[Prospectus Cover]
[logo] Pegasus Funds
Strength in Investing
P R O S P E C T U S
June 30, 1997
(As Revised October 16, 1997)
Pegasus
Funds
<PAGE>
PROSPECTUS June 30, 1997
(As Revised October 16, 1997)
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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 is dated June 30, 1997
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,
broker-dealers, registered investment advisers and other financial
institutions which have entered into an agreement with a "mutual fund
supermarket" or similar program, and the Asset Allocation Funds.
See "How to Buy Shares" on page 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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<PAGE>
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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<PAGE>
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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<PAGE>
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
-35-
<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
-36-
<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 the following investors: (1) qualified
trust, custody and/or agency account clients of FNBC, NBD or their
affiliates, including defined benefit retirement plans for which FNBC,
NBD or their affiliates act as investment manager, but excluding other
retirement, 401(k), employee benefit and profit sharing plans ("Fiduciary
Accounts"); (2) 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"); (3)
broker-dealers, registered investment advisers and other financial
institutions purchasing a minimum of $1 million, which have entered into an
agreement with a "mutual fund supermarket" or with the Distributor, which
includes the requirement that such shares be purchased for the benefit of
clients participating in a "wrap account" or similar program under which such
clients pay a fee ("Eligible Financial Intermediaries"); and (4) the Asset
Allocation Funds. Class I shares are not subject to an annual service fee
or distribution fee. Such financial institutions may require different minimum
initial charges, restrictions or cut-off times different from those applicable
to investors that invest in the Trust directly.
Class B shares will receive lower per share dividends and at
any given time the performance of Class B should be expected to be lower than
for shares of each other Class because of the higher expenses borne by Class
B. Similarly, Class A shares will receive lower per share dividends, and the
performance of Class A should be expected to be lower, than Class I shares
because of the higher expenses borne by Class A.
An investor who is not eligible to purchase Class I shares
should consider whether, during the anticipated life of the investor's
investment in a Fund, the accumulated distribution fee and CDSC on Class B
shares prior to conversion would be less than the initial sales charge, if
any, on Class A shares purchased at the same time, and to what extent, if
any, such differential would be offset by the return of Class A.
Additionally, investors qualifying for reduced initial sales charges who
expect to maintain their investment for an extended period of time might
consider purchasing Class A shares because the accumulated continuing
distribution fees on Class B shares may exceed the initial sales charge on
Class A shares during the life of the investment.
Information Applicable To All Purchasers
When purchasing Fund shares, an investor must specify the
Class of shares being purchased. If no Class of shares is specified, Class A
shares will be purchased.
The minimum initial investment for each Class is $1,000,
except for Eligible Financial Intermediaries purchasing Class I shares,
for which the minimum initial investment is $1 million. However, for
IRAs and other retirement plans, the minimum initial purchase is
$250. All subsequent investments must be at least $100. The initial
investment must be accompanied by the Account Application. The Investment
Adviser and Service Agents may impose initial or subsequent investment
minimums which are higher or lower than those specified above and may impose
different minimums for different types of accounts or purchase arrangements.
The Trust reserves the right to reject any purchase order.
If an order is received by the Transfer Agent or certain
authorized broker-dealers or designated intermediaries by the close of
trading on the floor of the New York Stock Exchange (the "Exchange"), or at
the Early Closing Time (as defined below), on any Business Day (as defined
-37-
below), shares will be purchased at the public offering price determined as
of the close of trading on the floor of the Exchange (currently 4:00 p.m.,
Eastern time) or as of the Early Closing Time on that day. Otherwise,
shares will be purchased at the public offering price determined as of
the close of trading on the floor of the Exchange or as of the Early
Closing Time on the next Business Day.
The Trust has authorized certain broker-dealers to accept
on its behalf purchase orders made through a "mutual fund supermarket."
Such authorized broker-dealers may designate other intermediaries to
accept purchase orders on behalf of the Trust.
Federal regulations require that an investor provide a
certified Taxpayer Identification Number ("TIN") upon opening or reopening an
account. See the Statement of Additional Information for information
concerning this requirement. Failure to furnish a certified TIN to the Trust
could subject an investor to a $50 penalty imposed by the Internal Revenue
Service (the "IRS"), and could subject the investor to backup withholding.
Shares may also be paid for by wiring federal funds to NBD
Bank, ABA 072000326, for the account of Pegasus Funds, deposit to FDIS
Cashbook Account number 79512, and identifying the customer name and account
number. Before wiring payment, customers must notify the Trust at
1-800-688-3350 of the dollar amount of the purchase. Notification must be
given before the respective closing time of the fund to be purchased.
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."
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<PAGE>
Class A Shares
Class A shares of each Fund are subject to an annual service
fee at the rate of up to 0.25% of the value of the average daily net assets
of Class A. See "Distribution Plan" and "Shareholder Services Plan."
Class A shares held by investors who after purchasing Class A shares
establish a Fiduciary Account will convert to Class I shares upon depositing
such shares into such Account, based on the relative net asset values for
shares of each such Class.
The public offering price for Class A shares of each Fund 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 a "mutual fund
supermarket" or with the Distributor, which includes a requirement that such
shares be purchased for the benefit of clients participating in a "wrap
account" or a similar program under which such clients pay a fee to such
broker-dealer, registered investment adviser or other financial institution.
The Investment Adviser may 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 redemption request is received in proper form by the Transfer Agent,
certain broker-dealers authorized by the Trust to accept on its behalf such
redemption requests made through a "mutual fund supermarket" or certain other
designated intermediaries, the relevant Fund will redeem the shares at the
next determined net asset value as described below. If an investor holds
Fund shares of more than one Class, any request for redemption must specify
the Class of shares being redeemed. If an investor fails to specify the
Class of shares to be redeemed, Class A shares will be redeemed first.
If an investor owns fewer shares of the Class than specified to be
redeemed, the redemption request may be delayed until the Transfer Agent
receives further instructions from the investor or his or her Service Agent.
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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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<PAGE>
During times of drastic economic or market conditions, an
investor may experience difficulty in contacting the Transfer Agent by
telephone to request a redemption or exchange of Fund shares. In such cases,
investors should consider using the other redemption procedures described
herein. Use of these other redemption procedures may result in the investor's
redemption request being processed at a later time than it would have been if
telephone redemption had been used. During the delay, a Fund's net asset
value may fluctuate.
Written Redemption Requests
Investors may redeem shares by written request mailed to the
Transfer Agent at P.O. Box 5142, Westborough, Massachusetts 01581-5120.
Redemption requests must be signed by each shareholder, including each owner
of a joint account, and each signature must be guaranteed for redemptions
greater than $50,000. The Transfer Agent has adopted standards and procedures
pursuant to which signature-guarantees in proper form generally will be
accepted from domestic banks, brokers, dealers, credit unions, national
securities exchanges, registered securities associations, clearing agencies
and savings associations, as well as from participants in the New York Stock
Exchange Medallion Signature Program, the Securities Transfer Agents
Medallion Program ("STAMP"), and the Stock Exchange's Medallion Program.
CLASS B SHARES
Contingent Deferred Sales Charge
A CDSC payable to the Distributor may be imposed on
redemptions of Class B shares depending on the number of years such shares
were held by the investor. The following table sets forth the rates of the
CDSC applied for the Funds:
<TABLE>
<CAPTION>
Equity Index, 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, (f)
redemptions initiated by a Fund of accounts with net assets of less than
$1,000, and (g) redemptions by Eligible Financial Intermediaries who have
purchased Class A shares at net asset value as part of a "wrap account" or
similar program.
Conversion Of Class B Shares
Class B shares automatically convert to Class A shares (and
thus become subject to the lower expenses borne by Class A shares) at the
beginning of the eighth year (the third year in the case of the Short Bond
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, and Rebecca L. Gersonde, Vice President, are primarily responsible for
the day-to-day management of the Municipal Bond and Michigan Municipal
Bond Funds. Mr. Grabowski has been the manager of the municipal desk at FCN
since 1984. Ms. Gersonde joined FCN in 1982.
J. Christopher Nicholl, Vice President, and Mr. Grabowski are primarily
responsible for the day-to-day management of the Intermediate Municipal Bond
Fund. Mr. Nicholl joined FCN in 1996. He served as an Investment Associate
at Prudential Securities, Inc. from 1987-1995.
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 A and/or Class I shares. In addition,
Class B shares are subject to an annual distribution fee for advertising,
marketing and distributing such shares and Class A and Class B shares are
subject to an annual service fee for ongoing personal services relating to
shareholder accounts and services related to the maintenance of shareholder
accounts. See "Distribution and Shareholder Services Plans." Expenses
attributable to a particular Fund or Class are charged against the assets of
that Fund or Class, respectively; other expenses of the Trust are allocated
among such Funds on the basis determined by the Board, including, but not
limited to, proportionately in relation to the net assets of each such Fund.
The imposition of the advisory fee, as well as other operating
expenses, including the fees paid under any Distribution Plan and Shareholder
Services Plan, will have the effect of reducing the total return to
investors. From time to time, the Investment Adviser may waive receipt of its
fees and/or voluntarily assume certain expenses of a Fund, which would have
the effect of lowering that Fund's overall expense ratio and increasing total
return to investors at the time such amounts are waived or assumed, as the
case may be. The Fund will not pay the Investment Adviser at a later time for
any amounts which may be waived, nor will the Fund reimburse the Investment
Adviser for any amounts which may be assumed.
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS
Class B shares of each Fund are subject to an annual
distribution fee pursuant to a Distribution Plan. Class A and Class B shares
of each Fund are subject to an annual service fee pursuant to a Shareholder
Services Plan.
DISTRIBUTION PLAN
(Class B only) Under a Distribution Plan adopted pursuant to
Rule 12b-1 under the 1940 Act, the Trust has agreed to pay the Distributor
for advertising, marketing and distributing shares of a Fund at an aggregate
annual rate not to exceed .75% of the value of the average daily net assets
of Class B shares. The Distributor may pay one or more Service Agents in
respect of these services. The Investment Adviser and its subsidiaries and
affiliates may act as Service Agents and receive fees under the Distribution
Plan. The Distributor determines the amount, if any, to be paid to Service
Agents under the Distribution Plan and the basis on which such payments are
made. The fees payable under the Distribution Plan are payable without regard
to actual expenses incurred.
SHAREHOLDER SERVICES PLAN
(Class A and Class B) Under a Shareholder Services Plan, the
Trust pays the Distributor for the provision of certain services to the
holders of Class A and Class B shares a fee at an annual rate of .25% of the
value of the average daily net assets of such shares. The services provided
may include personal services relating to shareholder accounts, such as
answering shareholder inquiries regarding the Funds and providing reports and
other information and services related to the 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. No
interest will accrue on amounts represented by uncashed distribution or
redemption checks.
TAXES
FEDERAL
Each Fund intends to qualify as a "regulated investment
company" under the Code. Such qualification generally will relieve the Funds
of liability for federal income taxes to the extent their earnings are
distributed in accordance with the Code.
Each Fund intends to distribute as dividends substantially all
of its net income each year. With the exception of dividends paid by the
Municipal Bond Funds, such dividends will be taxable as ordinary income to a
Fund's shareholders regardless of whether a distribution is received in cash
or reinvested in additional shares. Such ordinary income distributions will
qualify for the dividends received deduction for corporations to the extent
of the total qualifying dividends received by the distributing Fund from
domestic corporations for the taxable year.
Dividends derived from net capital gains will be taxable to
Fund shareholders as long-term capital gains, regardless of how long the
shareholders have held the shares and whether such gains are paid in cash or
reinvested in Fund shares.
Dividends paid by a Fund derived from net investment income,
together with distributions from net realized short-term securities gains and
all or a portion of any gain realized from the sale or other disposition of
certain market discount bonds, paid by such Fund to a foreign investor who is
the beneficial owner of such Fund's shares generally are subject to U.S.
nonresident withholding taxes at the rate of 30%, unless the foreign investor
claims the benefit of a lower rate specified in a tax treaty. Distributions
from net realized long-term securities gains paid by the Fund to such foreign
investor generally will not be subject to U.S. nonresident withholding tax.
However, such distributions may be subject to backup withholding, unless the
foreign investor certifies his non-U.S. residency status.
Federal regulations generally require the Trust to withhold
("backup withholding") and remit to the U.S. Treasury 31% of dividends and
distributions from net realized securities gains paid to a shareholder if
such shareholder fails to certify either that the TIN furnished in connection
with opening an account is correct, or that such shareholder has not received
notice from the IRS of being subject to backup withholding as a result of a
failure to properly report taxable dividend or interest income on a federal
income tax return. Furthermore, the IRS may notify the Trust to institute
backup withholding if the IRS determines a shareholder's TIN is incorrect or
if a shareholder has failed to properly report taxable dividend and interest
income on a federal income tax return.
Any dividends declared in October, November or December with a
record date before the end of the year will be deemed for federal tax
purposes to have been paid by the Fund and received by the shareholders in
that year if such dividends are actually paid on or before January 31 of the
following year.
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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% 11.47%/10.95% (1/23/86)
Class B shares (NAV/CDSC) 9.26%/5.26% N/A N/A 16.76%/14.83% (3/03/95)
Class I shares 10.43% N/A N/A 17.93% (3/03/95)
Managed Assets Balanced Fund*
Class A shares (NAV/public offering price) 12.99%/7.35% N/A N/A 10.89%/9.01% (1/1/94)
Class B shares (NAV/CDSC) 8.15%/4.15% N/A N/A 9.29%/8.44% (1/1/94)
Class I shares 13.04% N/A N/A 10.91% (1/1/94)
Managed Assets Growth Fund
Class A shares (NAV/public offering price) N/A N/A N/A .50%/(4.52)% (12/18/96)
Class B shares (NAV/CDSC) N/A N/A N/A (40)%/(5.38)% (12/18/96)
Class I shares N/A N/A N/A 1.00% (12/18/96)
EQUITY FUNDS:
Equity Income Fund(1) (2)
Class A shares (NAV/public offering price) 19.28%/13.32% 13.43%/12.27% 12.11%/11.54% 10.04%/9.86% (3/31/67)
Class B shares (NAV/CDSC) 18.27%/14.27% 13.10%/12.97% 11.95%/11.95% 9.99%/9.99% (3/31/67)
Class I shares 19.57% 13.95% 12.66% 10.61% (3/31/67)
Growth Fund(2) (3)
Class A shares (NAV/public offering price) 20.11%/14.11% 13.78%/12.62% 13.61%/13.03% 7.95%/7.76% (5/31/68)
Class B shares (NAV/CDSC) 19.04%/15.04% 13.44%/13.32% 13.44%/13.44% 7.89%/7.89% (5/31/68)
Class I shares 20.36% 14.28% 14.16% 8.50% (5/31/68)
Mid-Cap Opportunity Fund (2)
Class A shares (NAV/public offering price) 24.91%/18.67% 17.45%/16.26% 14.77%/14.19% 14.42%/13.97% (12/31/83)
Class B shares (NAV/CDSC) 24.88%/20.88% 17.45%/17.34% 14.77%/14.77% 14.42%/14.42% (12/31/83)
Class I shares 25.03% 17.48% 14.79% 14.43% (12/31/83)
Small-Cap Opportunity Fund(1) (2)
Class A shares (NAV/public offering price) 24.59%/18.36% 13.85%/12.69% 14.93%/14.34% 9.41%/9.18% (6/30/72)
Class B shares (NAV/CDSC) 24.42%/20.42% 13.63%/13.31% 14.82%/14.82% 9.36%/9.36% (6/30/72)
Class I shares 25.63% 14.46% 15.54% 9.99% (6/30/72)
Intrinsic Value Fund (2)
Class A shares (NAV/public offering price) 23.79%/17.61% 15.00%/13.82% 13.67%/13.09% 14.72%/14.18% (12/31/85)
Class B shares (NAV/CDSC) 23.24%/19.24% 14.89%/14.30% 13.62%/13.62% 14.67%/14.67% (12/31/85)
Class I shares 23.99% 15.03% 13.69% 14.73% (12/31/85)
Growth and Value Fund (2)
Class A shares (NAV/public offering price) 19.24%/13.29% 13.92%/12.76% 12.68%/12.10% 13.48%/13.05% (12/31/83)
Class B shares (NAV/CDSC) 17.74%/13.74% 13.64%/13.51% 12.54%/12.54% 13.44%/13.44% (12/31/83)
Class I shares 18.27% 13.74% 12.59% 13.41% (12/31/83)
Equity Index Fund (2)
Class A shares (NAV/public offering price) 23.03%/19.35% 14.91%/14.58% 14.93%/14.58% 15.65%/15.35% (6/30/85)
Class B shares (NAV/CDSC) 20.29%/17.29% 14.50%/14.50% 14.73%/14.73% 15.47%/15.47% (6/30/85)
Class I shares 22.58% 14.93% 14.94% 15.66% (6/30/85)
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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 (2)
Class A shares (NAV/public offering price) 7.50%/2.13% 7.70%/6.60% 8.26%/7.71% 9.20%/8.68% (4/30/86)
Class B shares (NAV/CDSC) 6.29%/2.29% 7.46%/7.31% 8.14%/8.14% 8.65%/8.65% (4/30/86)
Class I shares 7.79% 7.76% 8.29% 9.23% (4/30/86)
BOND FUNDS:
Intermediate Bond Fund (2)
Class A shares
(NAV/public offering price) 5.64%/2.48% 6.32%/5.68% 7.69%/7.36% 8.91%/8.65% (12/31/83)
Class B shares (NAV/CDSC) 5.56%/2.58% 6.31%/6.31% 7.68%/7.68% 8.94%/8.94% (12/31/83)
Class I shares 5.78% 6.35% 7.50% 8.92% (12/31/83)
Bond Fund (2)
Class A shares
(NAV/public offering price) 4.98%/.26% 7.48%/6.49% 8.45%/7.95% 10.13%/9.74% (12/31/83)
Class B shares (NAV/CDSC) 5.01%/1.08% 7.48%/7.34% 8.45%/8.45% 10.13%/10.13% (12/31/83)
Class I shares 5.08% 7.50% 8.46% 10.14% (12/31/83)
Short Bond Fund (2)
Class A shares
(NAV/public offering price) 4.45%/3.40% 5.09%/4.88% 6.78%/6.68% 7.95%/7.86% (12/31/83)
Class B shares (NAV/CDSC) 4.00%/1.04% 5.00%/5.00% 6.74%/6.74% 7.91%/7.91% (12/31/83)
Class I shares 4.56% 5.11% 6.79% 7.96% (12/31/83)
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%/3.51% (5/31/95)
Class I shares 3.14% N/A N/A 5.91% (3/05/93)
International Bond Fund(1) (2)
Class A shares
(NAV/public offering price) 5.62%/.86% 10.09%/9.08% N/A 11.10%/10.40% (9/30/89)
Class B shares (NAV/CDSC) 5.01%/1.01% 9.59%/9.45% N/A 10.76%/10.76% (9/30/89)
Class I shares 5.99% 10.75% N/A 11.74% (9/30/89)
MUNICIPAL BOND FUNDS:
Municipal Bond Fund(4)
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%/(1.35)% N/A N/A 6.38%/4.18% (4/04/95)
Class I shares 3.76% N/A N/A 9.62% (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%/7.02% (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 8.32% (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) 2.93%/(1.02)% N/A N/A 5.94%/5.28% (2/1/93)
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 of the Equity Income, Growth, Small-Cap Opportunity and
International Bond Funds for periods prior to January 27, 1995 is
represented by performance of certain common trust funds managed by
FNBC before the effective date of the registration statement of these
Funds. Performance of the Mid-Cap Opportunity (6/1/91), Intrinsic
Value (6/1/91), Growth and Value (6/1/91), Equity Index (7/10/92),
International Equity (12/3/94), Intermediate Bond (6/1/91), Bond
(6/1/91) and Short Bond (9/17/94) Funds for periods prior to the
inception dates shown is represented by performance of certain
common trust funds managed by NBD before the effective date of
the registration statement of these Funds. The common trust funds
were not registered under the 1940 Act and were not subject to
certain restrictions that are imposed by the 1940 Act. If the
common trust funds had been registered under the 1940 Act,
performance may have been adversely affected. The common trust
funds did not charge any expenses. Performance of the common trust
funds has been restated to reflect the maximum operating expenses charged
by the predecessor Prairie Funds upon their inception on January 27,
1995 in the case of the Equity Income, Growth, Small-Cap Opportunity
and International Bond Funds or by the other Funds upon their inception,
as the case may be.
(3) Performance for periods from January 27, 1995 to August 24, 1996 is
represented by the performance of the Prairie Growth Fund. On such date,
the assets and liabilities of the Prairie Growth Fund were transferred
to the Growth Fund.
(4) Performance for periods 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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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.
A-9
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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-10 97
