
<S> <C> <C> <C> <C> <C> <C> <C>
1996(b) $10.00 0.01 0.62 (0.03) (1.28) -- --
<CAPTION>
Class I Shares
<S> <C> <C> <C> <C> <C> <C> <C>
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(c) $10.00 0.14 (0.14) (0.14) -- -- --
<CAPTION>
Ratio of
Net
Net Assets Ratio of Investment
Total Net Asset End of Expenses Income Portfolio Average
Distri- Value End Total Period to Average to Average Turnover Commission
butions of Period Return(d) (000) Net Assets Net Assets Rate Rate
- ------- --------- --------- ---------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(1.57) $14.12 19.24% $ 59,027 0.91% 1.17% 43.21% $0.04
(0.48) $13.16 28.04% $ 49,872 0.84% 1.73% 26.80% --
(0.55) $10.67 0.55% $ 42,274 0.84% 2.07% 28.04% --
(0.79) $11.16 13.79% $ 29,467 0.83% 1.84% 42.31% --
(0.27) $10.51 8.19% $ 4,338 0.83%+ 2.49%+ 16.28%+ --
(1.31) $9.32 6.10%++ $ 183 1.80%+ 0.25%+ 43.21%+ $0.04
(1.58) $14.12 19.35% $733,632 0.80% 1.28% 43.21% $0.04
(0.48) $13.16 28.04% $687,295 0.84% 1.73% 26.80% --
(0.55) $10.67 0.55% $529,097 0.84% 2.07% 28.04% --
(0.79) $11.16 13.79% $400,168 0.83% 1.84% 42.31% --
(0.32) $10.51 9.87% $283,007 0.83% 2.20% 16.28% --
(0.14) $ 9.86 0.17%+ $238,086 0.85%+ 2.65%+ 0.94% --
<FN>
- ---------
(a) For the period May 1, 1992 (initial offering date of Class A Shares)
through December 31, 1992.
(b) For the period September 23, 1996 (initial offering date of Class B
Shares) through December 31, 1996.
(c) For the period June 1, 1991 (commencement of operations) through
December 31, 1991.
(d) Total returns as presented do not include any applicable sales load
or redemption charges.
+ Annualized.
++ Not annualized.
</TABLE>
-13-
<PAGE>
<TABLE>
<CAPTION>
Net Real-
ized and Distri- Distri- Distri-
Net Asset Unrealized butions butions butions in
Value Net Gains from Net from Excess of Total
Beginning Investment (Losses) on Investment Realized Realized Distri-
of Period Income Investments Income Gains Gains butions
--------- ---------- ----------- ---------- -------- ---------- -------
Equity Index Fund
Class A Shares
<S> <C> <C> <C> <C> <C> <C> <C>
1996 $14.15 0.30 2.85 (0.29) (0.26) -- (0.55)
1995 $10.65 0.30 3.65 (0.31) (0.14) -- (0.45)
1994 $11.15 0.31 (0.20) (0.30) (0.23) (0.08) (0.61)
1993 $10.52 0.28 0.75 (0.27) (0.13) -- (0.40)
1992(a) $10.00 0.12 0.52 (0.12) -- -- (0.12)
<CAPTION>
Class B Shares
<S> <C> <C> <C> <C> <C> <C> <C>
1996(b) $10.00 0.05 0.76 (0.06) (0.25) -- (0.31)
<CAPTION>
Class I Shares
<S> <C> <C> <C> <C> <C> <C> <C>
1996 $14.15 0.31 2.85 (0.30) (0.26) -- (0.56)
1995 $10.65 0.30 3.65 (0.31) (0.14) -- (0.45)
1994 $11.15 0.31 (0.20) (0.30) (0.23) (0.08) (0.61)
1993 $10.52 0.28 0.75 (0.27) (0.13) -- (0.40)
1992(a) $10.00 0.12 0.52 (0.12) -- -- (0.12)
<CAPTION>
Ratio of
Net
Net Assets Ratio of Investment
Net Asset End of Expenses Income Portfolio Average
Value End Total Period to Average to Average Turnover Commission
of Period Return(c) (000) Net Assets Net Assets Rate Rate
- --------- --------- ---------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
$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%++ --
$10.50 8.09%++ $ 113 1.29%+ 0.57%+ 12.25%+ $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%++ --
<FN>
- ---------
(a) For the period July 10, 1992 (inception) through December 31, 1992.
(b) For the period September 23, 1996 (initial offering date of Class B
Shares) through December 31, 1996.
(c) Total returns as presented do not include any applicable sales load
or redemption charges.
+ Annualized.
++ Not annualized.
</TABLE>
-14-
<PAGE>
<TABLE>
<CAPTION>
Net
Realized and Distri-
Net Asset Unrealized butions
Value Net Gains from Net Total Net Asset
Beginning Investment (Losses) on Investment Distri- Value End Total
of Period Income Investments Income butions of Period Return(c)
--------- ---------- ----------- ---------- ------- --------- ---------
International Equity Fund
Class A Shares
<S> <C> <C> <C> <C> <C> <C> <C>
1996 $11.05 0.10 0.72 (0.10) (0.10) $11.77 7.50%
1995 $10.01 0.10 1.05 (0.11) (0.11) $11.05 11.47%
<CAPTION>
Class B Shares
<S> <C> <C> <C> <C> <C> <C> <C>
1996(a) $10.84 0.04 0.24 (0.04) (0.04) $11.08 2.62%++
<CAPTION>
Class I Shares
<S> <C> <C> <C> <C> <C> <C> <C>
1996 $11.05 0.11 0.74 (0.11) (0.11) $11.79 7.79%
1995 $10.01 0.10 1.05 (0.11) (0.11) $11.05 11.47%
1994(b) $10.00 0.01 -- -- -- $10.01 1.26%+
<CAPTION>
Ratio of Ratio of Net
Ratio of Expenses Investment
Net to Average Income to Average
Net Assets Ratio of Investment Net Assets Net Assets
End of Expenses Income (Excluding Fee (Excluding Fee Portfolio Average
Period to Average to Average Waivers and Waivers and Turnover Commission
(000) Net Assets Net Assets Reimbursements) Reimbursements) Rate Rate
----- ---------- ---------- --------------- ----------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
$ 10,836 1.23% 0.88% 1.23% 0.88% 6.37% $0.07
$ 988 1.16% 1.43% 1.24% 1.35% 2.09% --
$ 1,131 2.05%+ 0.75%+ 2.05%+ 0.75%+ 6.37%+ $0.07
$389,997 1.10% 1.01% 1.10% 1.01% 6.37% $0.07
$106,300 1.16% 1.43% 1.24% 1.35% 2.09% --
$ 36,545 1.15%+ 1.18%+ 1.92%+ 0.41%+ 0.30%++ --
<FN>
- ---------
(a) For the period August 24, 1996 (initial offering date of Class B
Shares) through December 31, 1996.
(b) For the period December 3, 1994 (commencement of operations) through
December 31, 1994.
(c) Total returns as presented do not include any applicable sales load
or redemption charges.
+ Annualized.
++ Not annualized.
</TABLE>
-15-
<PAGE>
<TABLE>
<CAPTION>
Net
Realized and Distri- Distri-
Net Asset Unrealized butions butions
Value Net Gains from Net from Total
Beginning Investment (Losses) on Investment Realized Distri-
of Period Income Investments Income Gains butions
--------- ---------- ------------ ---------- -------- -------
Intermediate Bond Fund
Class A Shares
<S> <C> <C> <C> <C> <C> <C>
1996 $10.37 0.64 (0.07) (0.65) -- (0.65)
1995 $ 9.21 0.59 1.16 (0.59) -- (0.59)
1994 $10.41 0.56 (1.20) (0.55) (0.01) (0.56)
1993 $10.28 0.59 0.26 (0.59) 0.13 (0.72)
1992(a) $10.32 0.49 0.13 (0.49) (0.17) (0.66)
<CAPTION>
Class B Shares
<S> <C> <C> <C> <C> <C> <C>
1996(b) $10.00 0.15 0.20 (0.15) -- (0.15)
<CAPTION>
Class I Shares
<S> <C> <C> <C> <C> <C> <C>
1996 $10.37 0.64 (0.07) (0.65) -- (0.65)
1995 $ 9.21 0.59 1.16 (0.59) -- (0.59)
1994 $10.41 0.56 (1.20) (0.55) (0.01) (0.56)
1993 $10.28 0.59 0.26 (0.59) (0.13) (0.72)
1992 $10.55 0.71 (0.10) (0.71) (0.17) (0.88)
1991(c) $10.00 0.40 0.57 (0.40) (0.02) (0.42)
<CAPTION>
Ratio of
Net
Net Assets Ratio of Investment
Net Asset End of Expenses Income Portfolio
Value End Total Period to Average to Average Turnover
of Period Return(d) (000) Net Assets Net Assets Rate
- --------- --------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
$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 3.50%++ $ 122 1.60%+ 1.52%+ 31.62%
$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%
<FN>
- ---------
(a) For the period May 1, 1992 (initial offering date of Class A Shares)
through December 31, 1992.
(b) For the period September 23, 1996 (initial offering date of Class B
Shares) through December 31, 1996.
(c) For the period June 1, 1991 (commencement of operations) through
December 31, 1991.
(d) Total returns as presented do not include any applicable sales load
or redemption charges.
+ Annualized.
++ Not annualized.
</TABLE>
-16-
<PAGE>
<TABLE>
<CAPTION>
Net Real-
ized and Distri- Distri-
Net Asset Unrealized butions butions
Value Net Gains from Net from Total
Beginning Investment (Losses) on Investment Realized Distri-
of Period Income Investments Income Gains butions
--------- ---------- ----------- ---------- -------- -------
Bond Fund
Class A Shares
<S> <C> <C> <C> <C> <C> <C>
1996 $10.45 0.67 (0.18) (0.67) -- (0.67)
1995 $ 9.01 0.63 1.45 (0.64) -- (0.64)
1994 $10.32 0.61 (1.31) (0.59) (0.02) (0.61)
1993 $10.25 0.76 0.38 (0.76) (0.31) (1.07)
1992(a) $10.23 0.56 0.15 (0.56) (0.13) (0.69)
<CAPTION>
Class B Shares
<S> <C> <C> <C> <C> <C> <C>
1996(b) $10.00 0.21 0.27 (0.21) -- (0.21)
<CAPTION>
Class I Shares
<S> <C> <C> <C> <C> <C> <C>
1996 $10.45 0.68 (0.18) (0.68) -- (0.68)
1995 $ 9.01 0.63 1.45 (0.64) -- (0.64)
1994 $10.32 0.61 (1.31) (0.59) (0.02) (0.61)
1993 $10.25 0.76 0.38 (0.76) (0.31) (1.07)
1992 $10.55 0.83 (0.17) (0.83) (0.13) (0.96)
1991(c) $10.00 0.51 0.57 (0.51) (0.02) (0.53)
<CAPTION>
Ratio of
Net
Net Assets Ratio of Investment
Net Asset End of Expenses Income Portfolio
Value End Total Period to Average to Average Turnover
of Period Return(d) (000) Net Assets Net Assets Rate
--------- --------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
$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%+
$10.27 4.81%++ $ 280 1.59%+ 3.01%+ 24.92%+
$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%
<FN>
- ---------
(a) For the period May 1, 1992 (initial offering date of Class A Shares)
through December 31, 1992.
(b) For the period August 24, 1996 (initial offering date of Class B
Shares) through December 31, 1996.
(c) For the period June 1, 1991 (commencement of operations) through
December 31, 1991.
(d) Total returns as presented do not include any applicable sales load
or redemption charges.
+ Annualized.
++ Not annualized.
</TABLE>
-17-
<PAGE>
<TABLE>
<CAPTION>
Net
Realized and Distri- Distri-
Net Asset Unrealized butions butions
Value Net Gains from Net from Total Net Asset
Beginning Investment (Losses) on Investment Realized Distri- Value End
of Period Income Investments Income Gains butions of Period
--------- ---------- ----------- ---------- -------- ------- ---------
Short Bond Fund
Class A Shares
<S> <C> <C> <C> <C> <C> <C> <C>
1996 $10.23 0.55 (0.10) (0.55) (0.02) (0.57) $10.11
1995 $ 9.84 0.58 0.39 (0.58) -- (0.58) $10.23
1994(a) $10.00 0.17 (0.16) (0.17) -- (0.17) $ 9.84
<CAPTION>
Class B Shares
<S> <C> <C> <C> <C> <C> <C> <C>
1996(b) $10.00 0.12 0.04 (0.12) (0.02) (0.14) $10.02
<CAPTION>
Class I Shares
<S> <C> <C> <C> <C> <C> <C> <C>
1996 $10.23 0.55 (0.10) (0.55) (0.02) (0.57) $10.11
1995 $ 9.84 0.58 0.39 (0.58) -- (0.58) $10.23
1994(a) $10.00 0.17 (0.16) (0.17) -- (0.17) $ 9.84
<CAPTION>
Ratio
of Net
Ratio of Investment
Ratio of Expenses Income
Net to Average to Average
Net Assets Ratio of Investment Net Assets Net Assets
End of Expenses Income (Excluding Fee (Excluding Fee Portfolio
Total Period to Average to Average Waivers and Waivers and Turnover
Return(c) (000) Net Assets Net Assets Reimbursements) Reimbursements) Rate
- --------- ---------- ---------- ---------- --------------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
4.45% $ 1,033 0.80% 5.35% 0.82% 5.33% 109.58%
10.07% $ 766 0.75% 5.74% 0.81% 5.68% 30.94%
0.21%+ $ 308 0.75%+ 5.92%+ 0.93%+ 5.74%+ 10.20%++
2.04%++ $ 56 1.57%+ 1.47%+ 1.59%+ 1.45%+ 109.58%+
4.56% $171,427 0.70% 5.45% 0.72% 5.43% 109.58%
10.07% $162,571 0.75% 5.74% 0.81% 5.68% 30.94%
0.21%+ $ 63,931 0.75%+ 5.92%+ 0.93%+ 5.74%+ 10.20%++
<FN>
- ---------
(a) For the period September 17, 1994 (commencement of operations)
through December 31, 1994.
(b) For the period September 23, 1996 (initial offering date of Class B
Shares) through December 31, 1996.
(c) Total returns as presented do not include any applicable sales load
or redemption charges.
+ Annualized.
++ Not annualized.
</TABLE>
-18-
<PAGE>
<TABLE>
<CAPTION>
Net
Realized and Distri- Distri-
Net Asset Unrealized butions butions
Value Net Gains from Net from Total Conversion
Beginning Investment (Losses) on Investment Realized Distri- to Class A
of Period Income Investments Income Gains butions Shares
--------- ---------- ----------- ---------- -------- ------- ----------
Income Fund
Class A Shares
<S> <C> <C> <C> <C> <C> <C> <C>
1996 $ 8.18 0.41 (0.25) (0.40) (0.10) (0.50) --
1995(a) $ 7.68 0.44 0.72 (0.44) (0.22) (0.66) --
1995 $ 8.25 0.52 (0.57) (0.52) -- (0.52) --
1994(b) $ 8.36 0.47 (0.09) (0.47) (0.02) (0.49) --
<CAPTION>
Class B Shares
<S> <C> <C> <C> <C> <C> <C> <C>
1996 $ 8.18 0.45 (0.23) (0.45) (0.10) (0.55) --
1995(c) $ 8.13 0.24 0.27 (0.24) (0.22) (0.46) --
1994(d) $ 8.16 0.40 (0.55) (0.40) -- (0.40) (7.61)(e)
<CAPTION>
Class I Shares
<S> <C> <C> <C> <C> <C> <C> <C>
1996 $ 8.18 0.46 (0.24) (0.45) (0.10) (0.55) --
1995(a) $ 7.68 0.47 0.72 (0.47) (0.22) (0.69) --
1995 $ 8.25 0.52 (0.57) (0.52) -- (0.52) --
1994(b) $ 8.36 0.47 (0.09) (0.47) (0.02) (0.49) --
<CAPTION>
Ratio
of Net
Ratio of Investment
Ratio of Expenses Income
Net to Average to Average
Net Assets Ratio of Investment Net Assets Net Assets
Net Asset End of Expenses Income (Excluding Fee (Excluding Fee Portfolio
Value End Total Period to Average to Average Waivers and Waivers and Turnover
of Period Return(f) (000) Net Assets Net Assets Reimbursements) Reimbursements) Rate
--------- --------- ---------- ---------- ---------- --------------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 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%++
$ 7.85 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%++
--- (1.82)%++ -- 0.00% 6.48%+ 2.58%+ 3.90%+ 71.65%++
$ 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%++
<FN>
- ---------
(a) 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.
(b) For the period March 5, 1993 (commencement of operations) through
January 31, 1994.
(c) 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.
(d) 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.
(e) 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.
(f) Total returns as presented do not include any applicable sales load or
redemption charges.
+ Annualized.
++ Not annualized.
</TABLE>
-19-
<PAGE>
<TABLE>
<CAPTION>
Net Distri-
Realized and Distri- butions Distri-
Net Asset Unrealized butions in Excess butions
Value Net Gains from Net of Net from Total
Beginning Investment (Losses) on Investment Investment Realized Distri-
of Period Income Investments Income Income Gains butions
--------- ---------- ------------ ---------- ---------- -------- -------
International Bond Fund
Class A Shares
<S> <C> <C> <C> <C> <C> <C> <C>
1996 $10.75 0.54 0.04 (0.54) -- -- (0.54)
1995(a) $10.00 0.98 1.10 (0.98) (0.01) (0.34) (1.33)
<CAPTION>
Class B Shares
<S> <C> <C> <C> <C> <C> <C> <C>
1996 $10.81 0.47 0.06 (0.47) -- -- (0.47)
1995(a) $10.00 0.91 1.16 (0.91) (0.01) (0.34) (1.26)
<CAPTION>
Class I Shares
<S> <C> <C> <C> <C> <C> <C> <C>
1996 $10.81 0.59 0.04 (0.59) -- -- (0.59)
1995(a) $10.00 1.02 1.16 (1.02) (0.01) (0.34) (1.37)
<CAPTION>
Ratio
of Net
Ratio of Investment
Ratio of Expenses Income
Net to Average to Average
Net Assets Ratio of Investment Net Assets Net Assets
Net Asset End of Expenses Income (Excluding Fee (Excluding Fee Portfolio
Value End Total Period to Average to Average Waivers and Waivers and Turnover
of Period Return(b) (000) Net Assets Net Assets Reimbursements) Reimbursements) Rate
--------- --------- ---------- ---------- ---------- --------------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
$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%++
$10.87 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%++
$10.85 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%++
<FN>
- ---------
(a) For the period January 27, 1995 (commencement of operations) through
December 31, 1995.
(b) Total returns as presented do not include any applicable sales load or
redemption charges.
+ Annualized.
++ Not annualized.
</TABLE>
-20-
<PAGE>
<TABLE>
<CAPTION>
Net
Realized and Distri- Distri- Distri-
Net Asset Unrealized butions butions butions in
Value Net Gains from Net from Excess of
Beginning Investment (Losses) on Investment Realized Realized
of Period Income Investments Income Gains Gains
--------- ---------- ----------- ---------- -------- ----------
Municipal Bond Fund
Class A Shares
<S> <C> <C> <C> <C> <C> <C>
1996 $12.64 0.59 (0.18) (0.58) (0.01) (0.10)
1995(a) $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(b) $11.94 0.89 (0.12) (0.89) -- --
<CAPTION>
Ratio
of Net
Ratio of Investment
Ratio of Expenses Income
Net to Average to Average
Net Assets Ratio of Investment Net Assets Net Assets
Total Net Asset End of Expenses Income (Excluding Fee (Excluding Fee Portfolio
Distri- Value End Total Period to Average to Average Waivers and Waivers and Turnover
butions of Period Return(c) (000) Net Assets Net Assets Reimbursements) Reimbursements) Rate
------- --------- --------- --------- ---------- ---------- --------------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(0.69) $12.36 3.36% $29,352 0.83% 4.54% 0.89% 4.48% 64.51%
(0.72) $12.64 10.95%++ $ 7,426 0.89%+ 4.57%+ 1.04%+ 4.43%+ 69.31%++
(0.60) $12.06 4.45% $ 6,840 1.98% 5.09% 3.89% 3.18% 60.78%
(1.60) $12.13 3.70% $ 9,234 0.00% 4.85% 1.44% 3.41% 175.06%
(0.95) $13.25 14.37% $11,290 0.00% 5.49% 1.59% 3.90% 88.53%
(0.84) $12.49 10.50% $ 6,591 0.00% 5.99% 2.75% 3.24% 66.28%
(0.81) $12.10 10.13% $ 2,244 0.00% 6.87% 2.75% 4.12% 32.40%
(1.14) $11.77 9.39% $ 1,192 0.00% 6.60% 2.75% 3.85% 85.07%
(0.89) $11.82 6.82%+ $ 673 0.00% 7.46%+ 2.25%+ 5.21%+ 36.19%++
<FN>
- ---------
(a) 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.
(b) From March 1, 1988 (commencement of operations) to February 28, 1989.
(c) Total returns as presented do not include any applicable sales load or
redemption charges.
+ Annualized.
++ Not annualized.
</TABLE>
-21-
<PAGE>
<TABLE>
<CAPTION>
Net
Realized and Distri- Distri- Distri-
Net Asset Unrealized butions butions butions in
Value Net Gains from Net from Excess of Total Conversion
Beginning Investment (Losses) on Investment Realized Realized Distri- to Class A
of Period Income Investments Income Gains Gains butions Shares
--------- ---------- ----------- ---------- -------- ---------- ------- ----------
Municipal Bond Fund (continued)
Class B Shares
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $12.65 0.52 (0.21) (0.49) (0.01) (0.10) (0.60) --
1995(a) $12.17 0.34 0.72 (0.34) (0.24) -- (0.58) --
1994(b) $12.14 0.41 (0.70) (0.41) -- -- (0.41) (11.44)(d)
1994(c) $12.37 0.03 (0.23) (0.03) -- -- (0.03) --
<CAPTION>
Class I Shares
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $12.63 0.65 (0.20) (0.61) (0.01) (0.10) (0.72) --
1995(e) $12.06 0.52 0.81 (0.52) (0.24) -- (0.76) --
1995(f) $12.06 0.05 -- (0.05) -- -- (0.05) --
<CAPTION>
Ratio Ratio of
of Expenses Net Investment
Ratio of Net to Average Income to Average
Net Assets Ratio of Investment Net Assets Net Assets
Net Asset End of Expenses Income (Excluding Fee (Excluding Fee Portfolio
Value End Total Period to Average to Average Waivers and Waivers and Turnover
of Period Return(g) (000) Net Assets Net Assets Reimbursements) Reimbursements) Rate
--------- --------- ---------- ---------- ------------ --------------- ----------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
$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%++
--- (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%++
$12.36 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%++
<FN>
- ---------
(a) 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.
(b) 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.
(c) For the period February 8, 1994 (initial offering date of Class B
Shares) through February 28, 1994.
(d) On December 2, 1994, the Fund terminated its offering of Class B Shares
under the then-current sales load schedule and such shares converted to
Class A Shares.
(e) 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.
(f) For the period February 1, 1995 (initial offering date of Class I
Shares) to February 28, 1995.
(g) Total returns as presented do not include any applicable sales load or
redemption charges.
+ Annualized.
++ Not annualized.
</TABLE>
-22-
<PAGE>
<TABLE>
<CAPTION>
Net
Realized and Distri- Distri-
Net Asset Unrealized butions butions
Value Net Gains from Net from Total Net Asset
Beginning Investment (Losses) on Investment Realized Distri- Value End
of Period Income Investments Income Gains butions of Period
--------- ---------- ----------- ---------- -------- ------- ---------
Intermediate Municipal Bond Fund
Class A Shares
<S> <C> <C> <C> <C> <C> <C> <C>
1996 $12.25 0.53 (0.09) (0.51) (0.08) (0.59) $12.10
1995(a) $11.79 0.44 0.56 (0.44) (0.10) (0.54) $12.25
1995 $12.18 0.55 (0.36) (0.55) (0.03) (0.58) $11.79
1994 $12.79 0.61 0.01 (0.61) (0.62) (1.23) $12.18
1993 $12.25 0.64 0.68 (0.64) (0.14) (0.78) $12.79
1992 $11.95 0.76 0.37 (0.76) (0.07) (0.83) $12.25
1991 $11.65 0.80 0.31 (0.80) (0.01) (0.81) $11.95
1990 $11.43 0.78 0.22 (0.78) -- (0.78) $11.65
1989(b) $11.46 0.79 (0.03) (0.79) -- (0.79) $11.43
<CAPTION>
Ratio
of Net
Ratio of Investment
Ratio of Expenses Income
Net to Average to Average
Net Assets Ratio of Investment Net Assets Net Assets
End of Expenses Income (Excluding Fee (Excluding Fee Portfolio
Total Period to Average to Average Waivers and Waivers and Turnover
Return(c) (000) Net Assets Net Assets Reimbursements) Reimbursements) Rate
--------- ---------- ---------- ---------- --------------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
3.69% $ 19,049 0.83% 4.37% 0.88% 4.32% 52.95%
8.58%++ $ 17,777 0.83%+ 4.30%+ 0.97%+ 4.16%+ 44.75%++
1.64% $ 17,243 0.29% 4.73% 1.38% 3.64% 128.02%
4.94% $ 28,826 0.06% 4.78% 1.27% 3.57% 167.95%
11.26% $ 27,885 0.00% 5.16% 1.31% 3.85% 63.67%
9.78% $ 18,310 0.00% 6.15% 1.72% 4.43% 86.91%
9.94% $ 7,251 0.00% 6.76% 2.75% 4.01% 12.22%
9.00% $ 4,582 0.00% 6.62% 2.75% 3.87% 46.68%
6.82%+ $ 2,593 0.00% 6.83%+ 2.25%+ 4.58%+ 101.17%++
<FN>
- ---------
(a) 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.
(b) For the period March 1, 1988 (commencement of operations) through
February 28, 1989.
(c) Total returns as presented do not include any applicable sales load or
redemption charges.
+ Annualized.
++ Not annualized.
</TABLE>
-23-
<PAGE>
<TABLE>
<CAPTION>
Net
Realized and Distri- Distri-
Net Asset Unrealized butions butions
Value Net Gains from Net from Total Conversion
Beginning Investment (Losses) on Investment Realized Distri- to Class A
of Period Income Investments Income Gains butions Shares
--------- ---------- ----------- ---------- -------- ------- ----------
Intermediate Municipal Bond Fund (continued)
Class B Shares
<S> <C> <C> <C> <C> <C> <C> <C>
1996 $12.25 0.44 (0.09) (0.42) (0.08) (0.50) --
1995(a) $11.80 0.37 0.55 (0.37) (0.10) (0.47) --
1995(b) $11.57 0.04 0.23 (0.04) -- (0.04) --
1994(c) $12.18 0.37 (0.72) (0.37) (0.03) (0.40) (11.43)(d)
1994(e) $12.32 0.03 (0.14) (0.03) -- (0.03) --
<CAPTION>
Class I Shares
<S> <C> <C> <C> <C> <C> <C> <C>
1996 $12.25 0.56 (0.08) (0.54) (0.08) (0.62) --
1995(a) $11.80 0.47 0.55 (0.47) (0.10) (0.57) --
1995(f) $11.57 0.04 0.23 (0.04) -- (0.04) --
<CAPTION>
Ratio
of Net
Ratio of Investment
Ratio of Expenses Income
Net to Average to Average
Net Assets Ratio of Investment Net Assets Net Assets
Net Asset End of Income Income (Excluding Fee (Excluding Fee Portfolio
Value End Total Period to Average to Average Waivers and Waivers and Turnover
of Period Return(g) (000) Net Assets Net Assets Reimbursements) Reimbursements) Rate
- --------- --------- ---------- ---------- ---------- --------------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
$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%++
-- (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%++
$12.11 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%++
<FN>
- ---------
(a) 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.
(b) For the period January 30, 1995 (re-offering date of Class B Shares)
through February 28, 1995.
(c) 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.
(d) 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.
(e) For the period February 8, 1994 (initial offering date of Class B Shares)
through February 28, 1994.
(f) For the period February 1, 1995 (initial offering date of Class I Shares)
through February 28, 1995.
(g) Total returns as presented do not include any applicable sales load or
redemption charges.
+ Annualized.
++ Not annualized.
</TABLE>
-24-
<PAGE>
<TABLE>
<CAPTION>
Net
Realized and Distri- Distri-
Net Asset Unrealized butions butions
Value Net Gains from Net from Total Net Asset
Beginning Investment (Losses) on Investment Realized Distri- Value End
of Period Income Investments Income Gains butions of Period
--------- ---------- ----------- ---------- -------- ------- ---------
Michigan Municipal Bond Fund
Class A Shares
<S> <C> <C> <C> <C> <C> <C> <C>
1996 $10.60 0.48 (0.14) (0.46) -- (0.46) $10.48
1995 $ 9.54 0.48 1.06 (0.48) -- (0.48) $10.60
1994 $10.60 0.50 (1.06) (0.50) -- (0.50) $ 9.54
1993(a) $10.00 0.44 0.59 (0.43) -- (0.43) $10.60
<CAPTION>
Class B Shares
<S> <C> <C> <C> <C> <C> <C> <C>
1996(b) $10.00 0.07 0.17 (0.06) -- (0.06) $10.18
<CAPTION>
Class I Shares
<S> <C> <C> <C> <C> <C> <C> <C>
1996 $10.60 0.49 (0.14) (0.47) -- (0.47) $10.48
1995 $ 9.54 0.48 1.06 (0.48) -- (0.48) $10.60
1994 $10.60 0.50 (1.06) (0.50) -- (0.50) $ 9.54
1993(a) $10.00 0.44 0.59 (0.43) -- (0.43) $10.60
<CAPTION>
Ratio
of Net
Ratio of Investment
Ratio of Expenses Income
Net to Average to Average
Net Assets Ratio of Investment Net Assets Net Assets
End of Expenses Income (Excluding Fee (Excluding Fee Portfolio
Total Period to Average to Average Waivers and Waivers and Turnover
Return(c) (000) Net Assets Net Assets Reimbursements) Reimbursements) Rate
--------- ---------- ---------- ---------- --------------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
3.32% $ 18,575 0.88% 4.57% 0.96% 4.49% 24.49%
16.49% $ 21,034 0.79% 4.71% 1.04% 4.46% 26.97%
(5.42)% $ 21,106 0.53% 5.01% 1.05% 4.49% 25.93%
11.50%+ $ 26,342 0.19%+ 5.12%+ 1.21%+ 4.10%+ 41.70%++
2.45%++ $ 110 1.69%+ 2.01%+ 1.77%+ 1.93%+ 24.49%+
3.44% $ 41,909 0.77% 4.68% 0.85% 4.60% 24.49%
16.49% $ 32,419 0.79% 4.71% 1.04% 4.46% 26.97%
(5.42)% $ 24,157 0.53% 5.01% 1.05% 4.49% 25.93%
11.50%+ $ 15,772 0.19%+ 5.12%+ 1.21%+ 4.10%+ 41.70%++
<FN>
- ---------
(a) For the period February 1, 1993 (commencement of operations) through
December 31, 1993.
(b) For the period September 23, 1996 (initial offering date of Class B
Shares) through December 31, 1996.
(c) Total returns as presented do not include any applicable sales load or
redemption charges.
+ Annualized.
++ Not Annualized.
</TABLE>
-25-
<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 twenty-seven investment portfolios,
each of which consists of a separate pool of assets with separate investment
objectives and policies. This Prospectus, however, contains only twenty
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, 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 such
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
Statements 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. 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. The Asset Allocation Funds will generally limit their investments to
the Underlying Funds, although, as deemed appropriate by the Investment
Adviser, until the Managed Assets Balanced Fund is substantially invested in
the Underlying Funds, it may purchase these underlying securities directly.
The Investment Adviser currently expects that the Managed Assets Balanced
Fund's transition to having substantially all of its assets invested in the
Underlying Funds will be gradual.
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
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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:
<TABLE>
<CAPTION>
Target Asset Allocation
-----------------------
Asset Allocation Fund Equity Debt Cash Equivalent
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Managed Assets
Conservative Fund 30% - 50% 50% - 70% 0% - 20%
Managed Assets 50% - 70% 30% - 50% 0% - 20%
Balanced Fund
Managed Assets 70% - 90% 10% - 30% 0% - 20%
Growth Fund
Underlying Funds by Equity Income Fund Intermediate Bond Fund Money Market Fund
Category Growth Fund Bond Fund
Mid-Cap Opportunity Fund Short Bond Fund
Small-Cap Opportunity Income Fund
Fund International Bond Fund
Intrinsic Value Fund High Yield Bond Fund
Growth and Value 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
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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 and Equity 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 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
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<PAGE>
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 Equity Index Fund seeks to achieve a 95% correlation
coefficient between its performance and that of the S&P 500 Index. Therefore,
the Fund's price changes and total return are expected to closely match
movements in the underlying Index. Deviations from the performance of the S&P
500 Index ("tracking error") may result from shareholder purchases and
redemptions of shares of the Fund that occur daily, as well as from the
expenses borne by the Fund, cash reserves held by the Fund and purchases and
sales of securities made by the Fund to conform its holdings more closely
with those represented in the S&P 500 Index. In addition, tracking error may
occur due to changes made in the S&P 500 Index and the manner in which the
Index is calculated by S&P. In the event the performance of the Fund is not
comparable to the performance of the Index, the Board of Trustees will
examine the reasons for the deviation and the availability of corrective
measures. If substantial deviation in the Fund's performance were to continue
for extended periods, it is expected that the Board of Trustees would
consider possible changes to the Fund's investment objective.
The Equity Index Fund will not be managed by using traditional
economic, financial or market analysis. Instead, the Fund utilizes a sampling
methodology to determine which stocks to purchase or sell in order to closely
replicate the performance of the S&P 500 Index. Stocks are selected for the
Fund based on both capitalization weighting in the Index and industry
representation. Larger market capitalization securities in the S&P 500 Index
are added to the Fund according to their relative weight. Smaller
capitalization securities are then added to the Fund in equal weights
according to an analysis of the industry diversification of the S&P 500
Index. Therefore, while all industry weights in the Fund are essentially
matched to those of the S&P 500 Index, not necessarily all of its 500 stocks
are held in the Fund. The 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, the Fund may hold up to 5% of
its total assets in Cash Equivalent Securities. In addition, up to 5% of the
Fund's total assets may be invested in futures contracts and related options
in an effort to maintain exposure to price movements in the S&P 500 Index
pending investment of funds or while maintaining liquidity to meet potential
shareholder redemptions.
The International Equity Fund intends to invest under normal
market conditions at least 65% of the value of its total assets 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.
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<PAGE>
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 secutities, 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. 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.
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.
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<PAGE>
The Income 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 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
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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.
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.
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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 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
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<PAGE>
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 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
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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 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
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<PAGE>
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
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<PAGE>
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. 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 CDSC, as described under "How To
Redeem Shares" below, and are subject to a distribution fee and 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 are sold at net asset value with no sales
charge and are sold exclusively to 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"), to 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"),
financial institutions that have established omnibus accounts on behalf of
investors participating in a "mutual fund supermarket" or similar program,
and 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.
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 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
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<PAGE>
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.
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.
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 eventually 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,
if any, 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, 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."
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<PAGE>
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 is
the net asset value per share plus a sales load as shown below.
<TABLE>
<CAPTION>
ASSET ALLOCATION FUNDS and EQUITY FUNDS (other than the Equity Index Fund)
Total Sales Load
---------------- Dealers'
As a % of As a % of Reallowance
offering price net asset value as a % of
Amount of Transaction per share per share offering 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>
<TABLE>
<CAPTION>
BOND, INTERNATIONAL BOND, HIGH YIELD BOND, MUNICIPAL BOND and MICHIGAN
MUNICIPAL BOND FUNDS
Total Sales Load
---------------- Dealers'
As a % of As a % of Reallowance
offering price net asset value as a % of
Amount of Transaction per share per share offering 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>
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<PAGE>
<TABLE>
<CAPTION>
EQUITY INDEX, INCOME, INTERMEDIATE BOND and INTERMEDIATE MUNICIPAL BOND
FUNDS
Total Sales Load
---------------- Dealers'
As a % of As a % of Reallowance
offering price net asset value as a % of
Amount of Transaction per share per share offering 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>
<TABLE>
<CAPTION>
SHORT BOND FUND
Total Sales Load
---------------- Dealers'
As a % of As a % of Reallowance
offering price net asset value as a % of
Amount of Transaction per share per share offering price
- --------------------- -------------- --------------- --------------
<S> <C> <C> <C>
Less than $1,000,000 1.00 1.01 0.75
$1,000,000 and above none* none none
<FN>
* 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.
</TABLE>
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 Fund) and the Bond,
International 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, Short Bond, Income, 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
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<PAGE>
(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, at net
asset value, 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
at net asset value 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 at net asset value 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 at net asset value through
certain broker-dealers, registered investment advisers and other financial
institutions which have entered into an agreement with the Distributor, which
includes a requirement that such shares be sold 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 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 at net asset value,
without a sales charge, 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 at net asset value 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 at net asset value and rolls Fund
shares into a qualified IRA, then that IRA may purchase Class A shares at net
asset value.
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.
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<PAGE>
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 Fund 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 Fund 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.
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<PAGE>
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 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.
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<PAGE>
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.
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
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.
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<PAGE>
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. 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 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 request is received in proper form, 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.
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<PAGE>
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.
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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, Income,
Short Bond Intermediate Bond and Intermediate
Fund Municipal Bond Funds All Other Funds
---------- ---------------------------------- ---------------
CDSC as a % of CDSC as a % of CDSC as a % of
Year Since Amount Invested or Amount Invested Amount Invested
Purchase Was Made Redemption Proceeds or Redemption Proceeds or Redemption 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 *
<FN>
* Conversion to Class A shares.
</TABLE>
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
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<PAGE>
acquired through a contribution in excess of permitted amounts, (e)
in-service withdrawals from tax qualified plans by participants and (f)
redemptions initiated by a Fund of accounts with net assets of less than
$1,000.
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
Fund and the seventh year in the case of the Equity Index, Short Bond,
Income, 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
Fund and the sixth anniversary in the case of the Equity Index, Income,
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 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.
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.
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<PAGE>
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.
<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%
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%
Income 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%
Intermediate Municipal Bond Fund 0.40% 0.40%
Michigan Municipal Bond Fund 0.40% 0.40%
<CAPTION>
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 payment 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
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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
Income 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 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, is the person primarily responsible for the day-to-day management of
the Municipal Bond and Intermediate Municipal Bond Funds. Mr. Grabowski has
been the manager of the municipal desk at FCN since 1984.
Rebecca L. Gersonde, Vice President, is the person primarily responsible for
the day-to-day management of the Michigan Municipal Bond Fund. Ms. Gersonde
joined FCN in 1982.
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
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<PAGE>
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 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
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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 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 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.
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<PAGE>
DIVIDENDS AND DISTRIBUTIONS
The Managed Assets Balanced, Managed Assets Growth, Growth,
Small-Cap Opportunity, Mid-Cap Opportunity, Intrinsic Value, Growth and
Value, Equity 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.
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.
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<PAGE>
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. 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 the 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
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<PAGE>
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 Standard & Poor's 500 Index, an
index of unmanaged groups of common stocks, 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 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 and International 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
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<PAGE>
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.
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.
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<PAGE>
HISTORICAL PERFORMANCE INFORMATION
Composite performance is set forth below for the Funds or
predecessor funds, as the case may be, for various periods ended December 31,
1996, 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) 10.11%/4.60% 10.28%/9.15% 11.19%/10.63% 11.66%/10.95% (1/23/86)
Class B shares (NAV/CDSC) 8.97%/4.97% N/A N/A 11.60%/14.87% (3/03/95)
Class I shares 10.43% N/A N/A 17.95% (3/03/95)
Managed Assets Balanced Fund*
Class A shares (NAV/public offering price) 12.99%/7.35% N/A N/A 10.88%/9.02% (1/1/94)
Class B shares (NAV/CDSC) N/A N/A N/A 7.29%/2.29% (8/26/96)
Class I shares 13.04% N/A N/A 10.90% (1/1/94)
Managed Assets Growth Fund
Class A shares (NAV/public offering price) N/A N/A N/A .50%/-4.52% (12/17/96)
Class B shares (NAV/CDSC) N/A N/A N/A -.40%/-5.28% (12/17/96)
Class I shares N/A N/A N/A 1.00% (12/17/96)
EQUITY FUNDS:
Equity Income Fund(1)
Class A shares (NAV/public offering price) 19.28%/13.32% N/A N/A 25.43%/22.14% (1/27/95)
Class B shares (NAV/CDSC) 18.27%/14.27% N/A N/A 24.46%/22.75% (1/27/95)
Class I shares 19.57% N/A N/A 25.83% (1/27/95)
Growth Fund(2)
Class A shares (NAV/public offering price) 20.11%/14.11% N/A N/A 25.98%/22.67% (1/27/95)
Class B shares (NAV/CDSC) 19.04%/15.04% N/A N/A 24.98%/23.28% (1/27/95)
Class I shares 20.36% N/A N/A 26.32% (1/27/95)
Mid-Cap Opportunity Fund
Class A shares (NAV/public offering price) 24.91%/18.67% N/A N/A 17.42%/16.14% (5/1/92)
Class B shares (NAV/CDSC) N/A N/A N/A 7.94%/3.07% (9/23/96)
Class I shares 25.03% 17.48% N/A 16.55% (6/1/91)
Small-Cap Opportunity Fund(1)
Class A shares (NAV/public offering price) 24.59%/18.36% N/A N/A 25.71%/22.42% (1/27/95)
Class B shares (NAV/CDSC) 24.42%/20.42% N/A N/A 25.08%/23.38% (1/27/95)
Class I shares 25.63% N/A N/A 26.40% (1/27/95)
Intrinsic Value Fund
Class A shares (NAV/public offering price) 23.80%/17.61% N/A N/A 13.88%/12.64% (5/1/92)
Class B shares (NAV/CDSC) N/A N/A N/A 8.42%/3.42% (9/23/96)
Class I shares 23.99% 15.03% N/A 13.65% (6/1/91)
Growth and Value Fund
Class A shares (NAV/public offering price) 19.24%/13.29% N/A N/A 13.96%/12.72% (5/1/92)
Class B shares (NAV/CDSC) N/A N/A N/A 6.60%/1.34% (9/23/96)
Class I shares 19.35% 13.94% N/A 12.40% (6/1/91)
Equity Index Fund
Class A shares (NAV/public offering price) 22.49%/18.81% N/A N/A 16.56%/15.77% (7/10/92)
Class B shares (NAV/CDSC) N/A N/A N/A 8.09%/5.09% (9/23/96)
Class I shares 22.58% N/A N/A 16.58% (7/10/92)
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<PAGE>
<CAPTION>
Average Annual Total Return
---------------------------------------------------------------
Since Inception
1 Year 5 Years 10 Years (Inception Date)
------ ------- -------- ----------------
<S> <C> <C> <C> <C>
International Equity Fund
Class A shares (NAV/public offering price) 7.50%/2.13% N/A N/A 9.12%/6.46% (12/3/94)
Class B shares (NAV/CDSC) N/A N/A N/A 2.62%/-2.38% (8/26/96)
Class I shares 7.79% N/A N/A 9.26% (12/3/94)
BOND FUNDS:
Intermediate Bond Fund
Class A shares
(NAV/public offering price) 5.64%/2.48% N/A N/A 6.86%/6.16% (5/1/92)
Class B shares (NAV/CDSC) N/A N/A N/A 3.50%/.50% (9/23/96)
Class I shares 5.78% 6.35% N/A 7.42% (6/1/92)
Bond Fund
Class A shares
(NAV/public offering price) 4.98%/.26% N/A N/A 8.20%/7.14% (5/1/92)
Class B shares (NAV/CDSC) N/A N/A N/A 4.29%/-.71% (8/26/96)
Class I shares 5.08% 7.50% N/A 8.63% (6/1/91)
Short Bond Fund
Class A shares
(NAV/public offering price) 4.45%/3.40% N/A N/A 6.31%/5.85% (9/17/94)
Class B shares (NAV/CDSC) N/A N/A N/A 1.57%/.57% (9/23/96)
Class I shares 4.56% N/A N/A 6.36% (9/17/94)
Income Fund(1)
Class A shares
(NAV/public offering price) 2.75%/-.33% N/A N/A 5.73%/4.89% (3/05/93)
Class B shares (NAV/CDSC) 2.09%/-.79% N/A N/A 5.34%/3.50% (5/31/95)
Class I shares 3.14% N/A N/A 5.91% (3/05/93)
International Bond Fund(1)
Class A shares
(NAV/public offering price) 5.62%/.86% N/A N/A 13.60%/10.92% (1/27/95)
Class B shares (NAV/CDSC) 5.01%/1.01% N/A N/A 13.16%/11.30% (1/27/95)
Class I shares 5.99% N/A N/A 14.30% (1/27/95)
MUNICIPAL BOND FUNDS:
Municipal Bond Fund(3)
Class A shares
(NAV/public offering price) 3.36%/-1.29% 7.49%/6.51% N/A 8.29%/7.73% (3/01/88)
Class B shares (NAV/CDSC) 2.56%/-2.33% N/A N/A 6.39%/4.18% (4/04/95)
Class I shares 3.76% N/A N/A 9.25% (2/01/95)
Intermediate Municipal Bond Fund(1)
Class A shares
(NAV/public offering price) 3.69%/.58% 6.10%/5.46% N/A 7.40%/7.03% (3/01/88)
Class B shares (NAV/CDSC) 2.90%/-.06% N/A N/A 6.77%/5.29% (1/30/95)
Class I shares 4.05% N/A N/A 7.96% (1/30/95)
Michigan Municipal Bond Fund
Class A shares
(NAV/public offering price) 3.32%/-1.33% N/A N/A 6.04%/4.80% (2/1/93)
Class B shares (NAV/CDSC) N/A N/A N/A 2.45%/-2.55% (9/23/96)
Class I shares 3.44% N/A N/A 6.08% (2/1/93)
<FN>
- ---------
* 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.
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<PAGE>
(1) Prior to September 21, 1996, the Managed Assets Conservative, Equity
Income, Small-Cap Opportunity, Income, 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.
</TABLE>
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<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 twenty-seven 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, U.S. Government Securities Cash Management and
Treasury Prime Cash Management Funds.
Each Fund contained 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, 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 May 31, 1997, FCN and its affiliates held
beneficially of record approximately 33.12%, 42.10%, 64.81%, 19.61%, 74.70%,
67.94%, 80.73%, 55.08%, 71.49%, 66.65%, 91.58%, 68.89%, 18.33% and 47.71%,
respectively of the outstanding shares of the Managed Assets Balanced, Growth,
Mid-Cap Opportunity, Small-Cap Opportunity, Intrinsic Value, Growth and
Value, Equity Index, International Equity, Intermediate Bond, Bond, Short
Bond, International 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.
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<PAGE>
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,
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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.
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."
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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. 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 market 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 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.
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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
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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 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
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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 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
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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 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.
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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."
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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.
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.
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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 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
A-10
<PAGE>
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. 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.
A-11
<PAGE>
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.
A-12
<PAGE>
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 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.
A-13
<PAGE>
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 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 Managed Assets Growth Fund and High Yield Bond Fund are not
expected to exceed 100% and 100%, respectively.
A-14
<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. Capacity to pay interest and repay principal
is considered to be 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 considered
to have a strong capacity to pay interest and repay principal although it is
somewhat more susceptible to the adverse effects of changes in circumstances
and economic conditions than debt of a higher rated category. Debt rated
"BBB" is regarded as having an adequate capacity to pay interest and repay
principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and to repay principal for debt in
this category than for higher rated categories. Debt rated "BB," "B," "CCC,"
"CC" or "C" is regarded, on balance, as predominately speculative with
respect to capacity to pay interest and repay principal in accordance with
the terms of the obligations. "BB" indicates the lowest degree of speculation
and "C" the highest degree of speculation. While such debt will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions. Debt rated "CI"
is reserved for income bonds on which no interest is being paid. Debt rated
"D" is in default, and payment of interest and/or repayment of principal is
in arrears. The "D" rating also will be used upon the filing of a bankruptcy
petition if debt service payments 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.
Capacity to pay interest and repay principal is considered to be
exceptionally strong; "AA"--judged to be investment grade and of very high
credit quality, although the capacity to pay interest and repay principal is
not quite as strong as bonds rated "AAA"; "A"--deemed investment grade and of
high credit quality, although the capacity to pay interest and repay
principal may be somewhat more susceptible to the adverse changes in economic
conditions and circumstances than bonds with higher ratings; "BBB" is
regarded as having satisfactory credit quality with an adequate capacity to
pay interest and repay principal although adverse changes in economic
conditions and circumstances are more likely to 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. 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.
B-1
<PAGE>
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 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 considered short-term in the relevant market. 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 not as high as for issues
designated "A-1." 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. Moody's commercial paper
ratings are opinions of the ability of issuers to repay punctually promissory
obligations not having an original maturity in excess of 9 months. The rating
"Prime-1" is the highest commercial paper rating assigned by Moody's. Issuers
rated "Prime-1" (or related supporting institutions) are considered to have a
superior capacity for repayment of short-term promissory obligations. Issuers
rated "Prime-2" (or related supporting institutions) are considered to have a
strong capacity for repayment of short-term promissory obligations. Issuers
rated "Prime 3" are considered to have an acceptable capacity for repayment.
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-5" 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
B-2
<PAGE>
factors qualify issue as to 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. 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-5" possess weak credit
quality. Securities rated "D" are in actual or imminent payment default.
Unrated Securities
Unrated securities are securities which have not been rated by a nationally
recognized statistical rating organization.
B-3
<PAGE>
[ Back cover ]
THE PEGASUS FUNDS
Pegasus Equity Funds
Equity Income Fund
Intrinsic Value Fund
Growth and Value Fund
Equity Index Fund
Growth Fund
Mid-Cap Opportunity Fund
Small-Cap Opportunity Fund
International Equity Fund
Pegasus Managed Assets Funds
Managed Asset Conservative Fund
Managed Asset Balanced Fund
Managed Asset Growth Fund
Pegasus Fixed Income Funds
Short Bond Fund
Intermediate Bond Fund
Income Fund
Bond Fund
International Bond Fund
High Yield Bond Fund
Pegasus Tax-Exempt Fixed Income Funds
Intermediate Municipal Bond Fund
Municipal Bond Fund
Michigan Municipal Bond Fund
[logo] PEGASUS FUNDS
Strength in Investing
PRO-7 97
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
June 30, 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
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
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 pertaining to all or some of the classes
of shares of the Funds listed above (the "Prospectus") (each, a
<PAGE>
"Fund" and collectively, the "Funds"), as it may be revised from time to
time, and is incorporated by reference in its entirety into such Prospectus.
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' Prospectus 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 Prospectus.
-2-
<PAGE>
TABLE OF CONTENTS
Page
----
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.................................................... 57
Counsel................................................................. 57
Additional Information on Performance................................... 57
Appendix A.............................................................. A-1
Appendix B.............................................................. B-1
Financial Statements.................................................... FS-1
-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 twenty-
seven separate funds, of which twenty 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 responsible for, making decisions with respect to, and placing
orders for all purchases and sales of portfolio securities for this Fund.
<PAGE>
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%
Income Fund(4) 103.93% 173.26%
International Bond Fund 35.42% 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%
<FN>
- -----------
(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.
</TABLE>
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 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.
-2-
<PAGE>
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 Assets Balanced Funds invested
directly in portfolio securities. After such date, the Asset Allocation
Funds began investing in shares of the Underlying Funds.
-3-
<PAGE>
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 --
Bond Fund --
Short Bond Fund --
Income Fund --
International Bond Fund --
-4-
<PAGE>
Municipal Bond Fund --
Intermediate Municipal Bond Fund --
Michigan Municipal Bond Fund --
Money Market Fund --
<FN>
- ---------
(1) Commissions paid after the Reorganization with respect to such Fund
(See "The Trust").
</TABLE>
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 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
-5-
<PAGE>
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.
Equity Index Fund
The Investment Adviser believes that a sampling methodology
allows the Fund to maintain a close correlation to the performance of the S&P
500 Index while at the same time controlling the portfolio turnover and
transaction costs of the Fund.
Under normal market conditions, the Fund invests substantially
all of its total assets in the common stocks that comprise the S&P 500 Index
in accordance with their relative capitalization and sector weightings as
described above. It is possible, that if an issuer drops in ranking, or is
eliminated entirely from the S&P 500 Index, the Investment Adviser may be
required to sell some or all of the common stock of such issuer then held by
the 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 S&P 500 Index, 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
-6-
<PAGE>
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 the S&P 500 Index. The Fund may receive from time to time as
part of a "spin-off" or corporate restructuring of an issuer included in the
S&P 500 Index, securities that are themselves outside of the S&P 500 Index.
Such securities will be disposed of by the Fund in due course consistent with
the 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.
In selecting Debt Securities for the High Yield Bond Fund,
the professional portfolio management techniques used by the Sub-Adviser
includes:
-7-
<PAGE>
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, 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,
-8-
<PAGE>
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 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.
-9-
<PAGE>
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
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
-10-
<PAGE>
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 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
-11-
<PAGE>
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 or the Money Market Fund may decline below the
price of the securities it is obligated to repurchase.
-12-
<PAGE>
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.
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
-13-
<PAGE>
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, 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
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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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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
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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. The current value of the traded option is the last sale price or, in
the absence
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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 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.,
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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 revenues of the subdivision, such
subdivision would be deemed to be
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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.
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Such 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.
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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 the State's Attorney General. Spending for local units met
this requirement for fiscal
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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 assessment level of 50% of true cash value. Under Proposal A,
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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.
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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.
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As of the date of this Statement of Additional Information,
no shares of the High Yield Bond 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 December 31, 1996 (March
31, 1997 with respect to the Managed Assets Growth Fund) 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 $ 69,301,512 4,518,141 $15.34 $0.81(1) $16.15
Class B Shares $ 5,735,974 373,381 $15.36 -- $15.36
Class I Shares $ 1,500,888 97,565 $15.38 -- $15.38
Managed Assets Balanced Fund
Class A Shares $ 26,774,494 2,302,965 $11.63 $0.61(1) $12.24
Class B Shares $ 1,889,936 147,544 $12.81 -- $12.81
Class I Shares $101,596,322 8,762,842 $11.59 -- $11.59
Managed Assets Growth Fund
Class A Shares $ 821,678 82,382 $ 9.97 $0.50(1) $10.47
Class B Shares $ 733,648 74,424 $ 9.86 -- $ 9.86
Class I Shares $ 621,690 62,087 $10.01 -- $10.01
Equity Income Fund
Class A Shares $ 12,956,269 975,040 $13.29 $0.70(1) $13.99
Class B Shares $ 1,884,616 141,876 $13.28 -- $13.28
Class I Shares $314,648,895 23,739,941 $13.25 -- $13.25
Growth Fund
Class Shares $ 23,272,879 1,841,030 $12.64 $0.67(1) $13.31
Class B Shares $ 1,094,542 87,143 $12.56 -- $12.56
Class I Shares $533,405,961 42,218,766 $12.63 -- $12.63
Mid-Cap Opportunity Fund
Class A Shares $ 91,515,703 5,196,783 $17.61 $0.93(1) $18.54
Class B Shares $ 154,588 16,157 $ 9.57 -- $ 9.57
Class I Shares $677,607,737 38,475,172 $17.61 -- $17.61
-26-
<PAGE>
<CAPTION>
Net Asset Offering
Outstanding Value Per Sales Price to
Fund Net Assets Shares Share Charge Public
- ---- ---------- ----------- --------- ------ --------
<S> <C> <C> <C> <C> <C>
Small-Cap Opportunity Fund
Class A Shares $ 6,697,302 488,766 $13.70 $0.72(1) $14.42
Class B Shares $ 110,472 8,132 $13.58 $13.58
Class I Shares $125,840,310 9,115,753 $13.80 $13.80
Intrinsic Value Fund
Class A Shares $ 22,370,312 1,632,469 $13.70 $0.72(1) $14.42
Class B Shares $ 181,196 17,797 $10.18 -- $10.18
Class I Shares $357,360,009 26,072,063 $13.71 -- $13.71
Growth and Value Fund
Class A Shares $ 59,027,413 4,179,800 $14.12 $0.74(1) $14.86
Class B Shares $ 182,991 19,644 $ 9.32 -- $ 9.32
Class I Shares $733,631,456 51,941,688 $14.12 -- $14.12
Equity Index Fund
Class A Shares $ 35,336,228 2,109,823 $16.75 $0.52(3) $17.27
Class B Shares $ 112,309 10,696 $10.50 -- $10.50
Class I Shares $834,368,113 49,823,539 $16.75 -- $16.75
International Equity Fund
Class A Shares $ 10,836,197 920,454 $11.77 $0.62(1) $12.39
Class B Shares $ 1,131,191 102,058 $11.08 -- $11.08
Class I Shares $389,996,840 33,067,406 $11.79 -- $11.79
International Bond Fund
Class A Shares $ 18,324,384 1,780,068 $10.29 $0.32(3) $10.61
Class B Shares $ 121,590 11,918 $10.20 -- $10.20
Class I Shares $395,104,731 38,384,021 $10.29 -- $10.29
Bond Fund
Class A Shares $ 46,976,975 4,574,321 $10.27 $0.48(2) $10.75
Class B Shares $ 279,604 27,222 $10.27 -- $10.27
Class I Shares $757,627,072 73,753,421 $10.27 -- $10.27
-27-
<PAGE>
<CAPTION>
Net Asset Offering
Outstanding Value Per Sales Price to
Fund Net Assets Shares Share Charge Public
- ---- ---------- ----------- --------- ------ --------
<S> <C> <C> <C> <C> <C>
Short Bond Fund
Class A Shares $ 1,032,874 102,185 $10.11 $0.10(4) $10.21
Class B Shares $ 56,019 5,590 $10.02 -- $10.02
Class I Shares $171,427,138 16,956,120 $10.11 -- $10.11
Income Fund
Class A Shares $ 8,797,772 1,121,909 $7.84 $0.24(3) $ 8.08
Class B Shares $ 502,297 63,988 $7.85 -- $ 7.85
Class I Shares $187,111,674 23,831,822 $7.85 -- $ 7.85
International Bond Fund
Class A Shares $ 2,006,239 185,931 $10.79 $0.51(2) $11.30
Class B Shares $ 46,004 4,232 $10.87 -- $10.87
Class I Shares $ 53,844,797 4,962,535 $10.85 -- $10.85
Municipal Bond Fund
Class A Shares $ 29,352,216 2,373,965 $12.36 $0.58(2) $12.94
Class B Shares $ 671,989 54,378 $12.36 -- $12.36
Class I Shares $338,104,237 27,363,117 $12.36 -- $12.36
Intermediate Municipal Bond Fund
Class A Shares $ 19,049,219 1,574,071 $12.10 $0.37(3) $12.47
Class B Shares $ 611,392 50,549 $12.10 -- $12.10
Class I Shares $373,969,410 30,886,029 $12.11 -- $12.11
Michigan Municipal Bond Fund
Class A Shares $ 18,574,882 1,771,630 $10.48 $0.49(2) $10.97
Class B Shares $ 110,241 10,833 $10.18 -- $10.18
Class I Shares $ 41,908,551 3,997,337 $10.48 -- $10.48
<FN>
- -------------------------
1. The applicable sales charge for this Fund is 5.00% of offering price
(5.26% of net asset value per share).
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).
</TABLE>
-28-
<PAGE>
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
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
-29-
<PAGE>
<CAPTION>
December 31, December 31, December 31,
1996(1) 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Bond Fund $ 5,548 $ 30,433 $203,760
Short Bond Fund $ 1,247 $ 2,848 $ 0
Income 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
<FN>
- ---------
(1) Includes the Contingent Deferred Sales Charge imposed on Class B Shares
and certain redemptions of Class A Shares.
*Not available
</TABLE>
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 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.
-30-
<PAGE>
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 April 30, 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 178,816.467 50.01%
Conservative Fund- First Chicago NBD Svgs & Invsmt
Class I Pln
c/o Putnam Investments
P.O. Box 9740
Providence, RI 02940-9740
Managed Assets Corelink Financial, Inc. 1,911,060.537 32.22%
Balanced Fund- P.O. Box 4054
Class A Concord, CA 94524-4054
First Chicago NBD TTEE 1,264,579.073 21.32%
Clarian Health Partners Inc.
Defined Contribution Plan c/o
Putnam Investments
P.O. Box 9740
Providence, RI 02940-9740
Managed Assets First Chicago NBD TTEE 4,090,143.249 41.78%
Balanced Fund- First Chicago NBD Svgs & Invsmt
Class I Pln
c/o Putnam Investments
P.O. Box 9740
Providence, RI 02940-9740
Managed Assets NBD Bank As TTEE 8,331.850 7.81%
Growth Fund- Flint Mfg Co EE Savings and Ret
Class A Plan
107 N. Cross Street
Suite 2092
Wheaton, IL 60187
-31-
<PAGE>
<CAPTION>
Percentage of
Number of Outstanding
Fund Name and Address Shares Shares
- ---- ---------------- --------- -------------
<S> <C> <C> <C>
NBD Bank TTEE 7,585.758 7.11%
Harbor Industries Inc.
Non Union Pension Plan
U/A Dated 11/1/86
107 N. Cross Street
Suite 2092
Wheaton, IL 60187
Managed Assets Donaldson, Lufkin & Jenrette 29,473.484 30.16%
Growth Fund- Securities Corp. Inc.
Class B P.O. Box 2052
Jersey City, NJ 07303-2052
Managed Assets R. Hugh Elliot 58,085.264 92.96%
Growth Fund 4888 Sider Hill Drive
Class I Rochester, MI 46306
Growth Fund- Corelink Financial Services 305,847.205 12.01%
Class A FBO 26052652
P.O. Box 4054
Concord, CA 94524-4054
Growth Fund- Donaldson, Lufkin & Jenrette 15,561.769 22.76%
Class B Securities Corp. Inc.
P.O. Box 2052
Jersey City, NJ 07303-2052
Mid-Cap Corelink Financial Services 479,906.053 8.20%
Opportunity Fund- P.O. Box 4054
Class A Concord, CA 94524-4054
Mac and Company 552,393.348 9.44%
Mutual Funds Operations
P.O. Box 3198
Pittsburgh, PA 15230
Mid-Cap Donaldson, Lufkin & Jenrette 32,282.788 29.33%
Opportunity Fund- Securities Corporation Inc.
Class B P.O. Box 2052
Jersey City, NJ 07303-2052
-32-
<PAGE>
<CAPTION>
Percentage of
Number of Outstanding
Fund Name and Address Shares Shares
- ---- ---------------- --------- -------------
<S> <C> <C> <C>
Mid-Cap First Chicago NDB TTEE 4,549,903.185 11.80%
Opportunity Fund- First Chicago NBD Svgs & Invsmt
Class I Pln
c/o Putnam Investments
P.O. Box 9740
Providence, RI 02940-9740
Small-Cap Donaldson, Lufkin & Jenrette 8,965.356 34.33%
Opportunity Fund- Securities Corp. Inc.
Class B P.O. Box 2052
Jersey City, NJ 07303-2052
Intrinsic Value NBD TTEE 140,592.762 5.62%
Fund-Class A Metalloy Corp. 401(k) P/S Pln
U/A DTD 08/04/84 TOA Account
107 N. Cross Street
Suite 2092
Wheaton, IL 60187
Corelink Financial, Inc. 148,948.004 5.95%
P.O. Box 4054
Concord, CA 94524-4054
Intrinsic Value Donaldson, Lufkin & Jenrette 4,340.441 5.11%
Fund-Class B Securities Corp. Inc.
P.O. Box 2052
Jersey City, NJ 07303-2052
Growth and Value Corelink Financial, Inc. 305,232.669 5.72%
Fund - Class A P.O. Box 4054
Concord, CA 94524-4054
Growth and Value Donaldson, Lufkin & Jenrette 52,495.743 35.40%
Fund-Class B Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-2052
Growth and Value First Chicago NBD TTEE 5,514,314.538 10.38%
Fund-Class I First Chicago NBD Svgs & Invsmt
Plan
c/o Putnam Investments
P.O. Box 9740
Providence, RI 02940-9740
-33-
<PAGE>
<CAPTION>
Percentage of
Number of Outstanding
Fund Name and Address Shares Shares
- ---- ---------------- --------- -------------
<S> <C> <C> <C>
Equity Index Fund- NBD Bank TTEE FBO 207,964.506 6.88%
Class A The John Henry Company 401K
Plan
Savings Plan U/A DTD 04/01/94
107 N. Cross, Suite 2092
Wheaton, IL 60187
First Chicago NBD TTEE 953,847.535 31.47%
Honigman Miller Shwartz & Cohn
Income Deferral Plan and
Profit Sharing Plan
C/P Putnam Investments
P.O. Box 9740
Providence, RI 02940-9740
Equity Index Fund- Donaldson, Lufkin & Jenrette 10,416.947 27.29%
Class B Securities Corp. Inc.
P.O. Box 2052
Jersey City, NJ 07303-2052
International Equity Corelink Financial, Inc. 96,286.985 6.98%
Fund-Class A P.O. Box 4054
Concord, CA 94524-4054
Intermediate Bond FCNBD Corporation TTEE 117,170.397 5.73%
Fund-Class A FBO Horne Bld Specialties, Inc.
401K & PSP U/A DTD 1/1/68
218 E. Wesley, Suite 2030
Wheaton, IL 60187
FCNBD TTEE 563,214.232 27.52%
Barton Brands Employee Profit Shrg
& Retirement Plan & Trust
107 N. Cross Street
Suite 2092
Wheaton, IL 60187
Intermediate Bond Donaldson, Lufkin & Jenrette 17,489.562 75.42%
Fund-Class B Securities Corp. Inc.
P.O. Box 2052
Jersey City, NJ 07303-9998
-34-
<PAGE>
<CAPTION>
Percentage of
Number of Outstanding
Fund Name and Address Shares Shares
- ---- ---------------- --------- -------------
<S> <C> <C> <C>
Corelink Financial Services 2,593.901 11.18%
P.O. Box 4054
Concord, CA 94524-4054
Bond Fund-Class A First Chicago NBD TTEE 606,974.260 9.91%
Honigman Miller Shwartz & Cohn
Profit Sharing Plan
C/P Putnam Investments
P.O. Box 9740
Providence, RI 02940-9740
Bond Fund-Class B Donaldson, Lufkin & Jenrette 38,750.352 48.73%
Securities Corp. Inc.
P.O. Box 2052
Jersey City, NJ 07303-9998
Bond Fund-Class I First Chicago NBD TTEE 4,522,803.851 5.14%
First Chicago NBD Svgs & Invsmt
Plan
c/o Putnam Investments
P.O. Box 9740
Providence, RI 02940-9740
Short Bond Fund- Donaldson, Lufkin & Jenrette 58,607.798 31.72%
Class A Securities Corp. Inc.
P.O. Box 2052
Jersey City, NJ 07303-9998
FCNBD TTEE 46,229.113 25.02%
FBO Active Tool & Manufacturing
Money Purchase Pension Plan
Active Account
32901 Grahot
Roseville, MI 48066
Richard L. Foersterling 18,593.732 10.06%
1256 Penniman
Plymouth, MI 48170
Short Bond Fund- Donaldson, Lufkin & Jenrette 5,618.839 95.65%
Class B Securities Corp. Inc.
P.O. Box 2052
Jersey City, NJ 07303-9998
-35-
<PAGE>
<CAPTION>
Percentage of
Number of Outstanding
Fund Name and Address Shares Shares
- ---- ---------------- --------- -------------
<S> <C> <C> <C>
Income Fund- First Chicago As Trustee 81,811.733 7.12%
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 75,023.942 6.53%
McDonough Assoc.
218 E. Wesley Street
Suite 2030
Wheaton, IL 60187-5323
Corelink Financial, Inc. 148,848.100 12.96%
P.O. Box 4054
Concord, CA 94524-4054
First Chicago TTEE 68,276.729 5.95%
Hope Publishing Company
380 S. Main Place
Carol Stream, IL 60188-2448
First Chicago 64,911.376 5.65%
Brambles USA Inc. Pro & Sal Plan
DTD 7/1/96
107 N. Cross
Suite 2092
Wheaton, IL 60187
Income Fund- Donaldson, Lufkin & Jenrette 23,560.688 45.70%
Class B Securities Corp. Inc.
P.O. Box 2052
Jersey City, NJ 07399
International Bond Donaldson, Lufkin & Jenrette 4,903.717 83.70%
Fund-Class B Securities Corp. Inc.
P.O. Box 2052
Jersey City, NJ 07303-9998
-36-
<PAGE>
<CAPTION>
Percentage of
Number of Outstanding
Fund Name and Address Shares Shares
- ---- ---------------- --------- -------------
<S> <C> <C> <C>
Concord Holding Corporation Inc. 437.627 7.47%
Attn: Corporate Finance
3435 Stelzer Road
Columbus, OH 43219-6004
Municipal Bond Donaldson, Lufkin & Jenrette 644,964.120 26.87%
Fund-Class A Securities Corp. Inc.
One Pershing Plaza
Jersey City, NJ 07303-9998
Municipal Bond Donaldson, Lufkin & Jenrette 34,903.199 54.18%
Fund-Class B Securities Corp. Inc.
One Pershing Plaza
Jersey City, NJ 07303-9998
Intermediate Donaldson, Lufkin & Jenrette 187,033.150 12.24%
Municipal Bond Securities Corp. Inc.
Fund-Class A P.O. Box 2052
Jersey City, NJ 07399
Intermediate Donaldson, Lufkin & Jenrette 25,651.600 49.24%
Municipal Bond Securities Corp. Inc.
Fund-Class B P.O. Box 2052
Jersey City, NJ 07303
Michigan James J. Donahey 104,661.342 6.30%
Municipal Bond Pat J. Donahey JT Ten
Fund-Class A 421 Highland
Ann Arbor, MI 48104
Michigan Donaldson, Lufkin & Jenrette 19,975.697 95.21%
Municipal Bond Securities Corp. Inc.
Fund-Class B P.O. Box 2052
Jersey City, NJ 07303-9998
Money Market Corelink Financial Services 354,369.680 100.00%
Fund- P.O. Box 4054
Class B Concord, CA 94524-4054
Money Market Automated Cash Management 379,239,276.930 21.67%
Fund- System
Class I 9000 Haggerty Road
Belleville, MI 48111-1632
-37-
<PAGE>
<CAPTION>
Percentage of
Number of Outstanding
Fund Name and Address Shares Shares
- ---- ---------------- --------- -------------
<S> <C> <C> <C>
First Chicago NBD TTEE 143,969,706.130 8.23%
First Chicago NBD Svgs & Invsmt
Plan
c/o Putnam Investments
P.O. Box 9740
Providence, RI 02940-9740
</TABLE>
As of April 30, 1997, Trussal & Co., a nominee of NBD's
Trust Division, 900 Tower Drive, 10th Floor, Troy, Michigan 48098, held of
record 37.68%, 23.41%, 45.99%, 72.90%, 83.10%, 76.42%, 90.70%, 59.44%,
81.63%, 71.99%, 94.40%, 68.58%, 29.22%, 70.97% and 37.66%, respectively, of
the outstanding shares of the Managed Assets Balanced, Managed Assets Growth,
Growth, Mid-Cap Opportunity, Intrinsic Value, Growth and Value, Equity Index,
International Equity, Intermediate Bond, Bond, Short Bond, International
Bond, Municipal Bond, Michigan Municipal Bond and Money Market Funds,
respectively. As of April 30, 1997, Eagle & Co., a nominee of American
National Bank and Trust Company, 1 North LaSalle Street, 3rd Floor, Chicago,
Illinois 60602, held of record 91.57%, 46.91%, 70.27%, 34.59%, 91.56%,
26.51%, 62.70%, and 91.40%, respectively, of the outstanding shares of the
Equity Income, Growth, Small-Cap Opportunity, International Equity, Income,
International 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.
-38-
<PAGE>
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 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);
-39-
<PAGE>
(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.
Ordinary income of individuals is taxable at a maximum
marginal rate of 39.6%; however, because of limitations on itemized
deductions otherwise allowable and the phase-out of personal exemptions, the
maximum effective marginal rate of tax for some taxpayers may be higher. An
individual's long term capital gains are taxable at a maximum marginal rate
of 28%. For corporations, long term capital gains and ordinary income are
both taxable at a maximum marginal rate of 35%.
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
-40-
<PAGE>
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
Income 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.
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 Fund 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
-41-
<PAGE>
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 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").
-42-
<PAGE>
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.
Will M. Caldwell, Trustee
Retired; Executive Vice President, Chief Financial Officer and Director, Ford
Motor Company (1979-1985); Director, First Nationwide Bank (1986-1991);
Director, Air Products & Chemicals, Inc. (1985-1996); Director, Zurich
Holding Company of America (since 1990); Director, The Batts Group, Ltd.
(since 1986); Trustee and Vice Chairman, Detroit Medical
Center (1986-1991); Trustee, Pegasus Variable Annuity Fund. He is 71 years
old.rochelle
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
-43-
<PAGE>
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 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 62 years old.
Mark A. Dillon, Vice President
An employee of the Distributor. He is 35 years old and his address is 3435
Stelzer Road, Columbus, Ohio 43219-3035.
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.
-44-
<PAGE>
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
---------------------------------------
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:
-45-
<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(2)+
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)+
<FN>
- ----------------------
* 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. In addition, Mr. Heenan
had been the Chairman of the Board and President and Mr. Yehle had been the
Treasurer.
</TABLE>
- --------------------------------
The Trustees and Officers of the Trust, as a group, owned
less than 1% of the outstanding shares of each Fund as of May 12, 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
-46-
<PAGE>
(excluding capital gains and losses, if any). The Investment Adviser has
informed the Trust's Board of 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
Income 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
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<PAGE>
Trust paid NBD fees for advisory and administrative services under the
previous investment advisory agreement with NBD on behalf of the following
funds:
<TABLE>
<CAPTION>
January 1, 1996
through the December
Reorganization/ 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 December
Reorganization/ 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
Reorganization/ 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, Income, 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
Income 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, Income, 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.
-49-
<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 investments 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
Income 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, Income, 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, Income, 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, Income,
International Bond, Municipal Bond and Intermediate Municipal Bond Funds paid
FCNIMCO fees for administrative services, under the Funds' prior
administration agreement, as follows:
-51-
<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
Income 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 result in the
sale of Fund shares. However,
-52-
<PAGE>
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.
-53-
<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
Income 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
<FN>
- ----------------------
(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.
</TABLE>
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:
-54-
<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, Income,
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 --
Income 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>
-55-
<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
Income 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.
-56-
<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 are incorporated by
reference into this Statement of Additional Information. The December 31,
1996 financial statements and notes thereto have been audited by Arthur
Anderson LLP, whose report thereon also appears in such Annual Report and is
also incorporated herein by reference. The financial statements for periods
or years prior to December 31, 1995 with respect to the Managed Assets
Conservative, Equity Income, Growth, Small-Cap Opportunity, Income,
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.
Unaudited financial statements and notes thereto for the
Managed Assets Growth Fund are included in this Additional Statement.
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
-57-
<PAGE>
a semi-annual basis by adding one to the quotient, raising the sum to the
power of six, subtracting one from the result and then doubling the
difference. A 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
6
Yield = 2 [(----- + 1) - 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.
-58-
<PAGE>
For the 30-day period ended December 31, 1996, the yields,
calculated as set forth above, for the Funds were as follows:
<TABLE>
<CAPTION>
Class A Class B Class I
------- ------- -------
With Sales Load
---------------
<S> <C> <C> <C>
Intermediate Bond Fund 6.01% 5.38% 6.44%
Bond Fund 6.10% 5.61% 6.64%
Short Bond Fund 5.09% 4.31% 5.40%
Income Fund 5.48% 4.38% 5.91%
Municipal Bond Fund 4.45% 3.93% 4.89%
Intermediate Municipal Bond Fund 3.89% 3.27% 4.26%
Michigan Municipal Bond Fund 4.34% 3.84% 4.84%
<FN>
* 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.
</TABLE>
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 December 31, 1996 (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 Class B Class I
------- ------- -------
With Sales Load
---------------
<S> <C> <C> <C>
Municipal Bond Fund 7.37% 6.51% 8.10%
Intermediate Municipal Bond Fund 6.44% 5.41% 7.05%
Michigan Municipal Bond Fund 7.82% 6.86% 8.64%
</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:
1/n
ERV
T = [(-----) - 1]
P
Where: T = average annual total return.
-59-
<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 December 31, 1996 are shown below:
-60-
<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 Inception
Charge) Charge) Date
--------------- ---------------- ---------
<S> <C> <C> <C>
Managed Assets Conservative
Fund*(1)
Class A 211.77% 228.17% 01/23/86
Class B 28.52% 32.52% 03/03/95
Class I 35.33% 03/03/95
Managed Assets Balanced Fund*
Class A -29.56% 36.38% 01/01/94
Class B 2.28% 7.29% 08/26/96
Class I 36.44% 01/01/94
Equity Income Fund(1)
Class A 42.06% 54.80% 01/27/95
Class B 48.50% 52.50% 01/27/95
Class I 53.76% 01/27/95
Growth Fund(2)
Class A -48.31% 56.11% 01/27/95
Class B 49.74% 53.74% 01/27/95
Class I 56.92% 01/27/95
Mid-Cap Opportunity Fund
Class A -101.14% 111.72% 09/23/96
Class B 3.07% 7.94% 09/23/96
Class I 135.44% 06/01/91
Small-Cap Opportunity Fund(1)
Class A -47.71% 55.48% 01/27/95
Class B 49.98% 53.98% 01/27/95
Class I 57.13% 01/27/95
Intrinsic Value Fund
Class A -74.35% 83.52% 01/27/95
Class B 3.42% 8.42% 09/23/96
Class I 104.49% 06/01/91
Growth and Value Fund
Class A -74.93% 84.13% 05/01/92
Class B 1.34% 6.10% 09/23/96
Class I 92.21% 06/01/91
Equity Index Fund
Class A -92.73% 98.69% 07/10/92
Class B 5.04% 8.09% 09/23/96
Class I 98.80% 07/10/92
International Equity Fund
Class A -13.90% 19.89% 12/03/94
Class B -2.38% 2.62% 08/26/96
Class I 20.21% 12/03/94
Intermediate Bond Fund
Class A -32.24% 36.33% 05/01/92
Class B 0.50% 3.50% 09/23/96
Class I 49.20% 06/01/91
Bond Fund
Class A -38.00% 44.50% 05/01/92
Class B -0.71% 4.29% 08/26/96
Class I 58.96% 06/01/91
-61-
<PAGE>
<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 Inception
Charge) Charge) Date
--------------- ---------------- ---------
<S> <C> <C> <C>
Short Bond Fund
Class A 13.91% 15.06% 09/17/94
Class B 0.57% 1.57% 09/23/96
Class I 6.36% 09/17/94
Income Fund(1)
Class A 20.05% 23.76% 03/05/93
Class B 5.73% 3.57% 05/31/95
Class I 24.58% 03/05/93
International Bond Fund(1)
Class A 22.13% 27.88% 01/27/95
Class B 22.94% 26.94% 01/27/95
Class I 29.41% 01/27/95
Municipal Bond Fund(3)
Class A 93.16% 102.26% 03/01/88
Class B 7.41% 11.41% 04/04/95
Class C 18.49% 02/01/95
Intermediate Municipal Bond
Fund(1)
Class A 82.28% 87.91% 03/01/88
Class B 10.41% 13.41% 01/30/95
Class I 7.96% 01/30/95
Michigan Municipal Bond Fund
Class A 20.17% 25.83% 02/01/93
Class B -2.55% 2.45% 09/23/96
Class I 25.98% 02/01/93
<FN>
* 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, Income, 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.
</TABLE>
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
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<PAGE>
their returns for the period of time specified in the advertisement or
communication by assuming the 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.
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, shareholder profiles and
hypothetical investor scenarios, timely information on
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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.
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APPENDIX A
Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current
assessment of the likelihood of timely payment of debt considered short-term
in the relevant market. 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.
Moody's commercial paper ratings are opinions of the ability
of issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating
categories used by Moody's for commercial paper:
"Prime-1" - Issuers or related supporting institutions have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries;
high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection; broad
margins in earning 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 related supporting institutions have a
strong capacity for repayment of short-term promissory 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, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternative liquidity is maintained.
"Prime-3" - Issuers or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes
in the level of debt protection measurements and the requirement for
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 issue 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.
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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.
Fitch may also use the symbol "LOC" with its short-term
ratings to indicate that the rating is based upon 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 or interest of unsubordinated
instruments having a maturity of one year or less which are issued by United
States commercial banks, thrifts and non-bank banks; non-United States banks;
and broker-dealers. 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 indicates that while the degree of
safety regarding timely payment 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 the lowest investment
grade category and indicates that while the debt is more susceptible to
adverse developments (both internal
A-3
<PAGE>
and external) than obligations with higher ratings, capacity to service
principal and interest in a timely fashion is considered adequate.
"TBW-4" - This designation indicates that the debt 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 which posses a particularly strong credit
feature are supported by the highest capacity for timely repayment.
"A1" - Obligations are supported by the highest capacity for
timely repayment.
"A2" - Obligations are supported by a good capacity for timely
repayment.
"A3" - Obligations are supported by a satisfactory capacity
for timely repayment.
"B" - Obligations for which there is an uncertainty as to the
capacity to ensure timely repayment.
"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 to a debt obligation and indicates an extremely
strong capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to
pay interest and repay principal and differs from AAA issues only in small
degree.
"A" - Debt is considered to have a strong capacity to pay
interest and repay principal although such issues are somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than debt in higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and
repay principal in accordance with the terms of the obligation. "BB"
indicates the lowest degree of speculation and "C" the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
"BB" - Debt has less near-term vulnerability to default than
other speculative issues. However, it faces 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.
The "BB" rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal
repayments. Adverse business, financial or economic conditions will likely
impair capacity or willingness to pay interest and repay principal. The "B"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BB" or "BB-" rating.
"CCC" - Debt has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial or economic conditions, it is not
likely to have the capacity to pay interest and repay
A-5
<PAGE>
principal. The "CCC" rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied "B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated
to senior debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC-" debt rating. The
"C" rating may be used to cover a situation where a bankruptcy petition has
been filed, but debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no
interest is being paid.
"D" - Debt is in payment default. This rating is used when
interest payments or principal payments 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 if debt service payments 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 other elements present which make the long-term risks appear somewhat
larger than in "Aaa" securities.
A-6
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"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 considered 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" represents a 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" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
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"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.
To provide more detailed indications of credit quality, the
Fitch ratings from and including "AA" to "BBB" may be modified by the
addition of a plus (+) or minus (-) sign to show relative standing within
these major rating categories.
A-8
<PAGE>
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:
"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-9
<PAGE>
"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.
"SP-3" - The issuers of these municipal notes exhibit
speculative capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG") and variable
rate demand obligations are designated Variable Moody's Investment Grade
("VMIG"). Such ratings recognize the differences between short-term credit
risk and long-term risk. The following summarizes the ratings by Moody's
Investors Service, Inc. for short-term notes:
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<PAGE>
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the
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" - Loans bearing this designation are of high
quality, with margins of protection ample although not so large as in the
preceding group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of
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" - Loans bearing this designation are of
adequate quality, carrying specific risk but having protection commonly
regarded as required of an investment security and not distinctly or
predominantly speculative.
"SG" - Loans bearing this designation are of speculative
quality and lack 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 contracts on recognized
exchanges. Each exchange guarantees performance
B-1
<PAGE>
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 advantage from investing in the short-term securities; the Fund
would be
B-2
<PAGE>
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 & Poor's 100 or indices based on an industry or market segment, such
as oil and gas stocks.
B-3
<PAGE>
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
Portfolio Futures
--------- -------
-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
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
Portfolio Futures
--------- -------
-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
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
Portfolio Futures
--------- -------
-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
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
Portfolio Futures
--------- -------
-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
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 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
B-7
<PAGE>
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.
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
B-8
<PAGE>
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.
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
B-9
<PAGE>
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 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
B-10
<PAGE>
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
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
B-11
<PAGE>
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.
B-12
<PAGE>
<TABLE>
<CAPTION>
THE PEGASUS FUNDS
MANAGED ASSETS GROWTH FUND
STATEMENT OF ASSETS AND LIABILITIES
As of March 31, 1997
(Unaudited)
MANAGED ASSETS
GROWTH
FUND
--------------
<S> <C>
ASSETS:
Investment in securities:
At cost ........................................ $ 2,189,415
===========
At value ....................................... $ 2,153,902
Cash ................................................ 88,550
Receivable for securities sold ...................... --
Receivable for shares sold .......................... 107,964
Income receivable ................................... 6,745
Deferred organization costs, net .................... --
Prepaids and other assets ........................... 18,014
-----------
TOTAL ASSETS .............................. 2,375,175
-----------
LIABILITIES:
Payable for securities purchased .................... 183,299
Accrued investment advisory fees .................... 1,041
Accrued transfer agent fees ......................... 34
Accrued custodial fee ............................... 870
Administration fees payable ......................... 240
Shareholder services fees payable
(Class A Shares) ................................. 141
Shareholder services fees payable
(Class B Shares) ................................. 120
12b-1 fees payable (Class B Shares) ................. 361
Dividends payable ................................... 3,538
Payable for shares redeemed ......................... --
Other payables and accrued expenses ................. 2,239
-----------
TOTAL LIABILITIES ......................... 191,883
-----------
NET ASSETS ................................ $ 2,183,292
===========
Net Asset Value and Maximum Offering Price per Share:
Class A Shares:
Net assets .......................................... $ 821,678
Capital shares ...................................... 82,382
-----------
Net asset value per share ........................... 9.97
Maximum Sales Charge (1) ............................ 0.50
===========
Maximum offering price per share .................... $ 10.47
===========
Class B Shares:
Net assets .......................................... $ 733,648
Capital shares ...................................... 74,424
-----------
Net asset value per share ........................... $ 9.86
===========
Class I Shares:
Net assets .......................................... $ 621,690
Capital shares ...................................... 62,087
-----------
Net asset value per share ........................... $ 10.01
===========
COMPOSITION OF NET ASSETS:
Capital shares (unlimited number of
shares authorized, par value
$.10 per share) ................................ $ 21,889
Additional paid-in capital .......................... 2,196,520
Accumulated undistributed net investment income ..... 393
Accumulated undistributed net realized gains ........ 3
Net unrealized depreciation on investments .......... (35,513)
-----------
NET ASSETS ................................ $ 2,183,292
===========
<FN>
(1) Sales charge is 5.00% of Maximum Offering Price.
See accompanying notes to financial statements.
</TABLE>
1<PAGE>
<TABLE>
<CAPTION>
THE PEGASUS FUNDS
MANAGED ASSETS GROWTH FUND
STATEMENT OF OPERATIONS
For the Three Months Ended March 31, 1997
(Unaudited)
MANAGED ASSETS
GROWTH
FUND
--------------
<S> <C>
INVESTMENT INCOME
Interest .................................... $ 1,040
Dividends ................................... 13,838
--------
TOTAL INVESTMENT INCOME ................. 14,878
--------
EXPENSES
Investment advisory fees .................... 2,206
Administration fees ......................... 510
Shareholder Services fees (Class A Shares) .. 250
Shareholder Services fees (Class B Shares) .. 191
12b-1fees (Class B Shares) .................. 574
Professional fees ........................... 5,677
Custodian fees .............................. 2,526
Transfer and dividend disbursing agent fees . 98
Registration, filing fees and other expenses 813
Less:
Expense reimbursement ................... (8,613)
--------
NET EXPENSES ........................... 4,232
--------
NET INVESTMENT INCOME ........................... 10,646
--------
NET REALIZED AND UNREALIZED GAINS (LOSSES) ON
INVESTMENTS:
Net realized gains on:
Investment transactions ................ 3
Net change in unrealized depreciation on:
Investment securities .................. (43,059)
--------
NET REALIZED AND UNREALIZED LOSSES
ON INVESTMENTS ..................... (43,056)
--------
NET INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS ............................ $(32,410)
========
<FN>
See accompanying notes to financial statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
THE PEGASUS FUNDS
MANAGED ASSETS GROWTH FUND
STATEMENTS OF CHANGES IN NET ASSETS
MANAGED ASSETS
GROWTH
FUND
---------------------------------
For the three For the
months ended period ended
-------------- -----------------
March 31, 1996 Dec. 31, 1996 (1)
-------------- -----------------
(Unaudited)
<S> <C> <C>
FROM OPERATIONS:
Net investment income (loss) ............................ $ 10,646 $ (42)
Net realized gains (losses) on investment transactions ... 3 --
Net change in unrealized depreciation on investments ..... (43,059) 7,546
----------- -----------
Net decrease in net assets from operations ............... (32,410) 7,504
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income
Class A Shares ........................................ (3,690) --
Class B Shares ........................................ (2,982) --
Class I Shares ........................................ (3,539) --
----------- -----------
Total dividends from net investment income ............ (10,211) --
----------- -----------
From realized gains
Class A Shares ........................................ -- --
Class B Shares ........................................ -- --
Class I Shares ........................................ -- --
----------- -----------
Total distributions from realized gains ............... -- --
----------- -----------
Total distributions .................................... (10,211) --
----------- -----------
FROM CAPITAL SHARE TRANSACTIONS:
Proceeds from shares issued .............................. 1,534,894 678,805
Net asset value of shares issued in reinvestment of
distributions to shareholders .......................... 6,672 --
----------- -----------
1,541,566 678,805
Less: payments for shares redeemed ....................... (1,962) --
----------- -----------
Net increase in net assets from capital share transactions 1,539,604 678,805
----------- -----------
NET INCREASE IN NET ASSETS ................................. 1,496,983 686,309
NET ASSETS:
Beginning of period ...................................... 686,309 --
----------- -----------
End of period ............................................ $ 2,183,292 $ 686,309
=========== ===========
<FN>
(1) For the period December 18, 1996 (commencement of operations) through
December 31, 1996.
See accompanying notes to financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Pegasus Managed Assets Growth Fund
- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
March 31, 1997
- -------------------------------------------------------------------
Description Shares Market Value
----------- ------ ------------
<S> <C> <C>
MUTUAL FUNDS - 100.00%
Pegasus Bond Fund ................ 48,270 $ 484,628
Pegasus Growth Fund .............. 16,193 201,928
Pegasus Growth and Value Fund .... 42,303 605,785
Pegasus International Bond Fund .. 5,310 53,847
Pegasus International Equity Fund 24,224 282,700
Pegasus Intrinsic Value Fund ..... 20,397 282,700
Pegasus Mid-Cap Opportunity Fund.. 9,430 161,543
Pegasus Small-Cap Opportunity Fund 6,037 80,771
----------
TOTAL MUTUAL FUNDS ..................... $2,153,902
(Cost $2,189,415) ==========
</TABLE>
4
<PAGE>
THE PEGASUS FUNDS
MANAGED ASSETS GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) Organization and Commencement of Operations
The Pegasus Funds (Pegasus), formerly "The Woodward Funds", was organized
as a Massachusetts business trust on April 21, 1987, and registered under the
Investment Company Act of 1940, as amended, as an open-end investment
company. As of March 31, 1997, the Trust consisted of twenty-six separate
series, one of which was the Managed Assets Growth Fund which commenced on
December 17, 1996.
(2) Significant Accounting Policies
The following is a summary of significant accounting policies followed by
Pegasus in preparation of their financial statements. The policies are in
conformity with generally accepted accounting principles for investment
companies. Following generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Investments
Shares of open-end management investment companies (mutual funds) in
which the Funds invest are valued at their respective net asset value as
determined under the 1940 Act. Such mutual funds value securities in their
portfolios for which market quotations are readily available at their current
market value (generally the last reported sale price) and all other
securities and assets at fair pursuant to methods established in good faith
by by the Board of Trustees or Directors of the underlying mutual fund. Money
market funds in which the funds also invest generally value securities in
their portfolios on an amortized cost basis, which approximates market.
Investment security purchases and sales are accounted for on the day
after trade date.
Pegasus invests in securities subject to repurchase agreements. Such
transactions are entered into only with institutions included on the Federal
Reserve System's list of institutions with whom the Federal Reserve Open
Market Desk will do business. FCNIMCO, acting under the supervision of the
Board of Trustees, has established the following additional policies and
procedures relating to Pegasus' investments in securities subject to
repurchase agreements: 1) the value of the underlying collateral is required
to equal or exceed 102% of the funds advanced under the repurchase agreement
including accrued interest; 2) collateral is marked to market daily by
FCNIMCO to assure its value remains at least equal to 102% of the repurchase
agreement amount; and 3) funds are not disbursed by Pegasus or its agent
unless collateral is presented or acknowledged by the collateral custodian.
Investment Income
Dividends are recorded on the ex-dividend date.
Federal Income Taxes
It is Pegasus' policy to comply with the requirements of Subchapter M of
the Internal Revenue Code, as amended, applicable to regulated investment
companies and to distribute net investment income and realized gains to its
shareholders. Therefore, no federal income tax provision is required in the
accompanying financial statements.
Net investment income and net realized gains (losses) may differ for
financial statement and tax purposes primarily due to differing treatments of
foreign currency transactions and wash sales, due to the timing of dividend
distributions, the fiscal year in which amounts are distributed may differ
from the year that the net investment income or realized gains (losses) were
recorded by the Fund.
5
<PAGE>
Shareholder Dividends
Dividends from net investment income are declared and paid quarterly by
the Fund. Net realized capital gains are distributed annually. Distributions
from net investment income and net realized gains are made during each year
to avoid the 4% excise tax imposed on regulated investment companies by the
Internal Revenue Code. However, to the extent that net realized capital gains
of the Fund can be reduced by capital loss carryovers, if any, such gains
will not be distributed.
Deferred Organization Costs
Organization costs are being amortized on a straight-line basis over the
five year period beginning with the commencement of operations of the Fund.
Concentration of Risk
Investing in securities of foreign issuers and currency transactions may
involve certain considerations and risks not typically associated with
investing in U. S. companies and U.S. government securities. These risks
include revaluation of currencies, adverse fluctuations in foreign currency
values and possible adverse political, social and economic developments,
including those particular to a specific industry, country or region, which
could cause the securities and their markets to be less liquid and price more
volatile than those of comparable U.S. companies and U. S. government
securities.
Expenses
Expenses directly attributable to a Fund are charged to that Fund's
operations; expenses which are applicable to all Funds in the Pegasus Trust
are allocated among them on the basis of relative net assets. Fund expenses
directly attributable to a class of shares are charged to that class;
expenses which are applicable to all classes are allocated among them.
Pegasus monitors the rate at which expenses are charged to ensure that a
proper amount of expenses charged to income each year. This percentage is
subject to revision if there is a change in the estimate of the future net
assets of Pegasus or a change in expectations as to the level of actual
expenses.
Multiple Classes of Capital Shares of Beneficial Interest
The Fund offers Class A, Class B, and Class I shares. Each class of
shares has equal rights as to earnings, assets and voting privileges except
that each class bears different distribution and shareholder service
expenses. Each class of shares has exclusive voting rights with respect to
matters that effect just that class. Income, expenses (other than expenses
attributable to a specific class) and realized and unrealized gains or losses
on investments are allocated to each class of shares based on relative net
assets. Dividends are declared separately for each class. No class has
preferential dividend rights, differences in per share dividend rates are
generally due to differences in separate class expense. Class B shares
automatically convert to Class A shares at the beginning of the eighth year.
(3) Investment Advisory Fee, Administration Fee and Other Transactions With
Affiliates
FCNIMCO is the investment advisor pursuant to the Advisory Agreement
whereby FCNIMCO has agreed to provide the day-to-day management of each of
the Fund's investments. For its advisory services to Pegasus, FCNIMCO is is
entitled to a fee, computed daily and payable monthly.
The Trust has a Co-Administration Agreement with NBD Bank, FCNIMCO, and
BISYS Fund Services (collectively, the "Co-Administrators") pursuant to which
the Co-Administrators have agreed to assist in all aspects of the Fund's
operations for an administration fee, at an annual rate of 0.15% of the
Fund's average daily net assets.
BISYS Fund Services (BISYS) serves as the Trust's principal underwriter
and distributor of the Funds' shares.
NBD Bank, an affiliate of FCNIMCO, also compensated for its services as
Pegasus' custodian and is reimbursed for certain out of pocket expenses
incurred on behalf of Pegasus.
See Note 5 for a summary of fee rates and expenses pursuant to these
agreements.
6
<PAGE>
THE PEGASUS FUNDS
MANAGED ASSETS GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(4) Investment Securities Transactions
The following summarizes the securities transactions entered into by the
Fund, excluding short-term investments, for the three months ended March 31,
1997:
<TABLE>
<CAPTION>
FEDERAL TAX
PURCHASES SALES COST
--------- ----- -----------
<S> <C> <C> <C>
Managed Assets Growth Fund $1,522,482 $306 $ 2,189,415
</TABLE>
At March 31, 1997, accumulated net unrealized appreciation (depreciation) on
investments was as follows:
<TABLE>
<CAPTION>
NET UNREALIZED
UNREALIZED UNREALIZED APPRECIATION/
APPRECIATION DEPRECIATION (DEPRECIATION)
------------ ------------ --------------
<S> <C> <C> <C>
Managed Assets Growth Fund $9,174 $(44,687) $(35,513)
</TABLE>
7
<PAGE>
(5) Expenses
Following is a summary of total expense rates charged payable to FCNIMCO for
the period ended March 31, 1997.
<TABLE>
<CAPTION>
Managed Assets
Growth Fund
--------------
<S> <C>
CLASS A SHARES
Expense Rate: 1.20%
CLASS B SHARES
Expense Rate: 1.95%
CLASS I SHARES
Expense Rate: 0.95%
</TABLE>
For the period ended March 31, 1997, FCNIMCO voluntarily agreed to reimburse
a portion of the operating expenses of the Fund to the extent that the Fund's
expenses exceeded the following amounts (as a percentage of the Fund's
average net assets):
<TABLE>
<CAPTION>
Managed Assets
Growth Fund
--------------
<S> <C>
Class A Shares................. 1.25%
Class B Shares................. 2.00%
Class I Shares................. 0.95%
</TABLE>
Following is a summary of advisory fee rates payable to FCNIMCO and amounts
paid to FCNIMCO and BISYS pursuant to the agreements described in Note 3 for
the period ended March 31, 1997. The rates are stated as a percentage of the
Fund's average net assets.
<TABLE>
<CAPTION>
Managed Assets
Effective Date Growth Fund
-------------- --------------
<S> <C>
FCNIMCO Advisory Fee: 0.65%
Amounts Paid:
Advisory Fee to FCNIMCO................................ $2,206
Administration Fee to FCNIMCO and BISYS................ 510
Other Fees to FCNIMCO.................................. 2,526
Expense Reimburesments by FCNIMCO...................... (8,613)
</TABLE>
The Fund's Class A shares and Class B shares have a Shareholder Services
Plan (the"Plan") pursuant to which the Fund pay BISYS Fund Services (the
"Distributor") a fee, at an annual rate of 0.25% of the average daily net
assets of the outstanding Class A shares and Class B shares. Pursuant to the
terms of the Plan, the Distributor has agreed to provide certain shareholder
services to the holders of these shares. Additionally, under the terms of the
Plan, the Distributor may make payments to other shareholders service agents
which may include FCNIMCO, and its affiliates. For the period ended March 31,
1997 the Fund paid the folllowing amounts under the Plan to BISYS:
Managed Assets Growth Fund................................ $ 261
The Fund's Class B shares have a Distribution Plan adopted pursuant to
Rule 12b-1 under the Act (the "12b-1 Plan") pursuant to which the Fund has
agreed to pay the Distributor for advertising, marketing and distributing
Class B Shares of the Fund at an annual rate of .75% of the average daily net
assets of the Fund's outstanding Class B Shares. Under the terms of the 12b-1
Plan, the Distributor may make payments to FCNIMCO, and it's affiliates in
respect of these services. A contingent deferred sales charge (CDSC) payable
to the Distributor is imposed on redemptions of Class B shares depending on
the number of years of such shares were held by the investor. For the period
ended March 31, 1997, the Fund made the following payments under the 12b-1
Plan, all of which was retained by the Distributor.
12b-1 Fees CDSC Paid
---------- ---------
Managed Assets Growth Fund......... $361 $0
8
(6) Capital Share Transactions
Transactions in shares of the Fund are summarized below:
<TABLE>
<CAPTION>
Managed Assets Growth Fund
----------------------------------------------------
For the period ended December 17,1996
March 31, 1997 to December 31,1996
---------------------- ----------------------
Amount Shares Amount Shares
------ ------ ------ ------
<S> <C> <C> <C> <C>
Class A Shares:
Shares Issued ....... $ 764,856 74,732 $ 75,494 7,476
Dividends Reinvested 3,690 364
Shares Redeemed ..... (1,962) (190)
----------- ------- ----------- ------
Net Increase ........ $ 766,584 74,906 $ 75,494 7,476
=========== ======= =========== ======
Class B Shares:
Shares Issued ....... $ 735,435 72,468 $ 16,600 1,659
Dividends Reinvested 2,982 297
Shares Redeemed .....
----------- ------- ----------- ------
Net Increase ........ $ 738,417 72,765 $ 16,600 1,659
=========== ======= =========== ======
Class I Shares:
Shares Issued ....... $ 34,603 3,416 $ 586,711 58,671
Dividends Reinvested
Shares Redeemed .....
----------- ------- ----------- ------
Net Increase ........ $ 34,603 3,416 $ 586,711 58,671
=========== ======= =========== ======
Net Increase in Fund $ 1,539,604 151,087 $ 678,805 52,854
=========== ======= =========== ======
</TABLE>
9
<PAGE>
Pegasus Funds
Financial Highlights
The Financial Highlights present a per share analysis of how the Fund's net
assets values have changed during the periods presented. Additional
quantitatvie measures expressed in ratio form analyze important relationships
between certain items presented in financial statements. These financial
highlights have been derived from the financial statements of the Fund and
other information for the periods presented.
<TABLE>
<CAPTION>
MANAGED ASSETS GROWTH FUND
Class A Shares Class B Shares Class I Shares
------------------------------ ------------------------------ -------------------------------
For the For the For the
Period Ended For the Period Ended For the Period Ended For the
March 31, 1997 Period Ended March 31, 1997 Period Ended March 31, 1997 Period Ended
(Unaudited) Dec. 31, 1996(1) (Unaudited) Dec. 31, 1996(1) (Unaudited) Dec. 31, 1996(1)
-------------- ---------------- -------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period ............... $ 10.08 $ 10.00 $ 9.99 $ 10.00 $ 10.13 $ 10.00
Income (Loss) from
investment
operations:
Net investment income. 0.05 -- 0.03 -- 0.06 --
Net realized and
unrealized
gains (losses)
on investments.... (0.10) 0.08 (0.12) (0.01) (0.12) 0.13
---------- --------- ---------- --------- ---------- ----------
Total from investment
operations ........... (0.05) 0.08 (0.09) (0.01) (0.06) 0.13
---------- --------- ---------- --------- ---------- ----------
Less distributions:
From net investment
income ........... (0.05) -- (0.05) -- (0.06) --
From realized gains .. -- -- -- -- -- --
---------- --------- ---------- --------- ---------- ----------
Total distributions ...... (0.05) -- (0.05) -- (0.06) --
---------- --------- ---------- --------- ---------- ----------
Net change in net
asset value .......... (0.11) 0.08 (0.13) (0.01) (0.12) 0.13
---------- --------- ---------- --------- ---------- ----------
Net asset value,
end of
period ............... $ 9.97 $ 10.08 $ 9.86 $ 9.99 $ 10.01 $ 10.13
========== ========= ========== ========= ========== ==========
Total Return (b) ......... (2.12%)(a) 0.80%(c) (3.40%)(a) (0.10%)(a) (2.40%)(a) 1.30%(a)
Ratios/Supplemental Data
Net assets, end of
period (in 000's)....... $ 822 $ 75 $ 734 $ 17 $ 622 $ 594
Ratio to average
net assets:
Expenses ............... 1.20%(a) 1.20%(a) 1.95%(a) 1.95%(a) 0.95%(a) 0.95%(a)
Net investment income .. 4.31%(a) (0.45%)(a) 4.33%(a) (1.20%)(a) 4.33%(a) 0.20%(a)
Expenses without
fee waivers/
reimbursed expenses .. 1.71%(a) (3.50%)(a) 2.46%(a) (4.25%)(a) 1.46%(a) (3.50%)(a)
Net investment income
without fee
waivers/reimbursed
expenses ............. 3.80%(a) (2.75%)(a) 3.82%(a) (3.50%)(a) 3.82%(a) (2.50%)(a)
Portfolio turnover rate .. 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Average commission rate .. $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
<FN>
- ---------
(1) For the period December 18, 1996 (commencement of operations) through
December 31, 1996.
(a) Annualized for periods less than one year for comparablility purposes.
Actual annual values may be less than or greater than those shown.
(b) Total returns as presented do not include any applicable sales load or
redemption charges.
</TABLE>
10
