INSTITUTIONAL SHARES
MONEY MARKET FUND
INSTITUTIONAL MONEY MARKET FUND
U.S. TREASURY MONEY MARKET FUND
U.S. GOVERNMENT MONEY MARKET FUND
TAX-EXEMPT MONEY MARKET FUND
SHORT-TERM BOND MARKET FUND
INTERMEDIATE BOND MARKET FUND
TAX-EXEMPT INTERMEDIATE BOND FUND
BOND IMMDEX/TM FUND
BALANCED GROWTH FUND
GROWTH AND INCOME FUND
EQUITY INDEX FUND
GROWTH FUND
SPECIAL GROWTH FUND
EMERGING GROWTH FUND
MICROCAP FUND
INTERNATIONAL EQUITY FUND
PROSPECTUS
FEBRUARY 1, 1998
TO GET THERE, START HERE.(SM)
FIRSTAR FUNDS (LOGO)
TABLE OF CONTENTS
Expense Summary 3
Financial Highlights 5
Performance History 12
Investment Objectives and Policies 14
Other Investment Information 29
Purchase of Shares 40
Redemption of Shares 42
Exchange of Shares 43
Dividends and Distributions 43
Management of the Funds 44
Investment Limitations 47
Taxes 48
Description of Shares 50
Net Asset Value and Days of Operation 51
FIRSTAR FUNDS, INC. ("Firstar" or the"Company") is a family of eighteen
mutual funds that offer a variety of investment objectives designed to meet the
needs of institutional and individual investors. This Prospectus describes five
money market funds, four bond funds and eight equity funds available to
institutional investors. The Balanced Income Fund is described in a separate
prospectus. (For more complete information about that portfolio, including
charges and expenses, obtain a prospectus from Firstar Funds Center at the
address or telephone number on the back page. Read it carefully before you
invest or send money.)
MONEY MARKET FUNDS
AN INVESTMENT IN THE MONEY MARKET FUNDS IS NEITHER INSURED NOR GUARANTEED BY THE
U.S. GOVERNMENT. THERE CAN BE NO ASSURANCE THAT THESE FUNDS WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
THE MONEY MARKET FUND seeks to provide a high level of taxable current income
consistent with liquidity, the preservation of capital and a stable net asset
value. The Fund attempts to attain its objective by investing in a broad range
of commercial, bank, and government money market instruments.
THE INSTITUTIONAL MONEY MARKET FUND seeks to provide a high level of taxable
current income consistent with liquidity, the preservation of capital and a
stable net asset value. The Fund attempts to attain its objective by investing
in a broad range of commercial, bank, and government money market instruments.
THE U.S. TREASURY MONEY MARKET FUND seeks to provide a high level of current
income exempt from state income taxes consistent with liquidity, the
preservation of capital and a stable net asset value. The Fund pursues its
objective by investing in obligations issued or guaranteed as to principal and
interest by the U.S. Treasury, the interest income from which is exempt from
state income taxation.
THE U.S. GOVERNMENT MONEY MARKET FUND seeks to provide a high level of taxable
current income consistent with liquidity, the preservation of capital and a
stable net asset value. The Fund attempts to attain its objective by investing
in obligations that are issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, and in repurchase agreements relating to such
obligations, irrespective of state income tax considerations.
THE TAX-EXEMPT MONEY MARKET FUND seeks to provide a high level of current income
exempt from federal income taxes consistent with liquidity, the preservation of
capital and a stable net asset value. In pursuing its investment objective, the
Fund invests primarily in short-term debt obligations issued by state and local
governments.
BOND FUNDS
THE SHORT-TERM BOND MARKET FUND seeks to provide an annual rate of total return,
before Fund expenses, comparable to the annual rate of total return of the
Lehman Brothers 1-3 year Government/Corporate Bond Index.
THE INTERMEDIATE BOND MARKET FUND seeks to provide an annual rate of total
return, before Fund expenses, comparable to the annual rate of total return of
the Lehman Brothers Intermediate Government/Corporate Bond Index.
THE TAX-EXEMPT INTERMEDIATE BOND FUND seeks to provide current income that is
substantially exempt from federal income tax and emphasize total return with
relatively low volatility of principal.
THE BOND IMMDEX/TM FUND seeks to provide an annual rate of total return, before
Fund expenses, comparable to the annual rate of total return of the Lehman
Brothers Government/Corporate Bond Index.
EQUITY FUNDS
THE BALANCED GROWTH FUND (formerly Balanced Fund) seeks capital appreciation and
current income with relatively low volatility of capital.
THE GROWTH AND INCOME FUND seeks both reasonable income and long-term capital
appreciation.
THE EQUITY INDEX FUND seeks returns, before Fund expenses, comparable to the
price and yield performance of publicly traded common stocks in the aggregate as
represented by the S&P 500 Stock Index.
THE GROWTH FUND (formerly MidCore Growth Fund) seeks capital appreciation
through investment in securities of large-sized companies.
THE SPECIAL GROWTH FUND seeks capital appreciation through investment in
securities of medium-sized companies.
THE EMERGING GROWTH FUND seeks capital appreciation through investment in
securities of small-sized companies.
THE MICROCAP FUND seeks capital appreciation through investment in securities of
small companies.
The MicroCap Fund is currently closed to new investors and to additional share
purchases except for reinvestment of dividends from the Fund. The Fund may
reopen from time-to-time at the Company's discretion.
THE INTERNATIONAL EQUITY FUND seeks capital appreciation through investing in
foreign securities which the Sub-Adviser believes are undervalued.
Firstar Investment Research & Management Company, LLC ("FIRMCO" or the
"Adviser") serves as investment adviser to each Fund, and the Funds are
sponsored by B. C. Ziegler and Company (the "Distributor"). Hansberger Global
Investors, Inc. (the "Sub-Adviser") serves as the sub-adviser to the
International Equity Fund.
This Prospectus gives vital information about these Funds. For your own benefit
and protection, please read it before you invest, and keep it on hand for future
reference.
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.
SHARES OF THE FUNDS ARE NOT BANK DEPOSITS, AND ARE NEITHER ENDORSED BY, INSURED
BY, GUARANTEED BY, OBLIGATIONS OF, NOR OTHERWISE SUPPORTED BY THE FDIC, THE
FEDERAL RESERVE BOARD, FIRSTAR INVESTMENT RESEARCH & MANAGEMENT COMPANY, LLC,
FIRSTAR TRUST COMPANY, FIRSTAR CORPORATION, ITS AFFILIATES OR ANY OTHER BANK, OR
OTHER GOVERNMENTAL AGENCY. AN INVESTMENT IN THE FIRSTAR FUNDS INVOLVES
INVESTMENT RISKS INCLUDING POSSIBLE LOSS OF PRINCIPAL.
February 1, 1998
EXPENSE SUMMARY
Below is a summary of the shareowner transaction expenses and the annual
operating expenses incurred by the Institutional Money Market Fund and by
Institutional Shares of the Short-Term Bond Market, Intermediate Bond Market,
Tax-Exempt Intermediate Bond, Bond IMMDEX/TM, Balanced Growth, Growth and
Income, Equity Index, Growth, Special Growth, MicroCap, International Equity,
Money Market, U.S. Treasury Money Market, U.S. Government Money Market and Tax-
Exempt Money Market Funds during the fiscal year ended October 31, 1997. Also
below is a summary of the expenses expected to be incurred by the Emerging
Growth Fund during its first twelve months of operation. An example based on the
summaries is also shown.
SHAREOWNER MONEY MARKET BOND EQUITY
TRANSACTION EXPENSES FUNDS FUNDS FUNDS
- --------------------------------------------------------------------------------
Maximum Sales Charge
Imposed on Purchases None None None
Maximum Sales Charge Imposed
on Reinvested Dividends None None None
Deferred Sales Charge None None None
Redemption Fees None None None
Exchange Fees None None None
- --------------------------------------------------------------------------------
ANNUAL FUND TOTAL FUND
OPERATING EXPENSES ADVISORY OTHER OPERATING
(AS A PERCENTAGE FEES (AFTER SHAREOWNER EXPENSES EXPENSES
OF AVERAGE NET FEE 12B-1 SERVICING (AFTER FEE (AFTER FEE
ASSETS) WAIVERS)<F1> FEES<F2> FEES<F2> WAIVERS)<F3> WAIVERS)<F4>
- --------------------------------------------------------------------------------
MONEY MARKET FUNDS:
Money Market Fund 0.33% 0.03% N.A. 0.24% 0.60%
Institutional Money
Market Fund 0.29% 0.00% N.A. 0.06% 0.35%
U.S. Treasury Money
Market Fund 0.40% 0.00% N.A. 0.20% 0.60%
U.S. Government Money
Market Fund 0.47% 0.00% N.A. 0.13% 0.60%
Tax-Exempt Money
Market Fund 0.42% 0.00% N.A. 0.18% 0.60%
BOND FUNDS:
Short-Term Bond
Market Fund 0.32% 0.00% N.A. 0.18% 0.50%
Intermediate Bond
Market Fund 0.35% 0.00% N.A. 0.15% 0.50%
Tax-Exempt Intermediate
Bond Fund 0.19% 0.00% N.A. 0.31% 0.50%
Bond IMMDEX/TM Fund 0.30% 0.00% N.A. 0.12% 0.42%
EQUITY FUNDS:
Balanced Growth Fund 0.57% 0.00% N.A. 0.18% 0.75%
Growth and Income Fund 0.75% 0.00% N.A. 0.12% 0.87%
Equity Index Fund 0.25% 0.00% N.A. 0.13% 0.38%
Growth Fund 0.75% 0.00% N.A. 0.14% 0.89%
Special Growth Fund 0.75% 0.00% N.A. 0.12% 0.87%
Emerging Growth Fund 0.47% 0.00% N.A. 0.43% 0.90%
MicroCap Fund 1.50% 0.00% N.A. 0.20% 1.70%
International
Equity Fund 0.77% 0.00% N.A. 0.73% 1.50%
<F1> The Adviser has voluntarily agreed to waive a portion of its fees. These
waivers are expected to remain in effect for the current fiscal year.
However, these waivers are voluntary and can be modified or terminated at
any time without the Funds' consent. Absent such waivers, advisory fees
would be 0.50%, 0.50%, 0.50%, 0.50%, 0.50%, 0.60%, 0.50%, 0.50%, 0.75%,
0.75%, 0.75%, 0.75%, 1.50% and 1.45% for the Money Market, Institutional
Money Market, U.S. Treasury Money Market, U.S. Government Money Market,
Tax-Exempt Money Market, Short-Term Bond Market, Intermediate Bond
Market, Tax-Exempt Intermediate Bond, Balanced Growth, Growth and Income,
Growth, Emerging Growth, Microcap and International Equity Funds,
respectively. See "Management of the Funds" in this Prospectus for a more
complete description and the financial statements for the Funds
incorporated into the Statement of Additional Information ("SAI").
<F2> The total of all 12b-1 fees and Shareowner Servicing Fees may not exceed,
in the aggregate, the annual rate of 0.25% of a Fund's average daily net
assets. Only the Money Market Fund intends to pay 12b-1 fees for the
current year.
<F3> Absent administrative fee waivers, other expenses would have 0.31, 0.15%,
0.27%, 0.20%, 0.25%, 0.25%, 0.23%, 0.38%, 0.19%, 0.25%, 0.19%, 0.20%
0.21%, 0.20%, 0.51%, 0.28% and 0.80% for the Money Market, Institutional
Money Market, U.S. Treasury Money Market, U.S. Government Money Market
and Tax-Exempt Money Market, Short-Term Bond Market, Intermediate Bond
Market, Tax-Exempt Intermediate Bond, Bond IMMDEX/TM, Balanced Growth,
Growth and Income, Equity Index, Growth, Special Growth, Emerging Growth,
MicroCap and International Equity Funds, respectively. The administrative
fee waivers are expected to remain in effect for the current fiscal year.
However, these waivers are voluntary and can be modified or terminated at
any time without the Funds' consent.
<F4> Absent fee waivers, total operating expenses would have been 0.84%,
0.65%, 0.77%, 0.70%, 0.75%, 0.85%, 0.73%, 0.88%, 0.49%, 1.00%, 0.94%,
0.45%, 0.96%, 0.95%, 1.26%, 1.78% and 2.25% for the Money Market,
Institutional Money Market, U.S.Treasury Money Market, U.S.
Government Money Market, Tax-Exempt Money Market, Short-Term Bond Market,
Intermediate Bond Market, Tax-Exempt Intermediate Bond, Bond IMMDEX/TM,
Balanced Growth, Growth and Income, Equity Index, Growth, Special Growth,
Emerging Growth, MicroCap and International Equity Funds, respectively.
Example: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual returns, and (2) redemption of your investment at the end of the
following periods:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------------------------------------------------------------------------
Money Market Fund $ 6 $19 $33 $ 75
Institutional Money Market Fund 4 11 20 44
U.S. Treasury Money Market Fund 6 19 33 75
U.S. Government Money Market Fund 6 19 33 75
Tax-Exempt Money Market Fund 6 19 33 75
Short-Term Bond Market Fund 5 16 28 63
Intermediate Bond Market Fund 5 16 28 63
Tax-Exempt Intermediate Bond Fund 5 16 28 63
Bond IMMDEX/TM Fund 4 13 24 53
Balanced Growth Fund 8 24 42 93
Growth and Income Fund 9 28 48 107
Equity Index Fund 4 12 21 48
Growth Fund 9 28 49 110
Special Growth Fund 9 28 48 107
Emerging Growth Fund 9 29 50 111
MicroCap Fund 17 54 92 201
International Equity Fund 15 47 82 179
----------------------------------------------------------------------------
The foregoing tables are intended to assist investors in understanding the
expenses that shareowners bear either directly or indirectly and reflect
anticipated fees. In addition, Institutions may charge fees for providing
services in connection with their clients' investments in a Fund's shares.
The example shown above should not be considered a representation of past or
future investment return or operating expenses. Actual investment return and
operating expenses may be more or less than those shown. The Emerging Growth
Fund is new and the above figures are based on expenses expected during its
first twelve months of operations. Information regarding the Funds' actual
performance appears in their annual report to shareowners. Each shareowner of
record at the close of the fiscal year will be sent the annual report.
FINANCIAL HIGHLIGHTS
The financial highlights for each of the Funds have been audited by Price
Waterhouse LLP, independent accountants, whose report, which appears in the
annual report to shareowners for the fiscal year ended October 31, 1997, is
incorporated by reference into the SAI. Prior to January 9, 1995, the Short-Term
Bond Market, Intermediate Bond Market, Tax-Exempt Intermediate Bond, Bond
IMMDEX/TM, Balanced Growth, Growth and Income, Equity Index, Growth, Special
Growth and International Equity Funds offered only one class of shares to both
institutional and retail investors. On that date, the Funds began offering
Institutional Shares to institutional investors as described in this Prospectus
and Retail Shares to retail investors as described in a separate prospectus. The
tables on the following pages should be read in conjunction with the financial
statements and related notes also incorporated by reference into the SAI. You
may obtain the SAI and the annual report to shareowners, which contains
additional performance information, free of charge by calling or writing to the
Firstar Funds Center at the address listed on the back cover of this Prospectus.
<TABLE>
<CAPTION>
FINANCIAL
HIGHLIGHTS Supplemental Data and Ratios
-------------------------------------------------
Ratio of
Net Net Net Net
Asset Dividends Asset Assets, Ratio of Investment
Value, Net from Net Value, End of Net Expenses Income to
Beginning Investment Investment End of Period to Average Average Total
Of Period Income Income Period (000s) Net Assets Net Assets Return
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MONEY MARKET FUND
Mar. 16, 1988 <F1>
through Oct.
31, 1988 $1.00 $0.05 $(0.05) $1.00 $100,373 0.44%<F3> 7.35%<F3> 4.63%<F4>
Year Ended 1989 1.00 0.08 (0.08) 1.00 201,097 0.60% 8.66% 9.01%
Year Ended 1990 1.00 0.08 (0.08) 1.00 762,170 0.51% 7.81% 8.14%
Year Ended 1991 1.00 0.06 (0.06) 1.00 628,697 0.50% 6.28% 6.39%
Year Ended 1992<F2> 1.00 0.04 (0.04) 1.00 146,012 0.58% 3.84% 3.73%
Year Ended 1993 1.00 0.03 (0.03) 1.00 132,568 0.60% 2.67% 2.71%
Year Ended 1994 1.00 0.03 (0.03) 1.00 165,018 0.60% 3.44% 3.42%
Year Ended 1995 1.00 0.05 (0.05) 1.00 172,261 0.60% 5.36% 5.51%
Year Ended 1996 1.00 0.05 (0.05) 1.00 224,036 0.60% 4.94% 5.06%
Year Ended 1997 1.00 0.05 (0.05) 1.00 261,017 0.60% 4.98% 5.12%
INSTITUTIONAL
MONEY MARKET FUND
Apr. 26, 1991<F1>
through Oct.
31, 1991 1.00 0.03 (0.03) 1.00 189,048 0.50%<F5> 5.47%<F5> 2.87%<F6>
Year Ended 19922 1.00 0.04 (0.04) 1.00 696,132 0.41% 3.75% 3.88%
Year Ended 1993 1.00 0.03 (0.03) 1.00 588,301 0.38% 2.87% 2.92%
Year Ended 1994 1.00 0.04 (0.04) 1.00 754,636 0.37% 3.64% 3.65%
Year Ended 1995 1.00 0.06 (0.06) 1.00 716,566 0.35% 5.63% 5.77%
Year Ended 1996 1.00 0.05 (0.05) 1.00 750,051 0.35% 5.19% 5.32%
Year Ended 1997 1.00 0.05 (0.05) 1.00 1,201,341 0.35% 5.23% 5.38%
U.S. TREASURY MONEY
MARKET FUND
Apr. 29, 1991<F1>
through Oct.
31, 1991 1.00 0.03 (0.03) 1.00 36,267 0.52%<F5> 5.23%<F5> 2.69%<F6>
Year Ended 1992<F2> 1.00 0.04 (0.04) 1.00 37,342 0.60% 3.42% 3.48%
Year Ended 1993 1.00 0.03 (0.03) 1.00 40,744 0.60% 2.55% 2.59%
Year Ended 1994 1.00 0.03 (0.03) 1.00 56,020 0.60% 3.14% 3.20%
Year Ended 1995 1.00 0.05 (0.05) 1.00 64,655 0.60% 5.04% 5.16%
Year Ended 1996 1.00 0.05 (0.05) 1.00 53,430 0.60% 4.70% 4.80%
Year Ended 1997 1.00 0.05 (0.05) 1.00 78,478 0.60% 4.67% 4.80%
U.S. GOVERNMENT MONEY
MARKET FUND
Aug. 1, 1988<F1>
through Oct.
31, 1988 1.00 0.02 (0.02) 1.00 49,069 0.50%<F3> 7.56%<F3> 1.91%<F4>
Year Ended 1989 1.00 0.08 (0.08) 1.00 101,497 0.61% 8.43% 8.72%
Year Ended 1990 1.00 0.08 (0.08) 1.00 153,480 0.60% 7.55% 7.84%
Year Ended 1991 1.00 0.06 (0.06) 1.00 237,752 0.60% 5.80% 6.02%
Year Ended 1992<F2> 1.00 0.04 (0.04) 1.00 221,521 0.60% 3.56% 3.60%
Year Ended 1993 1.00 0.03 (0.03) 1.00 203,165 0.60% 2.59% 2.63%
Year Ended 1994 1.00 0.03 (0.03) 1.00 183,591 0.60% 3.29% 3.35%
Year Ended 1995 1.00 0.05 (0.05) 1.00 163,068 0.60% 5.24% 5.37%
Year Ended 1996 1.00 0.05 (0.05) 1.00 198,334 0.60% 4.84% 4.96%
Year Ended 1997 1.00 0.05 (0.05) 1.00 198,592 0.60% 4.83% 4.99%
TAX-EXEMPT MONEY
MARKET FUND
June 27, 1988<F1>
through Oct.
31, 1988 1.00 0.02 (0.02) 1.00 10,838 0.52%<F3> 5.10%<F3> 1.78%<F4>
Year Ended 1989 1.00 0.06 (0.06) 1.00 18,429 0.60% 5.82% 5.99%
Year Ended 1990 1.00 0.05 (0.05) 1.00 16,424 0.64% 5.38% 5.51%
Year Ended 1991 1.00 0.04 (0.04) 1.00 29,714 0.63% 4.34% 4.49%
Year Ended 1992<F2> 1.00 0.03 (0.03) 1.00 74,343 0.60% 2.83% 2.91%
Year Ended 1993 1.00 0.02 (0.02) 1.00 73,621 0.60% 2.12% 2.17%
Year Ended 1994 1.00 0.02 (0.02) 1.00 70,436 0.60% 2.23% 2.25%
Year Ended 1995 1.00 0.03 (0.03) 1.00 84,084 0.60% 3.36% 3.42%
Year Ended 1996 1.00 0.03 (0.03) 1.00 79,328 0.60% 3.09% 3.13%
Year Ended 1997 1.00 0.03 (0.03) 1.00 108,639 0.60% 3.06% 3.12%
<FN>
<F1> Commencement of operations.
<F2> Effective February 3, 1992, FIRMCO assumed the investment advisory responsibilities of Firstar Trust Company,
an affiliate of FIRMCO.
<F3> Annualized for the period ended October 31, 1988.
<F4> Not annualized for the period ended October 31, 1988.
<F5> Annualized for the period ended October 31, 1991.
<F6> Not annualized for the period ended October 31, 1991.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL Income From Investment Operations Less Distributions
HIGHLIGHTS (CONTINUED) ----------------------------------------------------- -----------------------------------------
Net Asset Net Realized and
Value, Net Unrealized Gains Total from Dividends from Distributions
Beginning Investment or (Losses) on Investment Net Investment from Total
of Period Income<F3> Securities Operations Income Capital Gains Distributions
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SHORT-TERM BOND MARKET
Dec. 29, 1989<F1> through
Oct. 31, 1990 $10.00 $0.66 $(0.21) $0.45 $(0.66) $ - $(0.66)
Year Ended 1991 9.79 0.73 0.54 1.27 (0.73) - (0.73)
Year Ended 1992<F2> 10.33 0.64 0.29 0.93 (0.64) (0.02) (0.66)
Year Ended 1993 10.60 0.58 0.10 0.68 (0.58) (0.14) (0.72)
Year Ended 1994 10.56 0.56 (0.41) 0.15 (0.56) (0.12) (0.68)
Year Ended 1995 10.03 0.63 0.24 0.87 (0.62) - (0.62)
Year Ended 1996 10.28 0.61 (0.03) 0.58 (0.61) - (0.61)
Year Ended 1997 10.25 0.62 0.02 0.64 (0.62) - (0.62)
INTERMEDIATE BOND MARKET
Jan. 5, 1993<F1> through
Oct. 31, 1993 10.00 0.40 0.45 0.85 (0.40) - (0.40)
Year Ended 1994 10.45 0.51 (0.69) (0.18) (0.51) (0.09) (0.60)
Year Ended 1995 9.67 0.62 0.53 1.15 (0.61) - (0.61)
Year Ended 1996 10.21 0.59 (0.02) 0.57 (0.59) - (0.59)
Year Ended 1997 10.19 0.60 0.12 0.72 (0.60) - (0.60)
TAX-EXEMPT INTERMEDIATE BOND
Feb. 8, 1993<F1> through
Oct. 31, 1993 10.00 0.27 0.26 0.53 (0.27) - (0.27)
Year Ended 1994 10.26 0.41 (0.48) (0.07) (0.41) - (0.41)
Year Ended 1995 9.78 0.44 0.46 0.90 (0.44) - (0.44)
Year Ended 1996 10.24 0.43 (0.03) 0.40 (0.43) - (0.43)
Year Ended 1997 10.21 0.44 0.15 0.59 (0.44) - (0.44)
BOND IMMDEX/TM
Dec. 29, 1989<F1> through
Oct. 31, 1990 25.00 1.67 (0.66) 1.01 (1.49) - (1.49)
Year Ended 1991 24.52 1.85 1.98 3.83 (1.85) - (1.85)
Year Ended 1992<F2> 26.50 1.75 0.96 2.71 (1.76) (0.14) (1.90)
Year Ended 1993 27.31 1.68 1.83 3.51 (1.70) (0.21) (1.91)
Year Ended 1994 28.91 1.65 (2.74) (1.09) (1.65) (0.50) (2.15)
Year Ended 1995 25.67 1.74 2.29 4.03 (1.84) (0.04) (1.88)
Year Ended 1996 27.82 1.70 (0.27) 1.43 (1.70) - (1.70)
Year Ended 1997 27.55 1.75 0.61 2.36 (1.75) - (1.75)
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL Supplemental Data and Ratios
HIGHLIGHTS (CONTINUED) ----------------------------------------------------------------------
Ratio of Net
Net Asset Net Ratio of Net Investment
Value, Assets, Expenses to Income to Portfolio
End Total End of Average Net Average Net Turnover
of Period Return<F4> Period (ooos) Assets<F5> Assets<F5> Rate<F4>
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SHORT-TERM BOND MARKET
Dec. 29, 1989<F1> through
Oct. 31, 1990 $ 9.79 4.64% $ 22,731 0.60% 7.93% 57.40%
Year Ended 1991 10.33 13.39% 63,183 0.60% 7.13% 66.80%
Year Ended 1992<F2> 10.60 9.28% 129,409 0.60% 6.00% 82.20%
Year Ended 1993 10.56 6.70% 142,518 0.52% 5.53% 87.62%
Year Ended 1994 10.03 1.46% 122,368 0.50% 5.43% 76.13%
Year Ended 1995 10.28 8.95% 94,959 0.50% 6.23% 100.58%
Year Ended 1996 10.25 5.80% 147,466 0.50% 5.92% 59.62%
Year Ended 1997 10.27 6.47% 136,084 0.50% 6.04% 77.12%
INTERMEDIATE BOND MARKET
Jan. 5, 1993<F1> through
Oct. 31, 1993 10.45 8.58% 56,794 0.50% 4.65% 82.37%
Year Ended 1994 9.67 (1.73%) 88,306 0.50% 5.19% 56.25%
Year Ended 1995 10.21 12.25% 128,941 0.50% 6.26% 66.69%
Year Ended 1996 10.19 5.77% 173,468 0.50% 5.84% 59.29%
Year Ended 1997 10.31 7.36% 254,521 0.50% 5.96% 40.61%
TAX-EXEMPT INTERMEDIATE BOND
Feb. 8, 1993<F1> through
Oct. 31, 1993 10.26 5.36% 23,866 0.59% 3.75% 3.23%
Year Ended 1994 9.78 (0.73%) 26,167 0.60% 4.04% 58.54%
Year Ended 1995 10.24 9.38% 27,595 0.51% 4.45% 44.13%
Year Ended 1996 10.21 4.02% 36,652 0.50% 4.24% 30.46%
Year Ended 1997 10.36 5.96% 52,208 0.50% 4.36% 11.22%
BOND IMMDEX/TM
Dec. 29, 1989<F1> through
Oct. 31, 1990 24.52 4.21% 44,241 0.50% 8.10% 111.28%
Year Ended 1991 26.50 16.16% 90,034 0.50% 7.85% 131.69%
Year Ended 1992<F2> 27.31 10.49% 181,421 0.50% 6.92% 37.72%
Year Ended 1993 28.91 13.30% 260,486 0.50% 6.10% 81.18%
Year Ended 1994 25.67 (3.89%) 256,778 0.48% 6.14% 49.70%
Year Ended 1995 27.82 16.26% 290,274 0.44% 6.51% 41.67%
Year Ended 1996 27.55 5.35% 370,556 0.43% 6.23% 33.38%
Year Ended 1997 28.16 8.90% 408,018 0.42% 6.33% 35.12%
<FN>
<F1> Commencement of operations.
<F2> Effective February 3, 1992, FIRMCO assumed the investment advisory responsibilities of Firstar Trust Company, an affiliate of
FIRMCO.
<F3> For the Tax-Exempt Intermediate Bond Fund, substantially all investment income is exempt from federal income tax.
<F4> Not annualized for the period ended October 31, 1990 for the Short-Term Bond Market and Bond IMMDEX/TM Funds and for the
period ended October 31, 1993 for the Intermediate Bond Market and Tax-Exempt Intermediate Bond Funds.
<F5> Annualized for the period ended October 31, 1990 for the Short-Term Bond Market and Bond IMMDEX/TM Funds and for the period
ended October 31, 1993 for the Intermediate Bond Market and Tax-Exempt Intermediate Bond Funds.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL Income from Investment Operations
HIGHLIGHTS (CONTINUED) --------------------------------------------------------
Net Asset Net Realized and
Value, Net Unrealized Gains Total from
Beginning Investment or (Losses) on Investmentn
of Period Income Securities Operations
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCED GROWTH
Mar. 30, 1992<F1> through Oct. 31, 1992 $20.00 $0.28 $ 0.44 $ 0.72
Year Ended 1993 20.49 0.47 2.27 2.74
Year Ended 1994 22.76 0.44 (0.66) (0.22)
Year Ended 1995 22.10 0.53 3.78 4.31
Year Ended 1996 25.90 0.55 2.62 3.17
Year Ended 1997 27.99 0.66 4.20 4.86
GROWTH AND INCOME
Dec. 29, 1989<F1> through Oct. 31, 1990 20.00 0.69 (2.05) (1.36)
Year Ended 1991 17.99 0.79 3.75 4.54
Year Ended 1992 21.72 0.69 0.56 1.25
Year Ended 1993<F3> 22.27 0.56 1.63 2.19
Year Ended 1994 23.70 0.43 (0.03) (0.40)
Year Ended 1995 23.09 0.42 5.14 5.56
Year Ended 1996 27.63 0.50 6.61 7.11
Year Ended 1997 33.08 0.46 8.94 9.40
EQUITY INDEX
Dec. 29, 1989<F1> through Oct. 31, 1990 25.00 0.59 (3.41) (2.82)
Year Ended 1991 21.63 0.73 6.31 7.04
Year Ended 1992<F2> 27.87 0.73 1.86 2.59
Year Ended 1993 29.72 0.75 3.32 4.07
Year Ended 1994 33.04 0.77 0.35 1.12
Year Ended 1995 33.41 0.76 7.71 8.47
Year Ended 1996 41.08 0.91 8.68 9.59
Year Ended 1997 49.43 0.95 14.33 15.28
GROWTH
Dec. 29, 1992<F1> through Oct. 31, 1993 20.09 0.09 1.32 1.41
Year Ended 1994 21.40 0.06 0.06 0.12
Year Ended 1995 21.47 0.03 4.16 4.19
Year Ended 1996 25.61 (0.01) 4.83 4.82
Year Ended 1997 30.43 0.04 6.31 6.35
SPECIAL GROWTH
Dec. 28, 1989<F1> through Oct. 31, 1990 20.00 0.22 (2.30) (2.08)
Year Ended 1991 17.72 0.27 10.34 10.61
Year Ended 1992<F2> 28.05 0.17 2.18 2.35
Year Ended 1993 28.50 0.07 4.47 4.54
Year Ended 1994 32.34 0.04 0.85 0.89
Year Ended 1995 33.19 0.00 8.49 8.49
Year Ended 1996 41.47 (0.04) 4.74 4.70
Year Ended 1997 41.58 (0.11) 8.49 8.38
EMERGING GROWTH
Aug. 15, 1997<F1> through Oct. 31, 1997 10.00 0.02 0.29 0.31
MICROCAP
Aug.1, 1995<F1> through June 30, 1996 10.00 (0.02) 6.14 6.12
July 1, 1996 through Oct. 31, 1996 15.45 (0.07) 0.82 0.75
Year Ended 1997 16.20 (0.15) 4.27 4.12
INTERNATIONAL EQUITY
Apr. 28, 1994<F1> through Oct. 31, 1994 20.00 0.04 (0.05) (0.01)
Year Ended 1995 19.99 0.12 (0.87) (0.75)
Year Ended 1996 19.99 0.11 1.44 1.55
Year Ended 1997<F6> 20.27 0.10 (1.10) (1.00)
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL Less Distributions
HIGHLIGHTS (CONTINUED) --------------------------------------------
Net Asset
Dividends from Distributions Value,
Net Investment from Total End
Income Capital Gains Distributions of Period
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCED GROWTH
Mar. 30, 1992<F1> through Oct. 31, 1992 $(0.23) $ - $(0.23) $20.49
Year Ended 1993 (0.47) - (0.47) 22.76
Year Ended 1994 (0.44) - (0.44) 22.10
Year Ended 1995 (0.51) - (0.51) 25.90
Year Ended 1996 (0.53) (0.55) (1.08) 27.99
Year Ended 1997 (0.66) (1.68) (2.34) 30.51
GROWTH AND INCOME
Dec. 29, 1989<F1> through Oct. 31, 1990 (0.65) - (0.65) 17.99
Year Ended 1991 (0.81) - (0.81) 21.72
Year Ended 1992 (0.70) - (0.70) 22.27
Year Ended 1993<F3> (0.57) (0.19) (0.76) 23.70
Year Ended 1994 (0.42) (0.59) (1.01) 23.09
Year Ended 1995 (0.42) (0.60) (1.02) 27.63
Year Ended 1996 (0.47) (1.19) (1.66) 33.08
Year Ended 1997 (0.47) (2.73) (3.20) 39.28
EQUITY INDEX
Dec. 29, 1989<F1> through Oct. 31, 1990 (0.55) - (0.55) 21.63
Year Ended 1991 (0.74) (0.06) (0.80) 27.87
Year Ended 1992<F2> (0.73) (0.01) (0.74) 29.72
Year Ended 1993 (0.75) - (0.75) 33.04
Year Ended 1994 (0.75) - (0.75) 33.41
Year Ended 1995 (0.74) (0.06) (0.80) 41.08
Year Ended 1996 (0.89) (0.35) (1.24) 49.43
Year Ended 1997 (0.94) (0.61) (1.55) 63.16
GROWTH
Dec. 29, 1992<F1> through Oct. 31, 1993 (0.10) - (0.10) 21.40
Year Ended 1994 (0.05) - (0.05) 21.47
Year Ended 1995 (0.05) - (0.05) 25.61
Year Ended 1996 - - - 30.43
Year Ended 1997 - (1.30) (1.30) 35.48
SPECIAL GROWTH
Dec. 28, 1989<F1> through Oct. 31, 1990 (0.20) - (0.20) 17.72
Year Ended 1991 (0.28) - (0.28) 28.05
Year Ended 1992<F2> (0.18) (1.72) (1.90) 28.50
Year Ended 1993 (0.08) (0.62) (0.70) 32.34
Year Ended 1994 (0.04) - (0.04) 33.19
Year Ended 1995 - (0.21) (0.21) 41.47
Year Ended 1996 - (4.59) (4.59) 41.58
Year Ended 1997 - (5.26) (5.26) 44.70
EMERGING GROWTH
Aug. 15, 1997<F1> through Oct. 31, 1997 - - - 10.31
MICROCAP
Aug.1, 1995<F1> through June 30, 1996 (0.05) (0.62) (0.67) 15.45
July 1, 1996 through Oct. 31, 1996 - - - 16.20
Year Ended 1997 - (2.75) (2.75) 17.57
INTERNATIONAL EQUITY
Apr. 28, 1994<F1> through Oct. 31, 1994 - - - 19.99
Year Ended 1995 (0.04) (0.01) (0.05) 19.19
Year Ended 1996 (0.10) (0.37) (0.47) 20.27
Year Ended 1997<F6> (0.17) (0.46) (0.63) 18.64
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL Supplemental Data and Ratios
HIGHLIGHTS (CONTINUED) -----------------------------------------------------------------------
Ratio of Net
Net Ratio of Net Investment
Assets, Expenses to Income to Portfolio Average
Total End of Average Net Average Net Turnover Commission
Return<F4> Period (000s) Assets<F5> Assets<F5> Rate<F4> Rate
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCED GROWTH
Mar. 30, 1992<F1> through Oct. 31, 1992 3.72% $ 45,653 0.75% 2.48% 29.04% N/A
Year Ended 1993 13.49% 82,099 0.75% 2.24% 71.60% N/A
Year Ended 1994 (0.93%) 94,657 0.75% 2.03% 59.77% N/A
Year Ended 1995 19.79% 104,552 0.75% 2.24% 61.87% N/A
Year Ended 1996 12.56% 129,415 0.75% 2.05% 63.91% $0.0581
Year Ended 1997 18.39% 164,382 0.75% 2.31% 69.90% 0.0552
GROWTH AND INCOME
Dec. 29, 1989<F1> through Oct. 31, 1990 (6.96%) 65,741 0.74% 4.39% 49.85% N/A
Year Ended 1991 25.63% 103,414 0.75% 3.93% 28.05% N/A
Year Ended 1992 5.82% 135,713 0.75% 3.16% 31.25% N/A
Year Ended 1993<F3> 9.93% 160,704 0.88% 2.44% 86.24% N/A
Year Ended 1994 1.84% 164,053 0.90% 1.89% 56.85% N/A
Year Ended 1995 25.00% 162,752 0.90% 1.70% 47.85% N/A
Year Ended 1996 26.90% 226,888 0.90% 1.67% 51.37% $0.0573
Year Ended 1997 30.83% 366,020 0.87% 1.34% 31.36% 0.0558
EQUITY INDEX
Dec. 29, 1989<F1> through Oct. 31, 1990 (11.46%) 35,569 0.49% 3.01% 9.09% N/A
Year Ended 1991 32.90% 51,481 0.50% 2.82% 1.38% N/A
Year Ended 1992<F2> 9.36% 81,070 0.50% 2.48% 5.50% N/A
Year Ended 1993 13.79% 83,820 0.50% 2.32% 13.78% N/A
Year Ended 1994 3.51% 107,563 0.50% 2.38% 13.28% N/A
Year Ended 1995 26.02% 138,106 0.46% 2.34% 4.61% N/A
Year Ended 1996 23.68% 212,072 0.41% 2.01% 7.48% $0.0604
Year Ended 1997 31.38% 315,759 0.38% 1.66% 9.81% 0.0592
GROWTH
Dec. 29, 1992<F1> through Oct. 31, 1993 7.53% 84,467 0.89% 0.57% 46.29% N/A
Year Ended 1994 0.56% 113,197 0.88% 0.30% 33.24% N/A
Year Ended 1995 19.55% 134,428 0.90% 0.13% 49.84% N/A
Year Ended 1996 18.82% 155,293 0.90% (0.04)% 56.75% $0.0582
Year Ended 1997 21.56% 181,650 0.89% 0.09% 62.09% 0.0557
SPECIAL GROWTH
Dec. 28, 1989<F1> through Oct. 31, 1990 (10.47%) 39,179 0.74% 1.41% 41.79% N/A
Year Ended 1991 60.23% 96,017 0.75% 1.10% 48.39% N/A
Year Ended 1992<F2> 8.86% 205,207 0.76% 0.65% 31.94% N/A
Year Ended 1993 16.15% 347,130 0.88% 0.24% 58.80% N/A
Year Ended 1994 2.77% 395,584 0.89% 0.13% 69.74% N/A
Year Ended 1995 25.79% 434,228 0.90% 0.00% 79.25% N/A
Year Ended 1996 12.58% 482,857 0.88% (0.10)% 103.34% $0.0576
Year Ended 1997 22.44% 569,028 0.87% (0.25)% 97.40% 0.0550
EMERGING GROWTH
Aug. 15, 1997<F1> through Oct. 31, 1997 3.10% 48,044 0.90% 1.18% 14.51% $0.0493
MICROCAP
Aug.1, 1995<F1> through June 30, 1996 63.93% 63,595 1.74% (0.16)% 283.67% $0.0423
July 1, 1996 through Oct. 31, 1996 4.85% 66,368 1.72% (1.44)% 64.44% 0.0460
Year Ended 1997 30.12% 103,840 1.70% (1.20)% 158.39% 0.0475
INTERNATIONAL EQUITY
Apr. 28, 1994<F1> through Oct. 31, 1994 (0.05%) 23,756 1.49% 0.44% 6.55% N/A
Year Ended 1995 (3.75%) 31,187 1.50% 0.66% 15.12% N/A
Year Ended 1996 8.21% 43,182 1.50% 0.54% 31.57% $0.0167
Year Ended 1997<F6> (5.10%) 57,206 1.50% 0.50% 97.09% 0.0087
<FN>
<F1> Commencement of operations.
<F2> Effective February 3, 1992, FIRMCO assumed the investment advisory responsibilities of Firstar Trust Company, an affiliate
of FIRMCO.
<F3> Effective June 17, 1993, FIRMCO assumed the investment advisory responsibilities of Firstar Trust Company, an affiliate of
FIRMCO.
<F4> Not annualized for the period ended October 31, 1990 for the Growth and Income, Equity Index and Special Growth Funds, for
the period ended October 31, 1992 for the Balanced Growth Fund, for the period ended October 31, 1993 for the Growth Fund,
for the period ended October 31, 1997 for the Emerging Growth Fund, for the period ended June 30, 1996 and October 31, 1996
for the MicroCap Fund and for the period ended October 31, 1994 for the International Equity Fund.
<F5> Annualized for the period ended October 31, 1990 for the Growth and Income, Equity Index and Special Growth Funds, for the
period ended October 31, 1992 for the Balanced Growth Fund, for the period ended October 31, 1993 for the Growth Fund, for
the period ended October 31, 1997 for the Emerging Growth Fund, for the period ended June 30, 1996 and October 31, 1996 for
the MicroCap Fund and for the period ended October 31, 1994 for the International Equity Fund.
<F6> Effective September 2, 1997, Hansberger Global Investors, Inc. assumed the investment sub-advisory responsibilities of
State Street Global Advisors.
</TABLE>
PERFORMANCE
HISTORY
SINCE INCEPTION
AVERAGE TOTAL RETURN* 1 YEAR 5 YEARS 10 YEARS (INCEPTION DATE)
- -------------------------------------------------------------------------------
SHORT-TERM BOND MARKET 6.47% 5.84% 7.48% N/A
INTERMEDIATE BOND MARKET 7.36% - - 6.59% (Jan. 5, 1993)
TAX-EXEMPT INTERMEDIATE
BOND 5.96% - - 5.02% (Feb. 8, 1993)
BOND IMMDEX/TM 8.90% 7.75% 8.90% N/A
BALANCED GROWTH 18.39% 12.40% - 11.75% (Mar. 30, 1992)
GROWTH AND INCOME 30.83% 18.35% - 14.40% (Dec. 29, 1989)
EQUITY INDEX 31.38% 19.24% 16.60% N/A
GROWTH 21.56% - - 13.77% (Dec. 29, 1992)
EMERGING GROWTH* - - - 3.10% (Aug. 15, 1997)
MICROCAP 30.12% - - 42.97% (Aug. 1, 1995)
INTERNATIONAL EQUITY (5.10)% - - (0.34)% (Apr. 28, 1994)
SPECIAL GROWTH 22.44% 15.65% - 16.13% (Dec. 28, 1989)
FIRMCO'S COLLECTIVE
INVESTMENT "B FUND" 29.66% 17.51% 18.42% N/A
- -------------------------------------------------------------------------------
* Average annual total return calculations are for periods ended October 31,
1997. The return for the Emerging Growth Fund represents its cumulative
return from inception and is not annualized.
** FIRMCO'S Collective Investment "B Fund" is a private account managed using
substantially the same investment objective, policies and restrictions as
the Firstar Special Growth Fund.
The performance of the Short-Term Bond Market, Bond IMMDEX/TM, and Equity Index
Funds for the period prior to December 29, 1989 is represented by the
performance of collective investment funds ("Collective Investment Funds")
which operated prior to the effectiveness of the registration statement of the
Firstar Short-Term Bond Market, Bond IMMDEX/TM and Equity Index Funds. At the
time of the Firstar Short- Term Bond Market, Bond IMMDEX/TM and Equity Index
Funds' inception, each Collective Investment Fund was operated using materially
equivalent investment objectives, policies, guidelines and restrictions as its
corresponding Firstar Fund. In connection with the Firstar Short-Term Bond
Market, Bond IMMDEX/TM and Equity Index Funds' commencement of operations, on
December 29, 1989, each Collective Investment Fund transferred its assets to its
Firstar Fund equivalent.
At the time of the transfer, the Adviser did not manage any other collective
investment or common trust funds using materially equivalent objectives,
policies, guidelines and restrictions to those of the Short-Term Bond Market,
Bond IMMDEX/TM and Equity Index Funds.
The Special Growth Fund is managed by FIRMCO using substantially the same
investment objective, polices and restrictions as the FIRMCO managed collective
investment fund Special Equity Growth Fund B (the "B Fund").
During the period prior to August 1997, the Special Growth Fund was managed
with an investment focus which differed from that of the B Fund. At that time,
the Special Growth Fund's prior focus on small- to medium-sized companies
was shifted to a focus on companies with a slightly larger minimim
capitalization, with a slightly higher range of anticipated median
capitalizations for the Fund. As a result of this shift, the Special Growth
Fund currently focuses on companies meeting the same capitalization size
criteria as those for the B Fund is relevant to a shareholder in the Firstar
Special Growth Fund.
The Collective Investment Funds were not and the B Fund is not open to the
public generally, nor registered under the Investment Company Act of 1940 (the
"1940 Act") or subject to certain restrictions that are imposed by the 1940
Act and the Internal Revenue Code. If the Collective Investment Funds and the B
Fund had been registered under the 1940 Act, performance may have been adversely
affected. Performance of the Collective Investment Funds has been restated to
reflect the Firstar Short-Term Bond Market, Bond IMMDEX and Equity Index Funds'
respective actual expenses during each such Fund's first fiscal year. The
performance of the B Fund has been restated to reflect the Special Growth Fund's
current expenses for institutional shares. Performance quotations of each
Collective Investment Fund and of the B Fund represent past performance of the
FIRMCO managed collective funds, which are separate and distinct from Firstar
Special Growth Fund, Short-Term Bond Market Fund, Bond IMMDEX Fund and Equity
Index Fund; do not represent past performance of those Funds; and should not be
considered as representative of future results of the Funds.
Effective September 2, 1997, Hansberger Global Investors, Inc. became investment
sub-advisor to the Firstar International Equity Fund. The Firstar International
Equity Fund is managed by the portfolio management team of James Chaney, Robert
Mazuelos and John Hock of Hansberger Global Investors, Inc. Mr. Chaney is
primarily responsible for the day to day management of the Fund and he uses
substantially the same investment objective, policies, restrictions and
strategies as the Templeton Institutional Funds, Inc. Foreign Equity Series (the
"Templeton Fund"), which was previously managed by Mr. Chaney. During Mr.
Chaney's tenure as the Templeton Fund's portfolio manager from October 1, 1993
to June 30, 1996, the Templeton Fund's average annual total return was 13.59%
and the average annual total return for the year ended June 30, 1996 was 16.89%.
During the period October 1, 1993 through June 30,1996, the expense ratio of the
Templeton Fund ranged between 1.00% and .88% of the Fund's average net assets
and the Templeton Fund did not waive any portion of its fees. The expense ratio
of the Firstar International Equity Fund since inception has been 1.50% of the
Fund's average net assets. Performance quotations of the Templeton Fund
represent past performance of the Templeton managed fund, which is separate and
distinct from the Firstar International Equity Fund; do not represent past
performance of the International Equity Fund; and should not be considered as
representative of future results of the International Equity Fund.
Performance assumes the reinvestment of all net investment income and capital
gains and reflects fee waivers. In the absence of fee waivers, performance would
be reduced. Performance quotations represent past performance, and should not be
considered as representative of future results.
INVESTMENT OBJECTIVES AND POLICIES
The descriptions that follow are designed to help you choose the Fund that best
fits your investment objectives. You may want to pursue more than one objective
by investing in more than one of the Firstar Funds. You are reminded that there
are risks in an investment in the Funds and there can be no assurance that each
Fund's investment objective will be attained. An investor should not consider an
investment in any individual Fund to be a complete investment program.
MONEY MARKET FUNDS
MONEY MARKET FUND
AND INSTITUTIONAL
MONEY MARKET FUND
The investment objective of the Money Market Fund and the Institutional Money
Market Fund is to seek to provide a high level of taxable current income
consistent with liquidity, the preservation of capital and a stable net asset
value. In pursuing its investment objective, each Fund will invest, during
normal market conditions, at least 80% of its assets in debt obligations with
remaining maturities of thirteen months or less as determined in accordance with
the rules of the Securities and Exchange Commission ("SEC"). Each Fund may
purchase a broad range of government, bank and commercial obligations that are
available in the money markets.
The Money Market Fund and the Institutional Money Market Fund will purchase only
"First Tier Eligible Securities" (as defined by the SEC) that present minimal
credit risks as determined by the Adviser pursuant to guidelines approved by the
Board of Directors (the "Board of Directors") of Firstar Funds, Inc.
("Firstar" or the"Company"). First Tier Eligible Securities include,
generally, (1) securities that either (a) have short-term debt ratings at the
time of purchase in the highest rating category by at least two unaffiliated
nationally recognized statistical rating organizations ("NRSROs") (or one
NRSRO if the security was rated by only one NRSRO), or (b) are issued or
guaranteed by persons with such ratings, and (2) certain securities that are
unrated (including securities of issuers that have long-term but not short-term
ratings) but are of comparable quality as determined in accordance with
guidelines approved by the Board of Directors. Appendix A to the SAI includes a
description of applicable NRSRO ratings. The following descriptions illustrate
the types of instruments in which each Fund invests.
The Money Market Fund and the Institutional Money Market Fund may purchase bank
obligations, such as certificates of deposit, bankers' acceptances and time
deposits, including U.S. dollar-denominated instruments issued or supported by
the credit of U.S. or foreign banks or savings institutions having total assets
at the time of purchase in excess of $1 billion. Investments by each Fund in the
obligations of foreign banks and foreign branches of U.S. banks will not exceed
25% of the value of the Fund's total assets at the time of investment. Each Fund
may also make interest-bearing savings deposits in commercial and savings banks
in amounts not in excess of 5% of its total assets.
Each Fund may purchase commercial paper, including asset-backed commercial
paper, and corporate bonds with remaining maturities of thirteen months or less
which meet the Fund's quality requirements set forth above.
The Money Market Fund and the Institutional Money Market Fund may purchase
variable and floating rate instruments, which may have a stated maturity in
excess of thirteen months but will permit each Fund to demand payment of the
instrument at least once every thirteen months upon not more than thirty days'
notice (unless the instrument is guaranteed by the U.S. Government or an agency
or instrumentality thereof). Such instruments may include variable amount master
demand notes, which are unsecured instruments that permit the indebtedness
thereunder to vary in addition to providing for periodic adjustments in the
interest rate. Issues of unrated variable and floating rate instruments will be
determined by the Adviser (under the supervision of the Board of Directors) to
be of comparable quality at the time of purchase to First Tier Eligible
Securities. An active secondary market may not exist, however, with respect to
particular variable and floating rate instruments, and usually will not exist
with respect to variable amount master demand notes. The absence of a secondary
market could make it difficult for the Fund to dispose of a variable or floating
rate instrument if the issuer defaulted on its payment obligation or during
periods that the Fund could not exercise its demand rights, and the Fund could,
for these or other reasons, suffer a loss with respect to such instruments.
The Money Market Fund and the Institutional Money Market Fund may invest in
short-term funding agreements. A funding agreement is a contract between an
issuer and a purchaser that obligates the issuer to pay a guaranteed rate of
interest on a principal sum deposited by the purchaser. Funding agreements will
also guarantee the return of principal and may guarantee a stream of payments
over time. A funding agreement has a fixed maturity and may have either a fixed
or variable interest rate that is based on an index and guaranteed for a set
time period. Because there is no secondary market for these investments, any
such funding agreement purchased by the Money Market Fund and the Institutional
Money Market Fund will be regarded as illiquid.
The Money Market Fund and the Institutional Money Market Fund may agree to
purchase U.S. government obligations from financial institutions subject to the
seller's agreement to repurchase them at an agreed upon time and price
("repurchase agreements"). During the term of the repurchase agreement, the
Adviser will continue to monitor the creditworthiness of the seller, and will
require the seller to maintain the value of the securities subject to the
agreement at not less than 102% of the repurchase price. Default or bankruptcy
of the seller would, however, expose the Fund to possible loss because of the
adverse market action or delay in connection with the disposition of the
underlying securities. The securities held subject to a repurchase agreement may
have stated maturities exceeding thirteen months, provided the repurchase
agreement itself matures in less than one year. Each Fund may purchase
obligations issued or guaranteed by the U.S. government or its agencies and
instrumentalities. Each Fund may also purchase stripped U.S. government
obligations and government-backed trusts. For further discussion of U.S.
government obligations and stripped securities, see "Other Investment
Information - Government Obligations.'
The Money Market Fund and the Institutional Money Market Fund may acquire
certain types of bank instruments issued or supported by the credit of foreign
banks or foreign branches of domestic banks where the Adviser deems the
instrument to present minimal credit risks. Such instruments nevertheless entail
risks that are different from those of investments in domestic obligations of
U.S. banks. Such risks include the possible imposition of foreign withholding
taxes on interest income payable on such instruments, the possible seizure or
nationalization of foreign deposits or the adoption of other foreign government
restrictions which might adversely affect the payment of principal and interest
on such instruments. Because the Funds invest in securities backed by banks and
other financial institutions, changes in the credit quality of these
institutions could cause losses to the Fund and affect its share price. For a
discussion of the inherent risks of foreign securities, see "Other Investment
Information - Foreign Securities.'
U.S. TREASURY
MONEY MARKET FUND
AND U.S. GOVERNMENT
MONEY MARKET FUND
The investment objective of the U.S. Treasury Money Market Fund is to seek to
provide a high level of current income exempt from state income taxes consistent
with liquidity, the preservation of capital and a stable net asset value. The
Fund seeks to achieve its objective by investing in securities with remaining
maturities of thirteen months or less (as determined in accordance with SEC
rules) that are issued or guaranteed as to principal and interest by the U.S.
Treasury (bills, certificates of indebtedness, notes and bonds). However, under
extraordinary circumstances, such as when U.S. Treasury securities are
unavailable, the Fund may temporarily hold cash.
The investment objective of the U.S. Government Money Market Fund is to seek to
provide a high level of taxable current income consistent with liquidity, the
preservation of capital and a stable net asset value (irrespective of state
income tax considerations). The Fund seeks to achieve its objective by investing
primarily in obligations with remaining maturities of thirteen months or less
(as determined in accordance with SEC rules) that are issued or guaranteed by
the U.S. government, its agencies or instrumentalities, and in repurchase
agreements relating to such obligations. Under normal market conditions, the
Fund intends to invest at least 65% of its total assets in U.S. government
obligations. Such U.S. government obligations may include Treasury bills,
certificates of indebtedness, notes and bonds, as well as issues of agencies and
instrumentalities of the U.S. government, including 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, Central
Bank for Cooperatives, Federal Home Loan Mortgage Corporation, Federal
Intermediate Credit Banks, Maritime Administration, Resolution Trust Corporation
and Tennessee Valley Authority. The U.S. Government Money Market Fund may also
purchase stripped U.S. government obligations and government- backed trusts. For
further discussion of U.S. government obligations, see "Other Investment
Information - Government Obligations.' For a discussion of stripped securities
in which the Money Market, Institutional Money Market and U.S. Government Money
Market Funds may invest see "Other Investment Information - Stripped
Securities.'
The U.S. Treasury Money Market Fund and the U.S. Government Money Market Fund
may enter into repurchase agreements with financial institutions. See "Money
Market Fund" and "Institutional Money Market Fund" above for a discussion of
repurchase agreements.
Although substantially all of the instruments acquired by the U.S. Treasury
Money Market Fund and U.S. Government Money Market Fund will be U.S. government
obligations (or repurchase agreements collateralized by such obligations),
shares of the U.S. Treasury Money Market Fund and U.S. Government Money Market
Fund are not themselves issued or guaranteed by any government agency. U.S.
government obligations that have stated maturities in excess of thirteen months
but have variable or floating interest rates may be acquired by the Funds in
accordance with SEC rules.
TAX-EXEMPT
MONEY MARKET FUND
The investment objective of the Tax-Exempt Money Market Fund is to seek to
provide a high level of current income that is exempt from federal income taxes
consistent with liquidity, the preservation of capital and a stable net asset
value. In pursuing this investment objective, the Fund invests in a diversified
portfolio of debt obligations issued by or on behalf of states, territories and
possessions of the United States, the District of Columbia and their
authorities, agencies, instrumentalities and political sub-divisions
("Municipal Obligations") which meet the Fund's quality requirements set forth
below. During normal market conditions, the Fund will invest at least 80% of its
assets in Municipal Obligations with remaining maturities of thirteen months or
less as determined in accordance with SEC rules. The Tax-Exempt Money Market
Fund will purchase only Municipal Obligations that are First Tier Eligible
Securities as defined above under "Money Market Fund and Institutional Money
Market Fund."
Municipal Obligations purchased by the Fund may be backed by letters of credit
issued by foreign and domestic banks and other financial institutions. Such
letters of credit are not necessarily subject to federal deposit insurance and
adverse developments in the banking industry could have a negative effect on the
credit quality of the Fund's portfolio securities and its ability to maintain a
stable net asset value and share price. Letters of credit issued by foreign
banks, like other obligations of foreign banks, may involve certain risks in
addition to those of domestic obligations. Because the Fund invests in
securities backed by banks and other financial institutions, changes in the
credit quality of these institutions could cause losses to the Fund and affect
its share price. See "Other Investment Information - Foreign Securities."
Municipal Obligations purchased by the Tax-Exempt Money Market Fund may include
variable and floating rate instruments issued by industrial development
authorities and other governmental entities. If such instruments are unrated,
they will be determined by the Fund's Adviser (under the supervision of the
Board of Directors) to be of comparable quality at the time of purchase to First
Tier Eligible Securities. While there may be no active secondary market with
respect to a particular variable or floating rate demand instrument purchased by
the Fund, the Fund may (at any time or during specified periods not exceeding
thirteen months, depending upon the instrument involved) demand payment in full
of the principal of the instrument and may re-sell the instrument to a third
party. The absence of such an active secondary market, however, could make it
difficult for the Fund to dispose of a variable or floating rate demand
instrument if the issuer defaulted on its payment obligation or during periods
that the Fund is not entitled to exercise its demand rights, and the Fund could,
for these or other reasons, suffer a loss with respect to such instruments.
From time to time on a temporary defensive basis due to market conditions, the
Tax-Exempt Money Market Fund may, without limit, hold uninvested cash reserves
or invest in short-term taxable money market obligations that are permissible
investments for the Money Market Fund, in such proportions as, in the opinion of
the Adviser, prevailing market or economic conditions warrant. Uninvested cash
reserves will not earn income. Taxable obligations acquired by the Fund will not
exceed under normal market conditions 20% of the Fund's total assets at the time
of purchase.
The two principal classifications of Municipal Obligations which may be held by
the Tax-Exempt Money Market Fund are "General Obligation" securities and
"Revenue" securities. General Obligation securities are secured by the
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest. Revenue securities are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special excise tax or other specific revenue source such
as the issuer of the facility being financed. Private activity bonds (e.g.,
bonds issued by industrial development authorities) that are issued by or on
behalf of public authorities to finance various privately operated facilities
are included within the term "Municipal Obligations" if the interest paid
thereon is exempt (subject to federal alternative minimum tax) from federal
income tax. (The Fund, however, does not currently intend to acquire private
activity bonds that are subject to the federal alternative minimum tax.) Private
activity bonds are in most cases Revenue securities and are not payable from the
unrestricted revenues of the issuer. The credit quality of such bonds is usually
directly related to the credit standing of the corporate user of the facility
involved.
The Tax-Exempt Money Market Fund may also acquire "Moral Obligation"
securities, which are normally issued by special purpose public authorities. If
the issuer of Moral Obligation securities 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.
The Tax-Exempt Money Market Fund may purchase securities on a "when-issued" or
delayed delivery basis and may purchase or sell securities on a "forward
commitment" basis. For more information, see "Other Investment Information -
When Issued Purchases and Forward Commitments."
The Tax-Exempt Money Market Fund may acquire "stand-by commitments" with
respect to Municipal Obligations held in its portfolio. Under a stand-by
commitment, a dealer agrees to purchase at the Fund's option specified Municipal
Obligations at a price equal to their amortized cost value plus accrued
interest. The Fund will acquire stand-by commitments solely to facilitate
portfolio liquidity and does not intend to exercise its rights thereunder for
trading purposes.
Although the Tax-Exempt Money Market Fund does not presently intend to do so on
a regular basis, it may invest more than 25% of its total assets in Municipal
Obligations, the issuers of which are located in the same state and the interest
on which is paid solely from revenues of similar projects if such investment is
deemed necessary or appropriate by the Adviser. To the extent that the Fund's
assets are concentrated in Municipal Obligations payable from revenues on
similar projects or issued by issuers in the same state, the Fund will be
subject to the peculiar economic, political and business risks represented by
the laws and economic conditions relating to such states and projects to a
greater extent than it would be if the Fund's assets were not so concentrated.
Furthermore, payment of Municipal Obligations of certain projects may be secured
by mortgages or deeds of trust. In the event of a default, enforcement of the
mortgages or deeds of trust will be subject to statutory enforcement procedures
and limitations, including rights of redemption and limitations on obtaining
deficiency judgments. In the event of a foreclosure, collection of the proceeds
of the foreclosure may be delayed and the amount of proceeds from the
foreclosure may not be sufficient to pay the principal of and accrued interest
on the defaulted Municipal Obligations.
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 issuers at the time of issuance. Neither the Fund nor the Adviser
will review the proceedings relating to the issuance of Municipal Obligations or
the bases for such opinions.
<TABLE>
<CAPTION>
BOND FUNDS
COMPARISON OF FIRSTAR BOND FUNDS
<S> <C> <C> <C>
SHORT-TERM FULL-TERM BOND
BOND FUND INTERMEDIATE-TERM BOND FUNDS FUND
FIRSTAR SHORT-TERM FIRSTAR INTERMEDIATE FIRSTAR TAX-EXEMPT FIRSTAR BOND
BOND MARKET FUND BOND MARKET FUND INTERMEDIATE BOND FUND IMMDEX/TM FUND
The Benchmark The Benchmark: The Benchmark: The Benchmark:
Lehman Bros. 1-3 Yr. Lehman Bros. Lehman Bros. 5-Year Lehman Bros
Gov't./Corp. Bond Intermediate General Obligation Gov't./Corp. Bond
Index Gov't./Corp. Bond Index Bond Index Index
Average Quality* Average Quality* Average Quality* Average Quality*
of Holdings - AA of Holdings - AA of Holdings - AAA of Holdings - AA
Average Maturity* Average Maturity* Average Maturity* Average Maturity*
2.5 Years 5.2 Years 5.1 Years 10.3 Years
1.7 Years Duration 3.3 Years Duration 4.2 Years Duration 5.2 Years Duration
Lehman Brothers is neither a sponsor of nor in any way affiliated with Firstar Funds.
</TABLE>
Average quality, maturity, and duration reflect the portfolios as of October 31,
1997, and will change from time to time in connection with the management of the
portfolios pursuant to the policies described in this Prospectus.
*Dollar-weighted average of portfolio securities held by the Funds.
TAXABLE BOND FUNDS
SHORT-TERM BOND
MARKET FUND
INTERMEDIATE BOND
MARKET FUND
BOND IMMDEX/TM FUND
INVESTMENT OBJECTIVES. The Short-Term Bond Market Fund seeks to provide an
annual rate of total return, before Fund expenses, comparable to the annual rate
of total return of the Lehman Brothers 1-3 Year Government/Corporate Bond Index
(the "Lehman 1-3 Gov't./Corp."). The Intermediate Bond Market Fund seeks to
provide an annual rate of total return, before Fund expenses, comparable to the
annual rate of total return of the Lehman Brothers Intermediate Government/
Corporate Bond Index (the "Lehman Intermediate Gov't./Corp."). The
Bond Immdex/tm Fund seeks to provide an annual rate of total return, before Fund
expenses, comparable to the annual rate of total return of the Lehman Brothers
Government/Corporate Bond Index (the "Lehman Gov't./Corp.").
Each Fund will attempt to achieve its objective by maintaining a comparable
duration to that of its benchmark index, and may invest a substantial portion of
its assets in securities that are not included in its benchmark index. The
Funds, therefore, are not "index" funds, which typically hold only securities
that are included in the indices they attempt to replicate.
DESCRIPTION OF BOND INDICES. The bond indices are market value weighted total
return indices measuring both the principal price changes of and income provided
by the underlying universe of securities that comprise the respective index. The
bond indices are intended to measure performance of their respective fixed-rate
debt market over given time intervals and differ with respect to the maturity
range of securities included. Each index is comprised of U.S. Treasury
securities, U.S. government agency securities, dollar denominated debt of
certain foreign, sovereign or supranational entities and investment grade
corporate debt obligations satisfying the following criteria as defined by
Lehman Brothers:
- Fixed-rate debt (as opposed to variable-rate debt);
- At least one year until maturity;
- Minimum outstanding par value of $100 million;
- Minimum quality rating of Baa by Moody's Investors Service, Inc.
("Moody's"), BBB by Standard and Poor's Rating Group ("S&P"), or BBB by
Fitch IBCA, Inc. ("Fitch"); and
LEHMAN 1-3 GOV'T./CORP.
-----------------------------------------------------------
- From one to three years remaining until maturity.
LEHMAN INTERMEDIATE GOV'T./CORP.
-----------------------------------------------------------
- From one to ten years remaining until maturity.
LEHMAN GOV'T./CORP.
-----------------------------------------------------------
- From one to thirty years or more remaining until maturity.
As of October 31, 1997, 1,027 issues were included in the Lehman 1-3
Gov't./Corp. representing $1.0 trillion in market value; 3,924 issues were
included in the Lehman Intermediate Gov't./Corp. representing $2.4 trillion in
market value; and 5,598 issues were included in the Lehman Gov't./Corp.
representing $3.4 trillion in market value.
INVESTMENT TECHNIQUES. In constructing and maintaining each Fund's portfolio,
the Adviser attempts to maintain an overall interest rate sensitivity equivalent
to its respective bond index and is intended to produce an annual rate of total
return, before Fund expenses, comparable to that of the respective bond index.
These techniques are used in conjunction with traditional methods of investment
management that rely on economic, financial and market analysis to select
portfolio investments.
The approach employed by the Adviser in managing each Fund's portfolio is to
define and measure the various duration characteristics of each bond index.
"Duration" is a term used to express the average time to receipt of expected
cash flows (discounted to their present value) on a particular fixed-income
instrument or a portfolio of instruments. For example, the duration of a five-
year zero coupon bond which pays no interest or principal until the maturity of
the bond is five years. This is because a zero coupon bond produces no cash flow
until the maturity date. On the other hand, a coupon bond that pays interest
semiannually and matures in five years will have a duration of less than five
years reflecting the semiannual cash flows resulting from coupon payments.
Duration generally defines the effect of interest rate changes on bond prices.
However, for large interest rate changes (generally changes of 1% or more) this
measure will not completely explain the interest rate sensitivity of a bond.
APPLICATION OF INVESTMENT TECHNIQUES. The Adviser will select securities for
each Fund's portfolio based upon their expected contribution to the portfolio's
overall duration and total return as compared to each bond index. The Adviser
expects that typically each Fund will hold less than 200 securities that in the
aggregate have similar price sensitivities or durations as the respective bond
index. Although the Adviser expects that as a general matter a significant
percentage of the securities acquired by each Fund will also be securities that
are included in the respective bond index, each Fund may invest more than 50% of
its total assets in securities that are not so included.
In order to reduce a negative deviation in return between each Fund and the
respective bond index, each Fund will normally attempt to be fully invested. The
Adviser may engage in practices that are intended to achieve an enhanced return,
before Fund expenses, over the respective bond index. As indicated above, each
Fund will hold only a percentage of the large number of issues included in its
respective bond index. In addition, a Fund may hold securities which are not
included in its respective bond index, including stripped government, asset-
backed and mortgage-backed obligations, collateralized mortgage obligations,
medium-term notes and Eurobonds, among others. This permits the Adviser to
engage in sampling and other strategies that are designed to achieve an enhanced
incremental gross return above the return on the respective bond index. For
example, the Adviser may, in light of current changes in market conditions,
"swap" portfolio securities whereby a bond or a group of bonds is sold and
another bond or group of bonds is bought that has similar duration
characteristics but, in the Adviser's opinion, a higher expected return.
Furthermore, the percentage mix of government and corporate issues held by a
Fund will differ from the percentage included in its respective bond index
whenever, in the Adviser's judgment, such a mix is desirable. Moreover, the
average quality of bonds held by each Fund (which is expected to be at least the
second highest rating category - AA by S&P or Aa by Moody's) may vary from the
average quality of bonds included in its respective bond index, and in selecting
among the various securities available for investment by a Fund the Adviser will
make its own creditworthiness determinations. These and other practices,
although intended to result in a positive incremental return in favor of a Fund,
may instead result in a negative deviation.
In an effort to make a Fund's duration and return comparable to those of its
respective bond index, the Adviser will continue to monitor a Fund's portfolio
and market changes in accordance with procedures established by the Adviser
under the supervision of the Board of Directors. It should be recognized,
however, that while the sensitivity of a Fund's portfolio to interest rate
changes is expected to be similar to that of its respective bond index, because
of the smaller number of issues held by a Fund, material events affecting a
Fund's portfolio (for example, an issuer's decline in credit quality) may
influence the performance of a Fund to a greater degree than such events will
influence its respective bond index and may prevent a Fund from attaining its
investment objective for particular periods. In the event the performance of a
Fund is not comparable to the performance of its respective bond index, the
Board of Directors will examine the reasons for the deviation and the
availability of corrective measures.
Each Fund's policy is to invest at least 65% of the total value of its assets in
a broad range of corporate, government, government agencies, stripped
government, asset-backed and mortgage-backed and collateralized mortgage
obligations during normal market conditions, as described in greater detail
below. The duration of a Fund will be similar to its respective bond index
during normal market conditions. In addition, the effective dollar-weighted
average portfolio maturity of each Fund's portfolio will be more than one year
but less than three years for the Short-Term Bond Market Fund; more than three
years but less than ten for the Intermediate Bond Market Fund; and greater than
five years for the Bond IMMDEX/TM Fund during normal market conditions.
The calculation of a Fund's duration and average portfolio maturity will,
however, be based on certain estimates relating to the duration and maturity of
the securities held by a Fund. There can be no assurance that these estimates
will be accurate or that the duration or average portfolio maturity of a Fund
will always remain within the maximum limits described above. Debt obligations
acquired by each Fund will be "investment -grade" at the time of purchase by
S&P, Moody's or other nationally recognized rating agencies. That is,
obligations will be rated within the four highest rating categories by S&P (AAA,
AA, A and BBB), Moody's (Aaa, Aa, A and Baa) or other nationally recognized
rating agencies or obligations that are unrated but determined by the Adviser to
be comparable in quality to instruments that are so rated. Obligations rated in
the lowest of the top four rating categories are considered to have speculative
characteristics and are subject to greater credit and market risk than higher
rated securities. As a result, the market value of these securities may be
expected to fluctuate more than those of securities with higher ratings.
Subsequent to its purchase by a Fund, a rated security may cease to be rated or
its rating may be reduced below the minimum rating required for purchase by that
Fund. The Adviser will consider such an event in determining whether the Fund
should continue to hold the security. The Adviser will sell promptly any
securities that are non-investment grade as a result of these events that exceed
5% of the Fund's net assets. See Appendix A to the SAI for a description of
applicable debt ratings.
Each Fund may make limited investments in guaranteed investment contracts
("GICs") issued by highly rated U.S. insurance companies. Pursuant to such
contracts, the Fund makes cash contributions to a separate account of the
insurance company which has been segregated from the general assets of the
issuer. The insurance company then pays to the Fund at the end of the contract
an amount equal to the cash contributions adjusted for the total return of an
index. A GIC is a separate account obligation of the issuing insurance company.
The Fund will only purchase GICs from issuers which, at the time of purchase,
are rated A or higher by Moody's or S&P, have assets of $1 billion or more and
meet quality and credit standards established by the Adviser. Generally, GICs
are not assignable or transferable without the permission of the issuing
insurance companies, and an active secondary market in GICs does not currently
exist. Therefore, GICs are considered by the Fund to be subject to the 10%
limitation on illiquid investments described under "Other Investment
Information.' Generally, a GIC allows a purchaser to buy an annuity with the
money accumulated under the contract; however, the Fund will not purchase any
such annuities.
The Funds may invest in certain other securities not contained in the indices
such as options, futures, repurchase agreements and other cash market
instruments. See "Other Investment Information."
The value of each Fund's portfolio, as is generally the case with each bond
index, can be expected to vary inversely from changes in prevailing interest
rates.
TAX-EXEMPT
INTERMEDIATE
BOND FUND
The investment objective of the Tax-Exempt Intermediate Bond Fund is to seek to
provide current income that is substantially exempt from federal income tax and
emphasize total return with relatively low volatility of principal. The Fund
will invest primarily in investment-grade intermediate-term municipal
obligations issued by state and local governments exempt from federal income
tax. In pursuing its investment objective, the Fund invests in a diversified
portfolio of Municipal Obligations (as defined above under "Tax-Exempt Money
Market Fund'). As a fundamental policy, the Fund will invest at least 80% of
its net assets in securities, the interest on which is exempt from regular
federal income and alternative minimum taxes, except during defensive periods.
(See "Investment Limitations.") The Fund intends to maintain an average
weighted maturity between three and ten years. There is no limit on the maturity
of any individual security in the Fund.
For a discussion of "General Obligation,"Revenue" and "Moral Obligation"
securities, see "Tax-Exempt Money Market Fund" previously referenced.
Although the Fund does not presently intend to do so on a regular basis, it may
invest more than 25% of its assets in Municipal Obligations, the issuers of
which are located in the same state or the interest on which is paid solely from
revenues of similar projects. For a discussion of the risks involved with
concentrating in such types of investments, see "Tax-Exempt Money Market
Fund.'
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 issuers at the time of issuance. Neither the Fund nor the Adviser
will review the proceedings relating to the issuance of Municipal Obligations or
the bases for such opinions.
Municipal Obligations purchased by the Fund will be investment grade at the time
of purchase. See "Taxable Bond Funds - Application of Investment Techniques"
above for a description of "investment grade securities." The Fund may also
purchase Municipal Obligations which are unrated at the time of purchase but are
determined to be of comparable quality by the Adviser or have comparable ratings
from other nationally recognized rating agencies. The Fund may also acquire
municipal notes and other short-term obligations rated SP-1 by S&P, or MIG-1 by
Moody's; tax-exempt commercial paper rated A-1 or higher by S&P, or VMIG-1 by
Moody's. Subsequent to its purchase by the Fund, a rated security may cease to
be rated or its rating may be reduced below the minimum rating required for
purchase by the Fund. The Adviser will consider such event in determining
whether the Fund should continue to hold the security. The Adviser will sell
promptly any securities that are not rated investment grade by at least one
nationally recognized rating agency and that exceed 5% of the Fund's net assets.
As indicated, the Fund's cash balances may be invested in short-term municipal
notes and tax-exempt commercial paper, as well as municipal bonds with remaining
maturities of thirteen months or less and securities issued by other investment
companies which invest in high quality, short-term municipal debt securities.
Except during temporary defensive periods, at least 65% of the Fund's total
assets will be invested in bonds and debentures. The value of the Fund's
portfolio can be expected to vary inversely to changes in prevailing interest
rates.
Municipal Obligations purchased by the Fund may be backed by letters of credit
issued by foreign and domestic banks and other financial institutions. Such
letters of credit are not necessarily subject to federal deposit insurance and
adverse developments in the banking industry could have a negative effect on the
credit quality of the Fund's portfolio securities and its ability to maintain a
stable net asset value and share price. Letters of credit issued by foreign
banks, like other obligations of foreign banks, may involve certain risks in
addition to those of domestic obligations. See "Other Investment Information -
Foreign Securities.'
Municipal Obligations purchased by the Fund may include variable and floating
rate instruments issued by industrial development authorities and other
governmental entities. If such instruments are unrated, they will be determined
by the Fund's Adviser (under the supervision of the Board of Directors) to be of
comparable quality at the time of purchase to investment grade. While there may
be no active secondary market with respect to a particular variable or floating
rate demand instrument purchased by the Fund, the Fund may (at any time or
during specified periods not exceeding thirteen months, depending upon the
instrument involved) demand payment in full of the principal of the instrument
and has the right to resell the instrument to a third party. The absence of such
an active secondary market, however, could make it difficult for the Fund to
dispose of a variable or floating rate demand instrument if the issuer defaulted
on its payment obligation or during periods that the Fund is not entitled to
exercise its demand rights, and the Fund could, for these or other reasons,
suffer a loss with respect to such instruments.
From time to time, on a temporary defensive basis due to market conditions, the
Fund may hold without any limitation uninvested cash reserves and invest without
any limitations in high quality short-term taxable money market obligations in
such proportions as in the opinion of the Adviser, prevailing market or economic
conditions warrant. Uninvested cash reserves will not earn income. See "Other
Investment Information - Money Market Instruments' below. Taxable obligations
acquired by the Fund will not exceed under normal market conditions 20% of the
Fund's net assets at the time of purchase.
The Fund may purchase put options on Municipal Obligations. A put gives the Fund
the right to sell a Municipal Obligation at a specified price at any time before
a specified date. A put will be sold, transferred or assigned only with the
related Municipal Obligation. The Fund will acquire puts only to enhance
liquidity, shorten the maturity of the related municipal security or permit the
Fund to invest its assets at more favorable rates. The aggregate price of a
security subject to a put may be higher than the price which otherwise would be
paid for the security without such an option, thereby increasing the security's
cost and reducing its yield.
The Fund may also acquire "stand-by commitments" with respect to Municipal
Obligations held in its portfolio. See "Tax-Exempt Money Market Fund" for a
description of stand-by commitments.
In addition, the Fund may acquire municipal lease obligations which are issued
by a state or local government or authority to acquire land and a wide variety
of equipment and facilities. These obligations typically are not fully backed by
the municipality's credit, and their interest may become taxable if the lease is
assigned. If the funds are not appropriated for the following year's lease
payments, the lease may terminate, with the possibility of default on the lease
obligation and significant loss to the Fund. Certificates of participation in
municipal lease obligations or installment sale contracts entitle the holder to
a proportionate interest in the lease-purchase payments made. The Adviser
determines and monitors the liquidity of municipal lease obligations (including
certificates of participation) under guidelines approved by the Board of
Directors requiring the Adviser to evaluate the credit quality of such
obligations and report on the nature of and the Fund's trading experience in the
municipal lease market. Under the guidelines, municipal lease obligations that
are not readily marketable and transferable are treated as illiquid. The Fund
will not knowingly invest more than 10% of the value of its net assets in
securities, including municipal leases, that are illiquid.
EQUITY FUNDS
BALANCED GROWTH FUND
INVESTMENT OBJECTIVE. The investment objective of the Balanced Growth Fund is to
achieve a balance of capital appreciation and current income with relatively low
volatility of capital. The Fund seeks to achieve its objective through a policy
of diversified investments in fixed-income and equity securities. Equity
securities will be selected on the basis of their potential for capital
appreciation. Current income will not be a significant consideration in the
selection of equity securities. Fixed-income securities will be selected in an
effort to provide an annual rate of total return with respect to the fixed-
income portion of the Fund's portfolio that is similar to the annual rate of
total return of the Lehman Brothers Government/Corporate Bond Index on a
consistent basis. In investing in fixed-income securities, the Adviser will use
specialized quantitative investment techniques. (For a description of the Lehman
Brothers Government/Corporate Bond Index see "Bond Funds - Description of Bond
Indices.' For a description of the specialized quantitative investment
techniques see "Investment Techniques" below.)
The Fund's policy is to invest at least 25% of the value of its total assets in
fixed-income senior securities and at least 50% and no more than 65% in equity
securities at all times. The actual percentage of assets invested in fixed-
income and equity securities will vary from time to time, depending on the
judgment of the Adviser as to the general market and economic conditions, trends
and yields, interest rates and fiscal and monetary developments.
INVESTMENT TECHNIQUES. Most equity securities held by the Fund will be publicly
traded common stocks of companies incorporated in the United States, although up
to 25% of its total assets may be invested, either directly or through
investments in sponsored American Depository Receipts (ADRs), in the securities
of foreign issuers. From time to time, the Fund may also acquire preferred
stocks. In addition, the Fund may invest in domestic securities convertible into
common stock, such as certain bonds and preferred stocks, and may invest up to
5% of its net assets in other types of domestic securities having common stock
characteristics, such as rights and warrants to purchase equity securities.
The Fund generally invests in companies the Adviser considers to be well managed
and to have attractive fundamental financial characteristics. Attractive
fundamental financial characteristics include, among other factors, low debt,
high return on equity and consistent revenue and earnings per share growth over
the prior three to five years. Companies in which the Fund may make equity
investments generally will have stock market capitalizations between $100
million and $10 billion. The median stock market capitalization is generally
anticipated to be between $1 billion and $3 billion and the weighted average
stock market capitalization is generally anticipated to be between $1.5 billion
and $5 billion. Stock market capitalizations are calculated by multiplying the
total number of common shares outstanding by the market price per share. The
Fund may also invest from time to time a portion of its assets, not to exceed
20% at the time of purchase, in companies with larger or smaller market
capitalizations.
In constructing and maintaining the fixed-income portion of the portfolio, the
Adviser attempts to achieve an annual rate of total return, before Fund
expenses, comparable to that of the Lehman Brothers Government/Corporate Bond
Index. See "Bond Funds - Description of Bond Indices." Specialized structured
investment management techniques are used in conjunction with traditional
methods of investment management that rely on economic, financial and market
analysis to select portfolio investments.
Fixed-income securities purchased by the Fund may include a broad range of
corporate, government, government agency, stripped government, asset-backed and
mortgage-backed obligations. The Fund may purchase fixed-income securities
without regard to any maturity limitation.
Debt obligations acquired by the Fund will be "investment-grade," as described
above under "Taxable Bond Funds - Application of Investment Techniques," at
the time of purchase, or unrated obligations deemed by the Adviser to be
comparable in quality to instruments so rated.
GROWTH AND
INCOME FUND
INVESTMENT OBJECTIVE. The investment objective of the Growth and Income Fund is
to seek both reasonable income and long-term capital appreciation. In seeking to
obtain "reasonable income," the Fund will emphasize income-producing
securities.
Common stocks purchased by the Fund will be selected primarily from a universe
of domestic companies that have established dividend-paying histories. During
normal market conditions, at least 50% of the Fund's net assets will be invested
in income-producing equity securities and each company initially selected for
inclusion in the Fund's portfolio must pay a current dividend. In addition to
dividend considerations, the Fund generally invests in medium- to large-sized
companies with stock market capitalizations over $1 billion that the Adviser
considers to be well managed and to have attractive fundamental financial
characteristics. Attractive fundamental financial characteristics include, among
other factors, low debt, high return on equity and consistent revenue and
earnings per share growth over the prior three to five years. The Fund may also
invest a portion of its assets, not to exceed 20% at the time of purchase, in
companies with smaller market capitalizations. The median stock market
capitalization is generally expected to be between $5 billion and $10 billion
and the weighted average stock market capitalization between $12 billion and $25
billion.
In addition to investments in common stocks, the Fund may invest in bonds,
notes, debentures and preferred stocks convertible into common stocks but only
to the extent that those securities also provide a current interest or dividend
payment stream. Although convertible securities frequently have speculative
characteristics and may be acquired by the Fund without regard to minimum
quality ratings, the Fund intends to invest less than 5% of its net assets in
non-investment grade securities. Up to 25% of the Fund's total assets may be
invested, either directly or through sponsored ADRs, in the securities of
foreign issuers. The Fund may also purchase put and call options, sell covered
call options and enter into transactions involving futures contracts and options
on futures as described later in this Prospectus.
The Fund may, to the extent consistent with its investment objective, purchase
non-convertible debt securities. Such debt obligations acquired by the Fund will
be investment grade, as described above under "Taxable Bond Funds - Application
of Investment Techniques,' at the time of purchase or unrated obligations
deemed by the Adviser to be comparable in quality to instruments so rated.
EQUITY INDEX FUND
INVESTMENT OBJECTIVE. The investment objective of the Equity Index Fund is to
seek returns, before Fund expenses, comparable to the price and yield
performance of publicly traded common stocks in the aggregate, as represented by
the S&P 500 Index. Under normal market conditions, the Fund intends to invest
substantially all of its total assets in securities included in the S&P 500
Index.
In seeking to attain its investment objective, the Fund uses the S&P 500 Index
as the standard performance comparison because it represents approximately two-
thirds of the total market value of all domestic common stocks and is well known
to investors. The S&P 500 Index consists of 500 selected common stocks, most of
which are listed on the New York Stock Exchange. Standard & Poor's selects the
stocks included in the S&P 500 Index on a statistical basis, and the S&P 500
Index is heavily weighted toward stocks with large market capitalizations. The
S&P 500 Index and the Equity Index Fund currently have a median stock market
capitalization of $6.6 billion and a weighted average stock market
capitalization of $53 billion. Standard & Poor's makes no representation or
warranty, implied or expressed, to the purchasers of Fund shares, or any member
of the public, regarding the advisability of investing in index funds or the
ability of the S&P 500 Index to track general stock market performance.
PORTFOLIO MANAGEMENT. Traditional methods of fund investment management
typically involve relatively frequent changes in a portfolio of securities on
the basis of economic, financial and market analysis. Index funds such as the
Equity Index Fund are not managed in this manner, however. Instead, with the aid
of a computer program, the Adviser purchases and sells securities for the Fund
in an attempt to produce investment results that substantially duplicate the
performance of the common stocks of the issuers represented in the S&P 500
Index, taking into account redemptions, sales of additional Fund shares and
other adjustments as described below.
The Fund does not expect to hold at any particular time all of the stocks
included in the S&P 500 Index. The Adviser believes, however, that through the
application of a capitalization weighting and sector balancing technique that it
will be able to construct and maintain the Fund's investment portfolio so that
it reasonably tracks the performance of the S&P 500 Index.
The Adviser believes the Fund will, under normal conditions, hold securities of
approximately 400 to 475 issuers included in the S&P 500 Index, and that the
quarterly performance of the Fund and the S&P 500 Index will be within +0.3%
under normal market conditions. Redemptions of a substantial number of shares of
the Fund could, however, reduce the number of issuers represented in the Fund's
investment portfolio, which could, in turn, adversely affect the accuracy with
which the Fund tracks the performance of the S&P 500 Index. In the event the
performance of the Fund is not comparable to the performance of the S&P 500
Index, the Board of Directors will examine the reasons for the deviation and the
availability of corrective measures. These measures would include additional fee
waivers by the Adviser and Co-Administrators or adjustments to the Adviser's
portfolio management practices. If substantial deviation in the Fund's
performance continued for extended periods, it is expected the Board of
Directors would consider possible changes to the Fund's investment objective.
If an issuer drops in ranking, or is eliminated entirely from the S&P 500 Index,
the Adviser may be required to sell some or all of the common stock of such
issuer then held by the Fund. Sales of portfolio securities may be made at times
when, if the Adviser were not required to effect purchases and sales of
portfolio securities in accordance with the S&P 500 Index, such securities might
not be sold. Such sales may result in lower prices for such securities than may
have been realized or in losses that may not have been incurred if the Adviser
were not required to effect the purchases and sales. "Adverse events" will not
necessarily be the basis for the disposition of portfolio securities, unless an
event causes the issuer to be eliminated entirely from the S&P 500 Index.
"Adverse events" include the failure of an issuer to declare or pay dividends,
the institution against an issuer of materially adverse legal proceedings, the
existence or threat of defaults materially and adversely affecting an issuer's
future declaration and payment of dividends, or the existence of other
materially adverse credit factors. However, although the Adviser does not intend
to screen securities for investment by the Fund by traditional methods of
financial and market analysis, the Adviser will monitor the Fund's investment
with a bias towards removing stocks of companies which may impair for any reason
the Fund's ability to achieve its investment objective.
The Fund invests primarily in the common stocks that comprise the S&P 500 Index
in accordance with their relative capitalization and sector weightings as
described above. It is possible, however, the Fund will from time to time
receive, as a part of a "spin-off" or other corporate reorganization of an
issuer included in the S&P 500 Index, securities that are themselves outside the
S&P 500 Index. Such securities will be disposed of by the Fund in due course
consistent with the Fund's investment objective.
A portion of the Fund's assets may be invested in options and futures contracts
as described below under "Other Investment Information."
GROWTH FUND
INVESTMENT OBJECTIVE. The investment objective of the Growth Fund is capital
appreciation. The Fund seeks to achieve its objective through investment in
securities of large-sized companies, selected on the basis of their potential
for price appreciation. Current income is not a significant consideration in the
selection of securities for this Fund.
The Fund's policy is to invest at least 50% of the value of its total assets in
equity securities under normal market conditions. Most equity securities held by
the Fund will be publicly traded common stocks of companies incorporated in the
United States, although up to 25% of its total assets may be invested, either
directly or through investments in ADRs , in the securities of foreign issuers.
From time to time, the Fund may also acquire preferred stocks and obligations,
such as bonds, debentures and notes, that in the opinion of the Adviser present
opportunities for capital appreciation. In addition, the Fund may invest in
securities convertible into common stock, such as certain bonds and preferred
stocks.
The Fund generally invests in large-sized companies, with stock market
capitalizations over $3 billion, that the Adviser considers to be well managed
and to have attractive fundamental financial characteristics. Attractive
fundamental financial characteristics include, among other factors, low debt,
high return on equity and consistent revenue and earnings per share growth over
the prior three to five years. The Adviser intends to focus its selection of
securities on large-sized companies and anticipates the Fund's median
capitalization would be between $4 billion and $8 billion; compared with the S&P
500 Index which currently has a median capitalization of $6.6 billion. The Fund
may also invest from time to time a portion of its assets, not to exceed 20% at
the time of purchase, in companies with market capitalizations below $3 billion.
The Fund may, to the extent consistent with its investment objective, purchase
non-convertible debt securities. Such debt obligations acquired by the Fund will
be investment grade, as described above under "Taxable Bond Funds - Application
of Investment Techniques,' at the time of purchase or unrated obligations
deemed by the Adviser to be comparable in quality to instruments so rated.
SPECIAL GROWTH FUND
INVESTMENT OBJECTIVE. The investment objective of the Special Growth Fund is
capital appreciation. The Fund seeks to achieve its objective through investment
in securities of medium-sized companies. Current income is not a significant
consideration in the selection of securities for this Fund. Securities are
selected for the Fund by the Adviser on the basis of their potential for price
appreciation.
The Fund's policy is to invest at least 50% of the value of its total assets in
equity securities under normal market conditions. Most equity securities held by
the Fund will be publicly traded common stocks of companies incorporated in the
United States, although up to 25% of its total assets may be invested, either
directly or through investments in ADRs, in the securities of foreign issuers.
From time to time, the Fund may also acquire preferred stocks and obligations,
such as bonds, debentures and notes, that in the opinion of the Adviser present
opportunities for capital appreciation. In addition, the Fund may invest in
securities convertible into common stock, such as certain bonds and preferred
stocks, and may 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.
The Fund generally invests in medium-sized companies the Adviser considers to be
well managed and to have attractive fundamental financial characteristics.
Attractive fundamental financial characteristics include, among other factors,
low debt, high return on equity and consistent revenue and earnings per share
growth over the prior three to five years. The Adviser believes greater
potential for price appreciation exists among medium-sized companies since they
tend to be less widely followed by other securities analysts and thus may be
more likely to be undervalued by the market. Companies with stock market
capitalizations between $700 million and $5 billion are considered by the
Adviser to be medium-sized. The Fund generally anticipates its median stock
market capitalization will be between $1 billion to $5 billion and its weighted
average will be between $2 billion and $5 billion. The Fund may also invest from
time to time a portion of its assets, not to exceed 20% at the time of purchase,
in companies with larger or smaller market capitalizations.
Securities of unseasoned companies, that is, companies with less than three
years of continuous operation, which present risks considerably greater than do
common stocks of more established companies, may be acquired from time to time
by the Fund when the Adviser believes such investments offer possibilities of
attractive capital appreciation. However, the Fund will not invest more than 5%
of the value of its total assets in the securities of unseasoned companies. In
addition, the Adviser may, to the extent consistent with the Fund's investment
objective of capital appreciation, acquire for the Fund bonds and other debt
securities. Non-convertible debt obligations acquired by the Fund will be
investment grade, as described above under "Taxable Bond Funds - Application of
Investment Techniques,' at the time of purchase or unrated obligations deemed
by the Adviser to be comparable in quality to instruments so rated.
In view of the specialized nature of its investment activities, investment in
the Fund's shares may be suitable only for those investors who are prepared to
invest without concern for current income and are financially able to assume
risk in search of long-term capital gain.
EMERGING GROWTH FUND
INVESTMENT OBJECTIVE. The investment objective of the Emerging Growth Fund is
capital appreciation. The Fund seeks to achieve its objective primarily through
investment in securities of small-sized companies. Current income is not a
significant consideration in the selection of securities for this Fund.
Securities are selected for the Fund by the Adviser on the basis of their
potential for price appreciation.
The Fund's policy is to invest at least 50% of the value of its total assets in
equity securities under normal market conditions. Most equity securities held by
the Fund will be publicly traded common stocks of companies incorporated in the
United States, although up to 25% of its total assets may be invested, either
directly or through investments in ADRs , in the securities of foreign issuers.
From time to time, the Fund may also acquire preferred stocks and obligations,
such as bonds, debentures and notes that, in the opinion of the Adviser, present
opportunities for capital appreciation. In addition, the Fund may invest in
securities convertible into common stock, such as certain bonds and preferred
stocks, and may 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.
The Fund generally invests in small-sized companies the Adviser considers to be
well managed and to have attractive fundamental financial characteristics, which
include, among other factors, low debt, high return on equity and consistent
revenue and earnings per share growth over the prior three to five years. The
Adviser believes greater potential for price appreciation exists among small-
sized companies since they tend to be less widely followed by other securities
analysts and thus may be more likely to be undervalued by the market. Companies
with stock market capitalizations between $250 million and $2 billion are
considered by the Adviser to be small-sized. The Fund generally anticipates its
median stock market capitalization will be between $500 million and $1.5 billion
and its weighted average will be between $750 million and $1.25 billion. From
time to time, the Fund may also invest a portion of its assets, not to exceed
20% at the time of purchase, in companies with larger or smaller market
capitalizations.
Securities of unseasoned companies; that is, companies with less than three
years' continuous operation, which present risks considerably greater than do
common stocks of more established companies, may be acquired from time to time
by the Fund when the Adviser believes such investments offer possibilities of
attractive capital appreciation. However, the Fund will not invest more than 10%
of the value of its total assets in the securities of unseasoned companies.
Non-convertible debt obligations acquired by the Fund will be "investment
grade,' at the time of purchase. That is, these obligations will be rated
within the four highest rating categories by Standard and Poor's Rating Group
("S&P") (AAA, AA, A and BBB), Moody's Investors Service, Inc. ("Moody's")
(Aaa, Aa, A and Baa) or other nationally recognized rating agencies. Unrated
obligations will be determined by the Adviser to be comparable in quality to
instruments that are so rated. Obligations rated in the lowest of the top four
rating categories are considered to have speculative characteristics and are
subject to greater credit and market risk than higher rated securities. As a
result, the market value of these securities may be expected to fluctuate more
than those of securities with higher ratings.
Subsequent to its purchase by the Fund, a rated security may cease to be rated
or its rating my be reduced below the minimum rating required for purchase by
the Fund. The Adviser will consider such an event in determining whether the
Fund should continue to hold the security. The Adviser will sell promptly any
securities that are not rated investment grade by at least one nationally
recognized rating agency and that exceed 5% of the Fund's net assets.
In view of the specialized nature of its investment activities, investment in
the Fund's shares may be suitable only for those investors who are prepared to
invest without concern for current income and are financially able to assume an
above-average level of market risk in search of long-term capital gain.
MICROCAP FUND
INVESTMENT OBJECTIVE. The investment objective of the MicroCap Fund is capital
appreciation. The Fund seeks to achieve its objective primarily through
investment in securities of small companies. At least 65% of the Fund's total
assets will be invested in securities of small capitalization companies
(companies with capitalizations at the time of purchase below the median market
capitalization of the Russell 2000 Index, which is currently approximately $400
million). Current income is not a significant consideration in the selection of
securities for this Fund. Securities are selected for the Fund by the Adviser on
the basis of their potential for price appreciation.
Most of the equity securities held by the Fund will be common stocks of
companies incorporated in the United States, although up to 25% of its total
assets may be invested, either directly or through investments in American
Depository Receipts, in the securities of foreign issuers. In addition to
investing in common stocks, the Fund may also acquire preferred stocks and
obligations, such as bonds, debentures and notes that, in the opinion of the
Adviser, present opportunities for capital appreciation. In addition, the Fund
may invest in securities convertible into common stock, such as certain bonds
and preferred stocks, and may 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.
The Fund generally invests in small companies the Adviser considers to be well
managed and to have attractive fundamental financial characteristics, which
include, among other factors, low debt, high return on equity and consistent
revenue and earnings per share growth over the prior three to five years. The
Adviser believes greater potential for price appreciation exists among small
companies since they tend to be less widely followed by other securities
analysts and thus may be more likely to be undervalued by the market. The Fund
generally anticipates the median stock market capitalization of the securities
it purchases will be between $50 million and $250 million and the weighted
average of such securities will be between $100 million and $250 million at the
time of purchase. The Fund may invest from time to time a portion of its assets,
not to exceed 35% at the time of purchase, in companies with market
capitalizations in excess of the median market capitalization of the Russell
2000 Index, which is currently approximately $400 million. If the market
capitalization of a company in which the Fund has invested increases above the
median market capitalization of the Russell 2000 Index, the Fund, consistent
with its investment objective, may continue to hold the security.
Securities of unseasoned companies, that is, companies with less than three
years' continuous operation, which present risks considerably greater than do
common stocks of more established companies, may be acquired from time to time
by the Fund when the Adviser believes such investments offer possibilities of
attractive capital appreciation. However, the Fund will not invest more than 5%
of the value of its total assets in the securities of unseasoned companies.
Companies in which the Fund primarily invests will include those that have
limited product lines, markets, or financial resources, or are dependent upon a
small management group. In addition, because these stocks are not well known to
the investing public, do not have significant institutional ownership, and are
followed by relatively few securities analysts, there will normally be less
publicly available information concerning these securities compared to what is
available for the securities of larger companies. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, can decrease the
value and liquidity of securities held by the Fund. Historically, small
capitalization stocks have been more volatile in price than larger
capitalization stocks. Among the reasons for the greater price volatility of
these small company stocks are the less certain growth prospects of smaller
firms, the lower degree of liquidity in the markets for such stocks, the greater
sensitivity of small companies to changing economic conditions and the fewer
market makers and the wider spreads between quoted bid and asked prices which
exist in the over-the-counter market for such stocks. Besides exhibiting greater
volatility, small company stocks may, to a degree, fluctuate independently of
larger company stocks. Small company stocks may decline in price as large
company stocks rise, or rise in price as large company stocks decline. Investors
should therefore expect that the Fund will be more volatile than, and may
fluctuate independently of, broad stock market indices such as the Standard &
Poor's 500 Index.
The securities in which the Fund invests will often be traded only in the over-
the-counter market or on a regional securities exchange, may be listed only in
the quotation service commonly known as the "pink sheets," and may not be
traded every day or in the volume typical of trading on a national securities
exchange. They may be subject to wide fluctuations in market value. The trading
market for any given security may be sufficiently thin as to make it difficult
for the Fund to dispose of a substantial block of such securities. The
disposition by the Fund of portfolio securities to meet redemptions or otherwise
may require the Fund to sell these securities at a discount from market prices
or during periods when, in the Adviser's judgment, such disposition is not
desirable or to make many small sales over a lengthy period of time.
The Fund may engage in short sales as further described below under "Other
Investment Information.' In view of the specialized nature of its investment
activities, investment in the Fund will be suitable only for those investors who
are prepared to invest without concern for current income and are financially
able to assume considerably more risk than the risks presented by a mutual fund
that invests in companies traded on a national securities exchange or NASDAQ.
The Fund's expenses in a year may exceed income. There can be no assurance the
investment objective of the Fund will be realized or that the value of the
Fund's investments will not decline in value. For these reasons, the Fund should
be considered as a long-term investment and not as a vehicle for seeking short-
term profits and income.
INTERNATIONAL EQUITY FUND
INVESTMENT OBJECTIVE. The investment objective of the International Equity Fund
is to seek capital appreciation through investing in foreign securities which
the Sub-Adviser believes are undervalued. Income will be an incidental
consideration. The Fund pursues its objective by investing under normal market
conditions substantially all (and in any event at least 65%) of the value of its
total assets in foreign common stocks and equity related securities (including
convertible securities and warrants).
The Sub-Adviser's investment decisions rely on a fundamental analysis of
securities with a long-term investment perspective. The Sub-Adviser seeks to
increase the scope and effectiveness of this fundamental investment approach by
extending the search for value into many countries. The Sub-Adviser believes
that this international search provides more diverse opportunities and
flexibility to shift portfolio investments not only from company to company and
industry to industry, but also country to country, in search of undervalued
securities. Under normal market conditions, the Fund will invest more than 80%
of its invested assets (excluding its cash position) in issuers located in at
least three countries other than the United States.
Although the Fund generally invests in common stocks, it may also invest in
preferred stocks and certain debt securities, rated or unrated, such as
convertible bonds and bonds selling at a discount, when the Sub-Adviser believes
the potential for appreciation will equal or exceed that available from
investments in common stock. The Fund may also invest in warrants or rights to
subscribe to or purchase such securities, and sponsored or unsponsored ADRs,
European Depository Receipts ("EDRs"), Global Depository Receipts ("GDRs")
and other depository receipts (collectively, "Depository Receipts"). For
further discussion of Depository Receipts, see "Other Investment Information"
below.
The Fund may invest in closed-end investment companies holding foreign
securities, and enter into transactions in options on securities and securities
indices, forward foreign currency contracts, and futures contracts and related
options. When deemed appropriate by the Adviser (or Sub-Adviser), the Fund may
invest cash balances in repurchase agreements and other money market investments
to maintain liquidity in an amount sufficient to meet expenses or for day-to-day
operating purposes. These investment techniques are described below under
"Other Investment Information" and under the heading "Investment Objectives
and Policies" in the SAI. Whenever, in the judgment of the Adviser (or Sub-
Adviser), market or economic conditions warrant, the Fund may adopt a temporary
defensive position and may invest without limit in money market securities
denominated in U.S. dollars or in the currency of any foreign country. See
"Other Investment Information - Money Market Instruments" below.
Because of the risks associated with international common stock investments, the
Fund is intended to be a long-term investment vehicle and is not designed to
provide investors with a means of speculating on short-term stock market
movements.
- --------------------------------------------------------------------------------
OTHER INVESTMENT
INFORMATION
MONEY MARKET INSTRUMENTS. The Funds may hold short-term U.S. government
obligations, high quality money market instruments (i.e., rated A-1 or better by
S&P or Prime-1 by Moody's or unrated instruments deemed by the Adviser to be of
comparable quality), repurchase agreements, bank obligations and cash, pending
investment, to meet anticipated redemption requests, or if, in the opinion of
the Adviser, other suitable securities are unavailable. The foregoing
investments may include among other things commercial paper, variable amount
master demand notes and corporate bonds with remaining maturities of thirteen
months or less and may be in such proportions as, in the opinion of the Adviser,
existing circumstances may warrant. Variable amount master demand notes are
unsecured instruments that permit the indebtedness thereunder to vary and
provide for periodic adjustments in the interest rate. Although the notes are
not normally traded and there may be no secondary market in the notes, the Funds
may demand payment of the principal of the instrument at any time. The notes are
not typically rated by credit rating agencies, but they must satisfy the
criteria set forth above for high quality money market instruments. If an issuer
of a variable amount master demand note defaulted on its payment obligation, the
Funds might be unable to dispose of the note because of the absence of a
secondary market and might, for this or other reasons, suffer a loss to the
extent of the default. The Funds invest in variable amount master demand notes
only when the Adviser deems the investment to involve minimal credit risk. The
Funds may also invest in obligations of foreign banks and foreign branches of
U.S. banks.
For temporary defensive purposes, during periods in which the Adviser (or the
Sub-Adviser) believes changes in economic, financial or political conditions
make it advisable, the International Equity Fund may reduce its holdings in
equity and other securities and may invest up to 100% of its assets in certain
short-term (less than twelve months to maturity) and medium-term (not greater
than five years to maturity) debt securities and in cash (U.S. dollars, foreign
currencies, or multicurrency units). These short-term and medium-term debt
securities may consist of (a) obligations of governments, agencies or
instrumentalities of any member state of the Organization for Economic
Cooperation and Development ("OECD"), (b) bank deposits and bank obligations
(including certificates of deposit, time deposits and bankers' acceptances) of
banks organized under the laws of any member state of the OECD, denominated in
any currency; (c) floating rate securities and other instruments denominated in
any currency issued by international development agencies; (d) finance company
and corporate commercial paper and other short-term corporate debt obligations
of corporations organized under the laws of any member state of the OECD meeting
the Fund's credit quality standards; and (e) repurchase agreements with banks
and broker-dealers covering any of the foregoing securities. The short-term and
medium-term debt securities in which the Fund may invest for temporary defensive
purposes will be those that the Adviser (or the Sub-Adviser) believes to be of
high quality, i.e., subject to relatively low credit risk of loss of interest or
principal (there is currently no rating system for debt securities in most
emerging countries). If rated, these securities will be rated in one of the four
highest rating categories by rating services such as Moody's or S&P. To the
extent the Fund invests in such instruments, it will not be invested in
accordance with the investment policies designed for it to realize its
investment objective.
SECURITIES OF OTHER INVESTMENT COMPANIES. In connection with the management of
daily cash positions, each Money Market Fund may invest in securities issued by
other investment companies with investment objectives and policies similar to
their own which invest in First Tier Eligible Securities and which determine
their net asset value per share based on the amortized cost or penny-rounding
method valuation. In addition, the Bond and Equity Funds may invest their cash
balances in securities issued by other investment companies which invest in high
quality, short-term debt securities. Some emerging countries have laws and
regulations that preclude direct foreign investment in the securities of
companies located there. Certain emerging countries permit, however, indirect
foreign investment in the securities of companies listed and traded on the stock
exchanges in these countries through specifically authorized investment funds.
The International Equity Fund may invest in these investment funds, as well as
other closed-end investment companies. None of the Funds will invest in any
other Firstar Fund. Securities of other investment companies will be acquired by
a Fund within the limits prescribed by the 1940 Act . In addition to the
advisory fees and other expenses the Fund bears directly in connection with its
own operations, as a shareowner of another investment company, the Fund would
bear its pro rata portion of the other investment company's advisory fees and
other expenses, and such fees and other expenses will be borne indirectly by the
Fund's shareowners.
GOVERNMENT OBLIGATIONS. To the extent consistent with their investment
objectives, the Money Market, Institutional Money Market, U.S. Treasury Money
Market, U.S. Government Money Market, Short-Term Bond Market, Intermediate Bond
Market, Bond IMMDEX/TM and Balanced Growth Funds may invest in a variety of U.S.
Treasury obligations consisting of bills, notes and bonds, which principally
differ only in their interest rates, maturities and time of issuance. These
Funds may also invest in other securities issued or guaranteed by the U.S.
Government, its agencies and instrumentalities. Obligations of certain agencies
and instrumentalities, such as the Government National Mortgage Association
("GNMA"), are supported by the full faith and credit of the U.S. Treasury;
others, such as those of 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 ("FNMA"), are supported
by the discretionary authority of the U.S. Government to purchase the agency's
obligations; still others are supported only by the credit of the agency or
instrumentality issuing the obligation. No assurance can be given that the U.S.
Government would provide financial support to U.S. government-sponsored agencies
or instrumentalities if it is not obligated to do so by law.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. The Short-Term Bond Market,
Intermediate Bond Market, Bond IMMDEX/TM and Balanced Growth Funds may purchase
residential and commercial mortgage-backed as well as other asset-backed
securities (i.e., securities backed by credit card receivables, automobile loans
or other assets). The average life of these securities varies with the
maturities of the underlying instruments which, in the case of mortgages, have
maximum maturities of thirty years. The average life of a mortgage-backed
instrument may be substantially less than the original maturity of the mortgages
underlying the securities as the result of scheduled principal payments and
mortgage prepayments. The rate of such mortgage prepayments, and hence the life
of the certificates, will be a function of current market rates and current
conditions in the relevant housing and commercial markets. In periods of falling
interest rates, the rate of mortgage prepayments tends to increase. During such
periods, the reinvestment of prepayment proceeds by a Fund will generally be at
lower rates than the rates that were carried by the obligations that have been
prepaid. As a result, the relationship between mortgage prepayments and interest
rates may give some high-yielding mortgage-related securities less potential for
growth in value than non-callable bonds with comparable maturities. In
calculating the average weighted maturity of each Fund, the maturity of asset-
backed securities will be based on estimates of average life. There can be no
assurance that these estimates will be accurate.
Presently, there are several types of mortgage-backed securities which provide
the holder with a pro rata interest in the underlying mortgages, and
collateralized mortgage obligations ("CMOs") which provide the holder with a
specified interest in the cash flow of a pool of underlying mortgages or other
mortgage-backed securities. 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 subject to greater
volatility and interest rate risk than other types of mortgage-backed
obligations. The Short-Term Bond Market, Intermediate Bond Market and Bond
IMMDEX/TM Funds will invest less than 50% of their respective total assets in
CMOs.
Asset-backed securities may involve certain risks that are not presented by
mortgage-backed securities arising primarily from the nature of the underlying
assets (i.e., credit card and automobile loan receivables as opposed to real
estate mortgages). For example, credit card receivables are generally unsecured
and may require the repossession of personal property upon the default of the
debtor which may be difficult or impracticable in some cases.
Non-mortgage asset-backed securities do not have the benefit of the same
security in the collateral as mortgage-backed securities. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
have given debtors the right to reduce the balance due on the credit cards. Most
issuers of automobile receivables permit the servicers to retain possession of
the underlying obligations. If the servicer were to sell these obligations to
another party, there is the risk that the purchaser would acquire an interest
superior to that of the holders of related automobile 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
automobile receivables may not have an effective security interest in all of the
obligations backing such receivables. Therefore, there is a possibility that
payments on the receivables together with recoveries on repossessed collateral
may not, in some cases, be able to support payments on these securities.
Asset-backed securities may be subject to greater risk of default during periods
of economic downturn than other instruments. Also, while the secondary market
for asset-backed securities is ordinarily quite liquid, in times of financial
stress the secondary market may not be as liquid as the market for other types
of securities, which could result in a Fund experiencing difficulty in valuing
or liquidating such securities.
ZERO COUPON OBLIGATIONS. The Short-Term Bond Market, Intermediate Bond Market,
Tax-Exempt Intermediate Bond and Bond IMMDEX/TM Funds may acquire zero coupon
obligations. Zero coupon obligations have greater price volatility than similar
maturity coupon obligations and will not result in the payment of interest until
maturity. The Funds will purchase such zero coupon obligations only if the
likely relative greater price volatility of such zero coupon obligations is not
inconsistent with such Fund's investment objective. The Funds will accrue income
on such investments for tax and accounting purposes, as required, which is
distributable to shareowners and which, because no cash is received at the time
of accrual, may require the liquidation of other portfolio securities to satisfy
each Fund's distribution obligations.
RESTRICTED SECURITIES. Each Fund will not knowingly invest more than 10% (except
the MicroCap Fund which will not knowingly invest more than 15%) and in all
cases will not invest more than 15%, of the value of its respective net assets
in securities that are illiquid at the time of purchase. These securities may
present a higher degree of business and financial risk, which can result in
substantial losses. Although these securities may be resold in privately
negotiated transactions, the prices realized from these sales could be less than
those originally paid by the Fund or less than what the Fund may consider the
fair value of such securities. Further, companies whose securities are not
publicly traded may not be subject to disclosure and other investor protection
requirements that might apply if their securities were publicly traded.
Repurchase agreements and time deposits that do not provide for payment to a
Fund within seven days and securities that are not registered under the
Securities Act of 1933 (the "Act") but may be purchased by institutional
buyers under Rule 144A, are subject to this 15% limit (unless such securities
are variable amount master demand notes with maturities of nine months or less,
or unless the Board of Directors or the Adviser (or Adviser and Sub-Adviser with
regard to the International Equity Fund), pursuant to guidelines adopted by the
Board of Directors, determines that a liquid trading market exists). (The
MicroCap Fund may invest up to 15% of the value it its net assets in securities
which are not registered under the Act but which can be sold to "qualified
institutional buyers' in accordance with Rule 144A under the Act. Any such
security will not be considered illiquid so long as it is determined by the
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 the Fund during any
period that qualified institutional buyers become uninterested in purchasing
these restricted securities.)
BORROWINGS. Each Fund may borrow money to the extent described below under
"Investment Limitations." A Fund would borrow money to meet redemption
requests prior to the settlement of securities already sold or in the process of
being sold by the Fund. If the securities held by a Fund should decline in value
while borrowings are outstanding, the net asset value of a Fund's outstanding
shares will decline in value by proportionately more than the decline in value
suffered by a Fund's securities. As a result, a Fund's share price may be
subject to greater fluctuation until the borrowing is paid off.
Reverse repurchase agreements are considered to be borrowings under the 1940
Act. At the time a Fund enters into a reverse repurchase agreement (an agreement
under which the Fund sells portfolio securities and agrees to repurchase them at
an agreed-upon date and price), it will place in a segregated custodial account
U.S. government securities or other liquid high-grade debt securities having a
value equal to or greater than the repurchase price (including accrued
interest), and will subsequently monitor the account to insure that such value
is maintained. Reverse repurchase agreements involve the risk that the market
value of the securities sold by the Fund may decline below the price of the
securities it is obligated to repurchase.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each non-money market Fund and
the Tax-Exempt Money Market Fund may purchase securities on a "when-issued" or
delayed delivery basis and may purchase or sell securities on a "forward
commitment' basis. These transactions, which involve a commitment by the 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. The Fund does not accrue income until the
securities delivery occurs. When-issued and forward commitment transactions
involve the risk, however, that the price or yield obtained in a transaction
(and therefore the value of the security) may be less favorable than the price
or yield (and therefore the value of the security) 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% (except the MicroCap Fund which
is limited to 20%) of the value of its total assets absent unusual market
conditions, and in the case of the Tax-Exempt Money Market Fund a forward
commitment or commitment to purchase will not exceed forty-five days. These
Funds do not intend to engage in when-issued purchases and forward commitments
for speculative purposes but only in furtherance of their respective investment
objectives.
SHORT SALES. The MicroCap Fund may enter into short sales with respect to its
equity security holdings. In a short sale transaction, the MicroCap Fund borrows
a security from a broker and sells it with the expectation that it will replace
the security borrowed from the broker by repurchasing the same security at a
lower price. These transactions may result in gains if a security's price
declines, but may result in losses if a security's price does not decline in
price.
When the MicroCap Fund engages in short sales, unless the short sale is
otherwise "covered" in accordance with the policies of the SEC, the Fund will
be required to maintain in a segregated account an amount of liquid assets
securities equal to the difference between: (a) the market value of the security
sold short as calculated on a daily basis and (b) any cash or United States
Government securities required to be deposited as collateral with the broker in
connection with the short sale (not including the proceeds from the short sale).
In addition, until the MicroCap Fund replaces the borrowed security, the Fund
will maintain the segregated account on a daily basis at such a level that the
amount deposited in the account plus the amount deposited with the broker as
collateral will equal the current market value of the security sold short. Short
sale transactions will be conducted so that not more than 20% of the value of
the MicroCap Fund's net assets at the time of entering into the short sale
(exclusive of proceeds from short sales) will be, when added together, (a) in
deposits collateralizing the obligation to replace securities borrowed to effect
short sales, and (b) allocated to the segregated account in connection with
short sales.
FOREIGN SECURITIES. Each Fund, except the U.S. Treasury Money Market, U.S.
Government Money Market and Equity Index Funds, may invest in foreign
securities. The Money Market Fund and Institutional Money Market Fund may
acquire certain types of bank instruments issued or supported by the credit of
foreign banks or foreign branches of domestic banks where the Adviser deems the
instrument to present minimal credit risks. The Tax-Exempt Money Market Fund may
purchase Municipal Obligations backed by letters of credit issued by foreign
banks. The remaining Funds' investments in the securities of foreign issuers may
include both securities of foreign corporations and banks, as well as securities
of foreign governments and their political subdivisions.
Investments in foreign securities, whether made directly or through ADRs ,
involve certain inherent risks and considerations not typically associated with
investing in U.S. companies, 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 and the possibility of
adverse changes in investment or exchange control regulations. There may be less
publicly available information about a foreign company than about a U.S.
company. Foreign companies are not subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to domestic
companies. In addition, foreign banks and foreign branches of U.S. banks are
subject to less stringent reserve requirements and to different accounting,
auditing, reporting and recordkeeping standards than those applicable to
domestic branches of U.S. banks. Further, foreign stock markets are generally
not as developed or efficient as those in the U.S., and in most foreign markets
volume and liquidity are less than in the U.S. Fixed commissions on foreign
stock exchanges are generally higher than the negotiated commissions on U.S.
exchanges, and there is generally less government supervision and regulation of
foreign stock exchanges, brokers and companies than in the U.S. With respect to
certain foreign countries, there is a possibility of expropriation or
confiscatory taxation, limitations on the removal of assets or diplomatic
developments that could affect investment within those countries. Additionally,
foreign securities and dividends and interest payable on those securities may be
subject to foreign taxes, including foreign withholding taxes, and other foreign
taxes may apply with respect to securities transactions. See "Taxes."
Transactions in foreign securities may involve greater time from the trade date
until the settlement date than domestic securities transactions, and may involve
the risk of possible losses through the holding of securities in custodians and
securities depositories in foreign countries. Additional costs associated with
an investment in foreign securities may include higher transaction costs and the
cost of foreign currency conversions. Changes in foreign exchange rates will
also affect the value of securities denominated or quoted in currencies other
than the U.S. dollar. In this regard, the Funds, with the exception of the
International Equity Fund, do not intend to hedge against foreign currency risk
(except on unsettled trades). Changes in currency exchange rates will affect the
value of unhedged positions and will impact a Fund's net asset value (positively
or negatively) irrespective of the performance of the portfolio securities held
by the Fund. See the section entitled "Foreign Currency Transactions" below
for the International Equity Fund. The Funds and their shareowners may encounter
substantial difficulties in obtaining and enforcing judgments against non-U.S.
resident individuals and companies. 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. Furthermore, because
the International Equity Fund will invest substantially all (and in any event,
at least 65%) of the value of its total assets in foreign securities, the net
asset value of the International Equity Fund is expected to be volatile.
AMERICAN DEPOSITORY RECEIPTS ("ADRS"), EUROPEAN DEPOSITORY RECEIPTS ("EDRS"),
AND GLOBAL DEPOSITORY RECEIPTS ("GDRS"). The Short-Term Bond Market,
Intermediate Bond Market, Bond IMMDEX/TM, Balanced Growth, Growth and Income,
Growth, Special Growth, Emerging Growth and International Equity Funds may
invest in sponsored ADRs, which are receipts issued by an American bank or trust
company evidencing ownership of underlying securities issued by a foreign
issuer. ADRs may be listed on a national securities exchange or may trade in the
over-the-counter market. ADR prices are denominated in U.S. dollars; the
underlying security may be denominated in a foreign currency.
The International Equity Fund may also invest in unsponsored ADRs. In
unsponsored ADR programs, the issuer may not be directly involved in arranging
its securities to be traded in the form of depository receipts. Although
regulatory requirements with respect to sponsored and unsponsored programs are
generally similar, in some cases it may be easier to obtain financial
information from an issuer that has participated in the creation of a sponsored
program. Accordingly, there may be less information available regarding issuers
of securities underlying unsponsored programs and there may not be a correlation
between such information and the market value of the Depository Receipts.
The International Equity Fund may also invest in EDRs and GDRs. EDRs are
receipts issued by a European financial institution evidencing ownership of
underlying foreign securities and are usually denominated in foreign currencies.
EDRs may not be denominated in the same currency as the securities they
represent. Generally, EDRs, in bearer form, are designed for use in the European
securities markets. GDRs are receipts structured similarly to EDRs and are
issued and traded in several international financial markets. They are designed
for trading in non-U.S. securities markets. The underlying security may be
subject to foreign government taxes which would reduce the yield on such
securities. See "Other Investment Information - Foreign Securities" above for
a discussion of certain risks in investing in foreign securities.
SECURITIES LENDING. Although none of the Funds intend to during the current
fiscal year, each of the Funds may lend portfolio securities.
STRIPPED SECURITIES. To the extent consistent with their investment objectives,
the Money Market, Institutional Money Market, U.S. Government Money Market,
Short-Term Bond Market, Intermediate Bond Market, Bond IMMDEX/TM and Balanced
Growth Funds may purchase participations in trusts that hold U.S. Treasury and
agency securities (such as TIGRs and CATs) and also may purchase Treasury
receipts and other "stripped" securities that evidence ownership in either the
future interest payments or the future principal payments of U.S. government
obligations. These participations are issued at a discount to their "face
value,' and may (particularly in the case of stripped mortgage-backed
securities) exhibit greater price volatility than ordinary debt securities
because of the manner in which their principal and interest are returned to
investors. The SEC staff believes that participations in CATs and TIGRs and
other similar trusts are not U.S. government securities. The U.S. Government
Money Market Fund may also invest 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.
OPTIONS. The Short-Term Bond Market, Intermediate Bond Market, Bond IMMDEX/TM,
Growth and Income, Equity Index and MicroCap Funds may purchase put and call
options in an amount not to exceed 5% of their respective net assets. The
International Equity Fund may purchase put and call options without limit. Such
options may relate to particular securities or various stock or bond indices and
may or may not be listed on a national securities exchange and issued by the
Options Clearing Corporation. Purchasing options is a specialized investment
technique which entails a substantial risk of a complete loss of the amount paid
as premiums to the writer of the option.
The Short-Term Bond Market, Intermediate Bond Market, Bond IMMDEX/TM and
International Equity Funds will engage in unlisted over-the-counter options only
with broker-dealers deemed creditworthy by the Adviser (or the Sub-Adviser).
Closing transactions in certain options are usually effected directly with the
same broker-dealer that effected the original option transaction. A Fund bears
the risk that the broker-dealer will fail to meet its obligations. There is no
assurance that a liquid secondary trading market exists for closing out an
unlisted option position. Furthermore, unlisted options are not subject to the
protections afforded purchasers of listed options by the Options Clearing
Corporation, which performs the obligations of its members who fail to perform
in connection with the purchase or sale of options.
Each Fund may purchase put options on portfolio securities at or about the same
time that it purchases the underlying security or at a later time. By buying a
put, a Fund limits its risk of loss from a decline in the market value of the
security until the put expires. Any appreciation in the value of and yield
otherwise available from the underlying security, however, will be partially
offset by the amount of the premium paid for the put option and any related
transaction costs. Call options may be purchased by a Fund in order to acquire
the underlying security at a later date at a price that avoids any additional
cost that would result from an increase in the market value of the security. A
call option may also be purchased to increase a Fund's return to investors at a
time when the call is expected to increase in value due to anticipated
appreciation of the underlying security. Prior to its expiration, a purchased
put or call option may be sold in a "closing sale transaction" (a sale by a
Fund, prior to the exercise of the option that it has purchased, of an option of
the same series), and profit or loss from the sale will depend on whether the
amount received is more or less than the premium paid for the option plus the
related transaction costs.
In addition, the Short-Term Bond Market, Intermediate Bond Market, Bond
IMMDEX/TM, Growth and Income, Equity Index, MicroCap and the International
Equity Funds may write call options on securities and on various stock or bond
indices. Each Fund may write a call option only if the option is "covered" by
the Fund's holding a position in the underlying securities or otherwise, which
would allow for immediate satisfaction of its obligation. Such options will be
listed on a national securities exchange and the aggregate value of the Fund's
assets subject to options written by the Short-Term Bond Market, Intermediate
Bond Market, Bond IMMDEX/TM, Growth and Income, Equity Index and MicroCap Funds
will not exceed 5%, 5%, 5%, 25%, 5% and 5%, respectively, of the value of its
net assets during the current year. The International Equity Fund may write call
options on securities and on various stock indices which will be traded on a
recognized securities or futures exchange or over the counter and during the
current year the aggregate value of the Fund's assets subject to options written
by the Fund will not exceed 5% of the value of its net assets. In order to close
out an option position, a Fund will be required to enter into a "closing
purchase transaction' (the purchase of a call option on a security or an index
with the same exercise price and expiration date as the call option which it
previously wrote on the same security or index).
By writing a covered call option on a security, a Fund foregoes the opportunity
to profit from an increase in the market price of the underlying security above
the exercise price except insofar as the premium represents such a profit, and
it is not able to sell the underlying security until the option expires or is
exercised or the Fund effects a closing purchase transaction by purchasing an
option of the same series. Except to the extent that a written call option on an
index is covered by an option on the same index purchased by the Fund, movements
in the index may result in a loss to the Fund; however, such losses may be
mitigated by changes in the value of securities held by the Fund during the
period the option was outstanding. The use of covered call options will not be a
primary investment technique of the Funds.
The International Equity Fund may also write (i.e., sell) covered put options on
securities and various securities indices. The writer of a put incurs an
obligation to buy the security underlying the option from the put's purchaser at
the exercise price at any time on or before the termination date, at the
purchaser's election (certain options the Fund writes will be exercisable by the
purchaser only on a specific date). Generally, a put is "covered" if the Fund
maintains cash, U.S. government securities or other liquid high grade debt
obligations equal to the exercise price of the option or if the Fund holds a put
on the same underlying security with a similar or higher exercise price. By
writing a covered put option on a security, the Fund receives a premium for
writing the option; however, the Fund assumes the risk that the value of the
security will decline before the exercise date, in which event, the Fund may
incur a loss in excess of the premium received when the put is exercised. Risks
associated with the use of options on securities include (i) imperfect
correlation between the change in market value of the securities the Fund holds
and the prices of options relating to the securities purchased or sold by the
Fund; and (ii) the possible lack of a liquid secondary market for an option.
For additional information relating to option trading practices and related
risks, see the SAI.
FUTURES CONTRACTS AND RELATED OPTIONS. The Adviser may determine that it would
be in the interest of the Short-Term Bond Market, Intermediate Bond Market, Bond
IMMDEX/TM, Growth and Income, Equity Index, MicroCap and International Equity
Funds to purchase or sell futures contracts, or options thereon, as a hedge
against changes resulting from market conditions in the value of the securities
held by the Funds, or of securities which it intends to purchase, to maintain
liquidity, to have fuller exposure to price movements in the respective stock or
bond index or to reduce transaction costs. For example, a Fund may enter into
transactions involving a bond or stock index futures contract, which is a
bilateral agreement pursuant to which the parties agree to take or make delivery
of an amount of cash equal to a specified dollar amount times the difference
between the index value (which assigns relative values to the securities
included in the index) at the close of the last trading day of the contract and
the price at which the futures contract is originally struck. No physical
delivery of the underlying bonds or stocks in the index is made. The Adviser may
also determine that it would be in the interest of a Fund to purchase or sell
interest rate futures contracts, or options thereon, which provide for the
future delivery of specified fixed-income securities. In addition, the Equity
Index Fund may purchase and sell futures and related options (based only on the
S&P 500 Index) to maintain cash reserves while simulating full investment in the
stocks underlying the S&P 500 Index, to keep substantially all of its assets
exposed to the market (as represented by the S&P 500 Index), and to reduce
transaction costs.
Risks associated with the use of futures contracts and options on futures
include (a) imperfect correlation between the change in market values of the
securities held by a Fund and the prices of related futures contracts and
options on futures purchased or sold by the Fund, and (b) the possible lack of a
liquid secondary market for futures contracts (or related options) and the
resulting inability of a Fund to close open futures positions, which could have
an adverse impact on the Fund's ability to hedge.
Positions in futures contracts may be closed out only on an exchange which
provides a secondary market for such futures. However, there can be no assurance
that a liquid secondary market will exist for any particular futures contract at
any specific time. Thus, it may not be possible to close a futures position. In
the event of adverse price movements, the Fund would continue to be required to
make daily cash payments to maintain its required margin. In such situations, if
the Fund has insufficient cash, it may have to sell portfolio holdings to meet
daily margin requirements at a time when it may be disadvantageous to do so. In
addition, the Fund may be required to make delivery of the instruments
underlying futures contracts it holds. The inability to close options and
futures positions also could have an adverse impact on the Fund's ability to
effectively hedge.
Successful use of futures by the Fund is also subject to the Adviser's (or Sub-
Adviser's) ability to correctly predict movements in the direction of the
market. For example, if a Fund has hedged against the possibility of a decline
in the market adversely affecting securities held by it and securities prices
increase instead, the Fund will lose part or all of the benefit to the increased
value of its securities which it has hedged because it will have approximately
equal offsetting losses in its futures positions. In addition, in some
situations, if the Fund has insufficient cash, it may have to sell securities to
meet daily variation margin requirements. Such sales of securities may be, but
will not necessarily be, at increased prices which reflect the rising market.
The Fund may have to sell securities at a time when it may be disadvantageous to
do so.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and extremely high
degree of leverage involved in futures pricing. As a result, a relatively small
price movement in a futures contract may result in immediate and substantial
loss (as well as gain) to the investor. For example, if at the time of purchase,
10% of the value of the futures contract is deposited as margin, a subsequent
10% decrease in the value of the futures contract would result in a total loss
of the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit, before any deduction for the transaction
costs, if the contract were closed out. Thus, a purchase or sale of a futures
contract may result in losses in excess of the amount invested in the contract.
Utilization of futures transactions by a Fund involves the risk of loss by the
Fund of margin deposits in the event of bankruptcy of a broker with whom the
Fund has an open position in a futures contract of related option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting some futures
traders to substantial losses.
The trading of futures contracts is also subject to the risk of trading halts,
suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal trading activity, which could at times make it difficult
or impossible to liquidate existing positions or to recover excess variation
margin payments.
Each Fund's commodities transactions must constitute bona fide hedging or other
permissible transactions pursuant to regulations promulgated by the Commodity
and Futures Trading Commission ("CFTC"). In addition, 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 its 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 percentage limitation. Pursuant to SEC requirements, a Fund may
be required to segregate cash or high quality money market instruments in
connection with its commodities transactions in an amount generally equal to the
value of the underlying commodity. The Company intends to comply with the
regulations of the CFTC exempting the Fund from registrations as a "commodity
pool operator.'
The Short-Term Bond Market, Intermediate Bond Market, Bond IMMDEX/TM and Growth
and Income Funds intend to limit their transactions in futures contracts and
related options so that not more than 5% of each Fund's respective net assets
are at risk. The Equity Index Fund and International Equity Fund intend to limit
their transactions in futures contracts so that not more than 10% and 25% of
each Fund's respective net assets are at risk. For a more detailed description
of futures contracts and futures options, including a discussion of the
limitations imposed by federal tax law, see Appendix B to the SAI.
FOREIGN CURRENCY TRANSACTIONS. The International Equity Fund may enter into
forward foreign currency exchange contracts ("forward contracts"), providing
for the purchase of or sale of an amount of a specified currency at a future
date. This Fund may use forward contracts to protect against a foreign
currency's decline against the U.S. dollar between the trade date and settlement
date for a securities transaction, or to lock in the U.S. dollar value of
dividends declared on securities it holds, or generally to protect the U.S.
dollar value of the securities it holds against exchange rate fluctuations. This
Fund may also use forward contracts to protect against fluctuating exchange
rates and exchange control regulations. Forward contracts may limit the Fund's
losses due to exchange rate fluctuation, but they will also limit any gains that
the Fund might otherwise have realized. This Fund may also hedge its foreign
currency exchange rate risk by entering into foreign currency futures contracts
("currency futures"). The forecasting of short-term currency market movements
is extremely difficult and whether short-term hedging strategies would be
successful is highly uncertain.
Except where segregated accounts are not required under the 1940 Act, when this
Fund enters into a forward contracts or currency futures, the Custodian will
place cash, U.S. government securities, or high-grade debt securities into a
segregated account of this Fund in an amount equal to the value of the Fund's
total assets committed to consummation of forward contracts and currency
futures. If the value of these segregated securities declines, additional cash
or securities will be placed in the account on a daily basis so that the account
value is at least equal to the Fund's commitments to such contracts. See
"Investment Objectives and Policies" in the SAI.
CONVERTIBLE SECURITIES AND WARRANTS. The Balanced Growth, Growth and Income,
Growth, Special Growth, Emerging Growth, MicroCap and International Equity Funds
may invest in convertible securities and warrants, including bonds, notes and
preferred stock, that may be converted into common stock either at a stated
price or within a specified period of time. In investing in convertibles, a Fund
is looking for 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.
During normal market conditions, no more than 5% of a Fund's net assets will be
purchased or held in convertible or other securities that (1) are not rated at
the time of purchase investment grade by S&P, Moody's or other nationally
recognized rating agencies; (2) are unrated and have not been determined by the
Adviser (or Adviser and Sub-Adviser with regard to the International Equity
Fund) to be of comparable quality to a security rated investment grade; or (3)
in the case of the International Equity Fund, have not received the foreign
equivalent of investment grade by a rating agency recognized in the local market
and determined to be of comparable quality by the Adviser and Sub-Adviser.
Securities rated below investment grade are predominantly speculative and are
commonly referred to as junk bonds. To the extent a Fund purchases convertibles
rated below investment grade or convertibles that are not rated, a greater risk
exists as to the timely repayment of the principal of, and the timely payment of
interest or dividends on, such securities. Subsequent to its purchase by a Fund,
a rated security may cease to be rated or its rating may be reduced below a
minimum rating for purchase by the Fund. The Adviser (and Sub-Adviser for the
International Equity Fund) will consider such an event in determining whether a
Fund should continue to hold the security. The Adviser (and Sub-Adviser for the
International Equity Fund) will sell promptly any securities that are non-
investment grade as a result of these events and that exceed 5% of a Fund's net
assets.
The Balanced Growth , Growth and Income, Growth, Special Growth, Emerging
Growth, MicroCap and International Equity Funds may purchase warrants and
similar rights, which are privileges issued by corporations enabling the owners
to subscribe to and purchase a specified number of shares of the corporation at
the specified price during a specified period of time. The purchase of warrants
involves the risk that a Fund could lose the purchase value of a warrant if the
right to subscribe to additional shares is not exercised prior to the warrant's
expiration. Also, the purchase of warrants involves the risk that the effective
price paid for the warrant added to the subscription price of the related
security may exceed the value of the subscribed security's market price such as
when there is no movement in the level of the underlying security. During normal
market conditions, no more than 5% of each Fund's net assets will be invested in
warrants. This 5% limit includes warrants that are not listed on any stock
exchange, and such warrants are limited to 2% of the International Equity Fund's
net assets. Warrants acquired by the International Equity Fund in units or
attached to securities are not subject to these limits.
CONCENTRATION. The Adviser (and Sub-Adviser for the International Equity Fund)
anticipates that from time to time certain industry sectors will not be
represented in the portfolios of the Equity Funds while other sectors will
represent a significant portion. As a matter of fundamental policy, however, the
Adviser (and Sub-Adviser for the International Equity Fund) will not purchase
any securities which would cause 25% or more of a Fund's total assets at the
time of purchase to be invested in the securities of issuers conducting their
principal business activities in the same industry, and each Fund's investments
will be diversified among individual issuers. The MicroCap Fund will not
purchase securities of any issuer which would cause 10% or more of the Fund's
total assets at the time of purchase to be invested in that issuer. In regard to
the International Equity Fund, a foreign government (but not the U.S.
Government) is deemed to be an "industry" and therefore investments in
obligations of any one foreign government are subject to this 25% limitation.
SMALL COMPANIES. Small companies in which the Funds may invest may have limited
product lines, markets, or financial resources, or may be dependent upon a small
management group, and their securities may be subject to more abrupt or erratic
market movements than larger, more established companies, both because their
securities are typically traded in lower volume and because the issuers are
typically subject to greater degree of changes in their earnings and prospects.
BOND INDICES. The Lehman Brothers 1-3 Gov't./Corp., the Lehman Brothers
Intermediate Gov't./Corp. and the Lehman Brothers Gov't./Corp. are trademarks of
Lehman Brothers. The Funds, their Adviser and Co-Administrators are not
affiliated in any way with Lehman Brothers. See "Management of the Funds."
Inclusion of a security in the bond indices in no way implies an opinion by
Lehman Brothers as to its attractiveness or appropriateness as an investment.
Lehman Brothers' publication of the bond indices is not made in connection with
any sale or offer for sale of securities or any solicitations of orders for the
purchase of securities.
PORTFOLIO TURNOVER. Each Fund may sell a portfolio investment soon after its
acquisition if the Adviser believes that such a disposition is consistent with
attaining the investment objective of the Fund. Portfolio investments may be
sold for a variety of reasons, such as a more favorable investment opportunity
or other circumstances bearing on the desirability of continuing to hold such
investments. A high rate of portfolio turnover (over 100%) may involve
correspondingly greater brokerage commission expenses and other transaction
costs, which must be borne directly by the Fund and ultimately by its
shareowners. High portfolio turnover may result in the realization of
substantial net capital gains; to the extent net short-term capital gains are
realized, distributions resulting from such gains will be ordinary income for
federal income tax purposes. (See "Taxes-Federal.") See"Financial
Highlights' for the Funds' portfolio turnover rates.
LOWER RATED DEBT SECURITIES. The International Equity Fund may invest up to 5%
of its net assets in lower rated or unrated debt securities. Debt considered
below investment grade may be referred to as "junk bonds" or "high risk"
securities. The emerging country debt securities in which the Fund may invest
are subject to significant risk and will not be required to meet any minimum
rating standard or equivalent.
SOVEREIGN DEBT. The International Equity Fund may invest up to 5% of its net
assets in obligations of foreign countries and political entities ("Sovereign
Debt'), which may trade at a substantial discount from face value. The Fund may
hold and trade Sovereign Debt of emerging market countries in appropriate
circumstances and to participate in debt conversion programs. Emerging country
Sovereign Debt involves a high degree of risk, is generally lower-quality debt,
and is considered speculative in nature.
BRADY BONDS. The International Equity Fund may invest up to 5% of its net assets
in Brady Bonds as part of its investment in Sovereign Debt of countries that
have restructured or are in the process of restructuring their Sovereign Debt
pursuant to the Brady Plan.
Brady Bonds are issued under the framework of the Brady Plan, an initiative
announced by former U.S. Treasury Secretary Nicholas F. Brady in 1989 as a
mechanism for debtor nations to restructure their outstanding external
indebtedness. The Brady Plan contemplates, among other things, the debtor
nation's adoption of certain economic reforms and the exchange of commercial
bank debt for newly issued bonds.
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PURCHASE OF SHARES
THE MICROCAP FUND IS CURRENTLY CLOSED TO NEW INVESTORS AND TO ADDITIONAL SHARE
PURCHASES EXCEPT FOR REINVESTMENT OF DIVIDENDS FROM THE FUND. THE FUND MAY
REOPEN FROM TIME-TO-TIME AT THE COMPANY'S DISCRETION
Institutional Shares of the Bond and Equity Funds and Shares of the Money Market
Funds are offered and sold on a continuous basis by the distributor for the
Funds, B.C. Ziegler and Company (the "Distributor"), which is independent of
the Adviser. The Distributor is a registered broker-dealer with offices at 215
North Main Street, West Bend, Wisconsin 53095.
Institutional Shares of the Bond and Equity Funds are exclusively sold to and
held by (a) trust, agency or custodial accounts opened through a Firstar
Corporation trust department, trust company or trust affiliate; (b) employer-
sponsored qualified retirement plans and (c) clients of FIRMCO. All share
purchases are effected pursuant to a customer's account at Firstar Trust Company
("Firstar Trust") or at another chosen institution pursuant to procedures
established in connection with the requirements of the account. Confirmations of
share purchases and redemptions will be sent to Firstar Trust or the other
institution involved. Firstar Trust and the other institutions (or their
nominees) (collectively referred to as "Institutions") will normally be the
holders of record of Fund shares, and will reflect their customers' beneficial
ownership of shares in the account statements provided by them to their
customers. The exercise of voting rights and the delivery to customers of
shareowner communications from the Fund will be governed by the customers'
account agreements with Firstar Trust and the other Institutions. Investors
wishing to purchase shares of the Funds should contact their account
representatives.
Institutional Shares and Shares of the Money Market Funds are sold without a
charge imposed by the Fund, although Institutions may charge fees for providing
administrative or other services in connection with investments in Fund shares.
The minimum initial investment for shares in the Institutional Money Market Fund
is $1,000,000 to be made by an individual account or combination of accounts;
however, Institutions may set different minimums for their customers. There is
no minimum initial or subsequent investment for Shares of the other Money Market
Funds or for Institutional Shares of the Bond and Equity Funds. The maximum
investment in the MicroCap Fund for an investor is $5,000,000.
Purchase orders must be transmitted to the Fund's transfer agent by telephone
(1-800-228-1024; in Milwaukee area: 414-287-3808 or by fax 414-287-3610 only if
preceded by a telephone call) prior to sending a wire in order to obtain a
confirmation number and to ensure prompt and accurate handling of funds.
Purchase orders for Money Market Funds that are received by the transfer agent
before 11:30 a.m. Central Time (12:30 p.m. Central Time for the Institutional
Money Market Fund) on a business day will be executed at that time, provided the
Institution placing the order undertakes to pay for its order in immediately
available funds wired to the transfer agent by the close of regular trading
hours on the New York Stock Exchange (the "Exchange"), or in the case of
orders placed by other investors, payment in such form and by such time is
guaranteed by a creditworthy financial institution at the time the order is
placed. Purchase orders for Money Market Funds received before 11:30 a.m.
Central Time (12:30 p.m. Central Time for the Institutional Money Market Fund)
on a business day when payment is made in any form other than by a same day wire
of immediately available funds, as well as orders received after 11:30 a.m.
Central Time (12:30 p.m. Central Time for the Institutional Money Market Fund)
and before the close of regular trading hours on the Exchange, normally 3:00
p.m. Central Time, will be executed as of the close of regular trading hours on
the Exchange, provided that payment is received by the close of regular trading
hours on the Exchange. Purchase orders for all other Funds that are received by
the transfer agent before the close of regular trading hours on the Exchange,
normally 3:00 p.m. Central Time, will be executed as of the close of regular
trading hours on the Exchange, provided that payment is received by the close of
regular trading hours on the Exchange. Purchase orders that are received after
the close of regular trading hours on the Exchange or on non-business days, and
orders for which payment is not received by the close of regular trading hours
on the Exchange on a business day, will be executed on the next business day
after receipt of both the order and payment in proper form by the transfer
agent.
Payment for Fund shares should be transmitted by wire in immediately available
funds to:
Firstar Bank Milwaukee, N.A.
ABA #0750-00022
Account #112-952-137
for further credit to
[name of the Fund]
[the investor's sixteen digit account number and the name/title of the account].
The Fund and its transfer agent are not responsible for the consequences of
delays resulting from the banking or Federal Reserve Wire system, or from
incomplete wiring instructions.
Payment may also be made by check payable to: Firstar Funds, P.O. Box 3011,
Milwaukee, WI 53201-3011, or delivered (via overnight delivery or in person) to
615 E. Michigan Street, Milwaukee, WI 53202.
It is the responsibility of Institutions to transmit orders and payment for the
purchase of shares by their customers to the transfer agent on a timely basis,
in accordance with the procedures stated above.
Certificates for shares will be issued only upon the request of an Institution.
The Funds reserve the right to reject any purchase order.
Payment for shares of a Fund in the amount of $1,000,000 or more may, at the
discretion of the Fund, be made in the form of securities that are permissible
investments for the Fund involved as described in this Prospectus. For further
information, see the SAI or contact the Firstar Funds Center at 1-800-982-8909
or 414-287-3710 (Milwaukee area).
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REDEMPTION OF SHARES
Customers who purchase Institutional Shares of a Fund through accounts at an
Institution may redeem all or part of their shares in accordance with the
instructions and limitations pertaining to such accounts. The procedures will
vary according to the type of account and Institution involved, and customers
should consult their account representatives in this regard.
Redemption orders must be transmitted by an Institution to the transfer agent in
writing or by telephone in the manner described under "Purchase of Shares."
Shares are redeemed at the net asset value per share next determined after the
transfer agent's receipt of the redemption order.
Payment for redeemed shares will normally be wired (if account is preauthorized)
in federal funds on the next business day if the redemption order is received by
the transfer agent before 3:00 p.m. Central Time. A Fund reserves the right,
however, to delay the wiring of redemption proceeds for up to seven days after
receipt of a redemption order if, in the judgment of the Adviser, an earlier
payment could adversely affect the Fund. However, if any portion of the shares
to be redeemed represents an investment made by check, the Funds may delay the
payment of the redemption proceeds until the transfer agent is reasonably
satisfied that the check has been collected, which may take up to twelve days
from the purchase date. The transfer agent currently charges a $15.00 fee for
each IRA distribution, which will be deducted from the shareowner's account or,
at the request of an Institution, billed directly to the Institution requesting
the redemption.
Firstar imposes no charge when shares are redeemed. However, Institutions may
charge a fee for providing administrative or other services in connection with
investments in Fund shares. If a customer has agreed with a particular
Institution to maintain a minimum account balance and the balance falls below
that minimum, the customer may be obliged by the Institution to redeem all or
part of the customer's shares in the Fund to the extent necessary to maintain
the required minimum balance. Firstar may also redeem shares of the Fund
involuntarily or make payment for redemption in securities if it appears
appropriate to do so in light of Firstar's responsibilities under the 1940 Act.
Investors would bear any brokerage or other transaction costs incurred in
converting the securities received to cash. See the SAI for examples of when
such redemptions might be appropriate.
It is the responsibility of Institutions to transmit redemption orders and
credit their customers' accounts with the redemption proceeds on a timely basis
in accordance with their agreements with the customers and to provide their
customers with account statements with respect to share transactions made for
the accounts.
In an effort to prevent unauthorized or fraudulent purchase and redemption
requests by telephone, Firstar and the transfer agent employ reasonable
procedures specified by the Funds to confirm that such instructions are genuine.
Among the procedures used to determine authenticity, investors electing to
purchase, redeem or exchange by telephone will be required to provide their
account number (unless opening a new account). All such telephone transactions
will be tape recorded and, except for transactions in Money Market Funds,
confirmed in writing to the shareowner. Statements of accounts shall be
conclusive if not objected to in writing within 10 days after transmitted by
mail. Firstar may implement other procedures from time to time. If reasonable
procedures are not implemented, Firstar and/or the transfer agent may be liable
for any loss due to unauthorized or fraudulent transactions. In all other cases,
the shareowner is liable for any loss for unauthorized transactions.
The Funds will not accept payment in cash or third party checks for the purchase
of shares. Federal regulations require that each investor provide a taxpayer
identification number upon opening or reopening an account. The Funds reserve
the right to reject applications without such a number or an indication that a
number has been applied for. If a number has been applied for, the number must
be provided and certified within sixty days of the date of the application.
Any accounts opened without a proper number will be subject to backup
withholding at a rate of 31% on all liquidations and dividend and capital
gain distributions.
INTERNET TRANSACTIONS. It is expected that the Funds will make available a
service which will permit shareowners to request purchases, exchanges and
redemptions of Fund shares after an account is opened on-line via the Internet.
For further information on this service and to authorize this service after it
is available, call Firstar Trust Company at 1-800-228-1024, and follow the
instructions you receive.
Firstar and its agents will not be responsible for any losses resulting from
unauthorized on-line transactions when procedures are followed which are
designed to confirm that the on-line transaction request is genuine. Statements
of accounts shall be conclusive if not objected to in writing within 10 days
after transmitted by mail. During periods of significant economic or market
change, it may be difficult to reach the Funds on-line. If this happens, you may
initiate transactions in your share accounts by mail or otherwise as described
in the Prospectus.
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EXCHANGE OF SHARES
Institutional Shareowners generally are permitted to exchange their
Institutional Shares in a Fund for Institutional Shares of other funds in the
Firstar family of funds, provided that such other shares may legally be sold in
the state of the investor's residence and the investor is eligible for
Institutional Shares at the time of the exchange. This exchange privilege does
not apply to shares of the Institutional Money Market Fund. Firstar reserves the
right to terminate indefinitely the exchange privilege of any shareowner or
account representative who requests more than four exchanges within a calendar
year, whether for oneself or one's customers. Firstar may determine to do so
with prior notice to the shareowner or account representative based on a
consideration of both the number of exchanges the particular shareowner or
account representative has requested and the time period over which those
exchange requests have been made, together with the level of expense to the
Funds or other adverse effects which may result from the additional exchange
requests.
Investors may find the exchange privilege useful if their investment objectives
or market outlook should change after they invest in the Firstar family of
funds. For federal income tax purposes, an exchange of shares is a taxable event
and, accordingly, a capital gain or loss may be realized by an investor. Before
making an exchange request, an investor should consult a tax or other financial
adviser to determine the tax consequences of a particular exchange. No exchange
fee is currently imposed by Firstar on exchanges. Firstar reserves, however, the
right to impose a charge in the future. In addition, Institutions may charge a
fee for providing administrative or other services in connection with exchanges.
The Funds reserve the right to reject any exchange request with prior notice to
a shareowner and the exchange privilege may be modified or terminated at any
time. At least sixty days' notice will be given to shareowners of any material
modification or termination except where notice is not required under SEC
regulations. The responsibility of the Funds and their transfer agent for the
authenticity of telephone exchange instructions is limited as described above
under "Redemption of Shares."
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DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income of the Money Market, Institutional Money
Market, U.S. Treasury Money Market, U.S. Government Money Market and Tax-Exempt
Money Market Funds are declared on each business day on the shares that are
outstanding immediately after 11:30 a.m. Central Time (12:30 p.m. Central Time
for the Institutional Money Market Fund) on the declaration date.
Dividends from net investment income of the Short-Term Bond Market, Intermediate
Bond Market, Tax-Exempt Intermediate Bond and Bond IMMDEX/TM Funds are declared
and paid monthly. Dividends from net investment income of the Balanced Growth,
Growth and Income and Equity Index Funds are declared and paid quarterly.
Dividends from net investment income of the Growth, Special Growth, Emerging
Growth, MicroCap and International Equity Funds are declared and paid annually.
Each non-money market Fund's net realized capital gains are distributed at least
annually to avoid tax to the Fund. The money market Funds do not expect to
realize net long-term capital gains.
Dividends and distributions will reduce the net asset value of the Funds'
Institutional Shares of the non-money market Funds by the amount of the dividend
or distribution. Dividends and distributions are automatically reinvested in
additional Institutional Shares of the non-money market Funds or Shares of the
Money Market Funds on which the dividend or distribution is paid at their net
asset value per share (as determined on the payable date), unless the shareowner
notifies the transfer agent or account representative that dividends or capital
gains distributions, or both, should be paid in cash. Cash dividends and
distributions will be paid by check, or by wire transfer if requested by the
shareowner, within five business days after the end of the month or within five
business days after a redemption of all of a shareowner's shares of a Fund.
Reinvested dividends and distributions receive the same tax treatment as those
paid in cash.
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MANAGEMENT OF THE FUNDS
The business and affairs of the Funds are managed under the direction of the
Board of Directors of the Firstar Funds, Inc. ("Firstar" or the"Company").
The SAI contains the name and background information regarding each Director.
ADVISORY SERVICES
FIRMCO, a Wisconsin limited liability company and subsidiary of Firstar
Corporation, a bank holding company, serves as investment adviser to each Fund.
FIRMCO, with principal offices at Firstar Center, 777 East Wisconsin Avenue, 8th
Floor, Milwaukee, Wisconsin 53202, has been engaged in the business of providing
investment advisory services since 1986. FIRMCO currently has $22.3 billion in
assets under active management, of which $13.4 billion is invested in fixed
income and money market securities and $8.9 billion in equity securities.
Firstar Corporation has agreed to permit the Company to use the name "Firstar
Funds' and expansions thereof on a non-exclusive and royalty-free basis in
connection with mutual fund management and distribution services within the
United States, its territories and possessions; this agreement may be terminated
by Firstar Corporation under specified circumstances, including if no affiliate
of Firstar Corporation is serving as investment adviser for any portfolio
offered by the Company.
Subject to the general supervision of the Board of Directors and in accordance
with the respective investment objective and policies of each Fund, the Adviser
manages each Fund's portfolio, makes decisions with respect to and places orders
for all purchases and sales of each Fund's portfolio securities, and maintains
records relating to such purchases and sales (except for the International
Equity Fund). Subject to the general supervision of the Board of Directors and
in accordance with the investment objective and policies of the International
Equity Fund, the Adviser is responsible for the Fund's investment program,
general investment criteria and policies. Under the terms of the Advisory
Agreement between the Fund and the Adviser, the Adviser is authorized to
delegate its duties under that agreement to another adviser. As described below,
the Adviser has retained Hansberger Global Investors, Inc. with respect to the
International Equity Fund's investments.
The Adviser (or Sub-Adviser for the International Equity Fund) is authorized to
allocate purchase and sale orders for portfolio securities to Shareowner
Organizations, including, in the case of agency transactions, Shareowner
Organizations which are affiliated with the Adviser (or Sub-Adviser), to take
into account the sale of Fund shares if the Adviser (or Sub-Adviser for the
International Equity Fund) believes that the quality of the transaction and the
amount of the commission are comparable to what they would be with other
qualified brokerage firms.
The Adviser is entitled to receive from each Fund a fee, calculated daily and
payable monthly, at the following annual rates (as a percentage of the Fund's
average daily net assets): 0.50% on the first $2 billion of the Money Market,
Institutional Money Market, U.S. Treasury Money Market, U.S. Government Money
Market and Tax-Exempt Money Market Funds, plus 0.40% on average daily net assets
in excess of $2 billion; 0.60% for the Short-Term Bond Market Fund; 0.50% for
each of the Intermediate Bond Market and Tax-Exempt Intermediate Bond Funds;
0.30% for the Bond IMMDEX/TM Fund; 0.75% for each of the Balanced Growth, Growth
and Income, Growth, Special Growth and Emerging Growth Funds; 0.25% for the
Equity Index Fund; 1.50% for the MicroCap Fund; 1.50% on the International
Equity Fund's first $25 million, 1.25% on the next $75 million and 1.10% on
average daily net assets in excess of $100 million. The Adviser earned fees, net
of waivers, for the fiscal year ended October 31, 1997, at the annual rate of
0.33% for the Money Market Fund, 0.29% for the Institutional Money Market Fund,
0.40% for the U.S. Treasury Money Market Fund, 0.47% for the U.S. Government
Money Market Fund, 0.42% for the Tax-Exempt Money Market Fund, 0.32% for the
Short-Term Bond Market Fund, 0.35% for the Intermediate Bond Market Fund, 0.19%
for the Tax-Exempt Intermediate Bond Fund, 0.30% for the Bond IMMDEX/TM Fund,
0.57% for the Balanced Growth Fund, 0.75% for the Growth and Income Fund, 0.75%
for the Growth Fund, 0.25% for the Equity Index Fund, 0.75% for the Special
Growth Fund, 0.47% for the Emerging Growth Fund, 1.50% for the MicroCap Fund and
0.77% for the International Equity Fund.
The Adviser may voluntarily waive all or a portion of the advisory fee otherwise
payable by a Fund from time to time. These waivers may be terminated at any time
at the Adviser's discretion.
Hansberger Global Investors, Inc., a Delaware corporation founded in 1994, with
its principal office at 515 East Las Olas Boulevard, Suite 1300, Fort
Lauderdale, Florida 33301, provides sub-advisory services to the International
Equity Fund. Subject to the oversight and supervision of the Fund's Board of
Directors and Adviser, the Sub-Adviser formulates and implements a continuous
investment program for the Fund, selects investments in accordance with the
Fund's investment objective and policies and places orders for purchases and
sales of the Fund's portfolio transactions subject to applicable law and
procedures adopted by the Fund's Board of Directors. Additional information
appears in the SAI.
As of October 31, 1997, the Sub-Adviser had $1.4 billion in assets under
management.
The Sub-Adviser is entitled to a fee, payable by the Adviser, for its services
and expenses incurred with respect to the International Equity Fund. The fee is
computed daily and paid monthly at the following annual rates (as a percentage
of the Fund's average daily net assets): 0.75% on the Fund's first $25 million,
0.50% of the next $75 million and 0.35% of the Fund's average daily net assets
in excess of $100 million.
The following are biographies of the portfolio managers of each non-money market
Fund.
Mary Ellen Stanek and Daniel Tranchita co-manage the Short-Term Bond Market
Fund. Ms. Stanek is the President of FIRMCO and Director of Fixed Income
Services; she has served in this role since 1994. In addition, Ms. Stanek has
served as an officer of the Funds since September 1994. She has nineteen years
of investment management experience and was named a Director of FIRMCO in 1992.
Prior to joining FIRMCO, Ms. Stanek headed the Fixed Income and Quantitative
Investment Management Department at Firstar Trust Company. She has been the
Fund's portfolio manager since its inception on December 29, 1989. Mr. Tranchita
is a Vice President and Senior Portfolio Manager and has been with Firstar since
1989. He has nine years of investment management experience and has been a
portfolio manager of the Fund since January 1, 1993. Both Ms. Stanek and Mr.
Tranchita are Chartered Financial Analysts.
Mary Ellen Stanek and Teresa Westman co-manage the Intermediate Bond Market
Fund. A Senior Vice President and Senior Portfolio Manager of FIRMCO, Ms.
Westman joined Firstar in 1987 and has eleven years of investment management
experience. Ms. Westman is a Chartered Financial Analyst. Both Ms. Stanek and
Ms. Westman have managed the Fund since its inception on January 5, 1993.
Warren Pierson manages the Tax-Exempt Intermediate Bond Fund. Mr. Pierson joined
Firstar in 1985 and has twelve years of fixed income experience at Firstar. He
is a Vice President and Senior Portfolio Manager of FIRMCO and has been the
portfolio manager of the Fund since June 22, 1993. Mr. Pierson is a Chartered
Financial Analyst.
Mary Ellen Stanek and Teresa Westman co-manage the Bond IMMDEX/TM Fund. Ms.
Stanek has managed the Fund since its inception on December 29, 1989. Ms.
Westman has been a portfolio manager of the Fund since January 1, 1992.
Teresa Westman and Marian Zentmyer co-manage the Balanced Growth Fund. Ms.
Westman has managed the Fund since its inception on March 30, 1992. Ms.
Zentmyer, a Senior Vice President and Senior Portfolio Manager of FIRMCO, has
been with Firstar since 1982 and has nineteen years of investment management
experience. Ms. Zentmyer is a Chartered Financial Analyst and Certified
Financial Planner and has managed the Fund since June 18, 1996.
Marian Zentmyer and Maya Bittar co-manage the Growth and Income Fund. Ms.
Zentmyer has managed the Fund since February 22, 1993. Ms. Bittar is a Vice
President and Senior Portfolio Manager of FIRMCO and has been with Firstar since
1993. She has five years of investment management experience and has managed the
Fund since October 1, 1995. Ms. Bittar is a Chartered Financial Analyst.
Daniel Tranchita and Carl Smith co-manage the Equity Index Fund. Mr. Tranchita
has managed the Fund since July 1, 1992. Mr. Smith is an Assistant Vice
President and Portfolio Manager of FIRMCO, has been with Firstar since 1982 and
has managed the Fund since July 1, 1997. Mr. Smith has five years of investment
management experience.
Marian Zentmyer, Maya Bittar and Walter Dewey co-manage the Growth Fund. Ms.
Zentmyer has managed the Fund since June 18, 1996 and Ms. Bittar since December
1 ,1996. Mr. Dewey is a Vice President and Senior Portfolio Manager of FIRMCO
and has been with Firstar since 1986 and has thirteen years of investment
management experience. Mr. Dewey is a Chartered Financial Analyst and has
managed the Fund since July 7,1997.
J. Scott Harkness and Todd Krieg co-manage the Special Growth Fund. Mr. Harkness
has managed the Fund since its inception on December 28, 1989. Mr. Harkness is
Chairman, a Director and Chief Investment Officer of FIRMCO. He has been with
Firstar for seventeen years and has eighteen years of investment management
experience. Mr. Krieg has been with Firstar since 1992 and has six years of
investment management experience. Mr. Krieg is a Vice President and Senior
Portfolio Manager of FIRMCO and has managed the Fund since September 1, 1994.
Mr. Harkness and Mr. Krieg are Chartered Financial Analysts.
Todd Krieg and Matthew D'Attilio co-manage the Emerging Growth Fund. Mr.
D'Attilio is an Assistant Vice President and Portfolio Manager of FIRMCO and has
been with Firstar since 1993. He has five years of investment management
experience. Both Mr. Krieg and Mr. D'Attilio are Chartered Financial Analysts
and have managed the Fund since its inception on August 15, 1997.
Joe Frohna manages the MicroCap Fund. Mr. Frohna is an Assistant Vice President
and Portfolio Manager of FIRMCO and has been with Firstar since 1995. He has
five years of investment management experience and has managed the Fund since
September 9, 1997. Mr. Frohna is a Chartered Financial Analyst and Certified
Public Accountant.
Daniel Tranchita has managed the International Equity Fund for the Adviser since
its inception on April 28, 1994. The portfolio management team, comprised of
James Chaney, Robert Mazuelos and John Hock manages the Fund for the Sub-
Adviser. Mr. Chaney is primarily responsible for the day to day management of
the Fund. Mr. Chaney joined the Sub-Adviser as Chief Investment Officer in 1996
and has thirteen years of investment experience. Prior to joining the Sub-
Adviser, he was Executive Vice President for Templeton Worldwide, Inc. and a
senior member of its Portfolio Management/Strategy Committee. Robert Mazuelos
joined the Sub-Adviser in 1995 as a research analyst. Prior to joining the Sub-
Adviser, he was a performance analyst at Templeton Investment Counsel, Inc.
where he was responsible for return analysis on separate accounts and mutual
funds. John Hock joined the Sub-Adviser in 1996 as a research analyst. Prior to
joining the Sub-Adviser, he was a senior analyst in the global securities
research and economics group at Merrill Lynch.
ADMINISTRATIVE SERVICES
Firstar Trust Company ("Firstar Trust") and B. C. Ziegler and Company
("Ziegler") serve as the Co-Administrators (the"Co-Administrators"). The Co-
Administrators have agreed to provide the following administrative services for
the Firstar Funds: assist in maintaining office facilities for the Funds;
furnish clerical and certain other services required by the Funds; compile data
for and prepare notices to the SEC; prepare semiannual reports to the SEC and
current shareowners and filings with state securities commissions; coordinate
federal and state tax returns; monitor the arrangements pertaining to the Funds'
agreements with shareowner organizations; monitor the Funds' expense accruals;
monitor compliance with the Funds' investment policies and limitations; and
generally assist the Funds' operations. As further described in the SAI, certain
services under the Co-Administration Agreement are provided jointly by Firstar
Trust and Ziegler and other services are provided separately by either Firstar
Trust or Ziegler. The Co-Administrators are entitled to receive a fee for their
administrative services, computed daily and payable monthly, at the annual rate
of 0.125% of Firstar's first $2 billion of average aggregate daily net assets,
plus 0.10% of Firstar's average aggregate daily net assets in excess of $2
billion. The Co-Administrators may voluntarily waive all or a portion of their
administrative fee from time to time. These waivers may be terminated at any
time at the Co-Administrators' discretion.
For the fiscal year ended October 31, 1997, the Funds accrued administrative
fees, after waivers, at the following effective annual rates of each Fund's
respective average net assets 0.04%, 0.02%, 0.04%, 0.04%, 0.04%, 0.04%, 0.04%,
0.04%, 0.04%, 0.04%, 0.04%, 0.04%, 0.04%, 0.04%, 0.04%, 0.04% and 0.04% for the
Money Market, Institutional Money Market, U.S. Treasury Money Market, U.S.
Government Money Market, Tax-Exempt Money Market, Short-Term Bond Market,
Intermediate Bond Market, Tax-Exempt Intermediate Bond, Bond IMMDEX/TM, Balanced
Growth, Growth and Income, Equity Index, Growth, Special Growth, Emerging
Growth, MicroCap and International Equity Funds.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING
AGENT, AND ACCOUNTING SERVICES AGENT
Firstar Trust, an affiliate of the Adviser, provides transfer agency and
dividend disbursing agency services for all the Funds and custodial and
accounting services for the Funds. For the fiscal year ended October 31, 1997,
total transfer agency, dividend disbursing agency, custodial and accounting
services fees earned by Firstar Trust were approximately: 0.13%, 0.03%, 0.09%,
0.06%, 0.08%, 0.10%, 0.08%, 0.16%, 0.06%, 0.09%, 0.06%, 0.06%, 0.07%, 0.06%,
0.18%, 0.10% and 0.19% of the Money Market, Institutional Money Market, U.S.
Treasury Money Market, U.S. Government Money Market, Tax-Exempt Money Market,
Short-Term Bond Market, Intermediate Bond Market, Tax-Exempt Intermediate Bond,
Bond IMMDEX/TM, Balanced Growth, Growth and Income, Equity Index, Growth,
Special Growth, Emerging Growth, MicroCap and International Equity Funds'
average daily net assets, respectively. Additional information regarding the
fees payable by the Funds to Firstar Trust for these services is provided in the
SAI. Inquiries to the transfer agent may be sent to the following address:
Firstar Trust Company, P.O. Box 3011, Milwaukee, Wisconsin 53201-3011.
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INVESTMENT LIMITATIONS
Except for the limitations detailed below, the investment objective and policies
of each Fund described in this Prospectus are not fundamental and may be changed
by the Board of Directors without the affirmative vote of the holders of a
majority of a Fund's outstanding shares. If there is a change in a Fund's
investment objective, shareowners should consider whether the Fund remains an
appropriate investment in light of their then current financial position and
needs. The following descriptions summarize several of each Fund's fundamental
investment limitations which are set forth in full in the SAI.
NO FUND MAY:
1. Purchase securities of any one issuer (other than U.S. government
securities) if more than 5% of the value of its total assets will be
invested in the securities of such issuer, except that up to 25% of the
value of a Fund's total assets may be invested without regard to this 5%
limitation.
2. Subject to the foregoing 25% exception, purchase more than 10% of the
outstanding voting securities of any issuer.
3. Invest 25% or more of its total assets in one or more issuers conducting
their principal business activities in the same industry.
4. With the exception of the MicroCap Fund, borrow money or enter into reverse
repurchase agreements except for temporary purposes in amounts up to 10% of
the value of the total assets at the time of such borrowing, or mortgage,
pledge or hypothecate any assets except in connection with such borrowings.
Whenever borrowings (including reverse repurchase agreements) exceed 5% of
the Fund's total assets, the Fund will not make any investments. The
MicroCap Fund may not borrow money or enter into reverse repurchase
agreements in amounts over one-third of the value of the total assets at the
time of such borrowing, or mortgage, pledge or hypothecate any assets except
in connection with such borrowings.
In addition, the Tax-Exempt Money Market Fund and the Tax-Exempt Intermediate
Bond Fund may not:
5. Invest less than 80% of its net assets in securities the interest on which
is exempt from federal income tax, except during defensive periods or during
periods of unusual market conditions. For purposes of this fundamental
policy, Municipal Obligations that are subject to federal alternative
minimum tax are considered taxable.
With respect to Investment Limitation No. 1, in accordance with current SEC
regulations, the Money Market Fund intends (as a matter of nonfundamental
policy) to limit investments in the securities of any single issuer (other than
securities issued or guaranteed by the U.S. government, it agencies or
instrumentalities, certain fully collateralized repurchase agreements,
securities with certain guarantees and, under certain circumstances, securities
of certain money market funds) to not more than 5% of the Fund's total assets at
the time of purchase, provided that the Fund may invest up to 25% of its total
assets in the securities of any one issuer for a period of up to three business
days. Compliance with the diversification requirements of SEC Rule 2a-7 will be
deemed to be compliance with the fundamental diversification restriction above.
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
the Fund's portfolio securities will not constitute a violation of such
limitation. If, due to market fluctuations or other reasons, the amount of
borrowings or reverse repurchase agreements exceed the limit stated above, a
Fund will promptly reduce such amount.
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TAXES
FEDERAL
Firstar's management intends that each Fund will qualify as a "regulated
investment company' under the Internal Revenue Code of 1986, as amended (the
"Code"). Such qualification generally will relieve each Fund of liability for
federal income taxes to the extent its earnings are distributed in accordance
with the Code.
Any dividend or distribution out of "net capital gain" (the excess of a Fund's
net long-term capital gain over its net short-term capital loss), if any, of a
Fund will be taxable to a shareowner of a Fund as long-term capital gain,
regardless of how long the shareowner has held shares of a Fund. Such long-term
capital gain will be 20% or 28% rate gain, depending upon the Fund's holding
period for the assets the sale of which generated the capital gain. All other
distributions, to the extent that they are taxable, are taxed to shareowners as
ordinary income.
In addition, the Tax-Exempt Money Market Fund and the Tax-Exempt Intermediate
Bond Fund each contemplate paying to its respective shareowners at least 90% of
its exempt interest income net of certain deductions. Dividends derived from
exempt-interest income generally may be treated by shareowners as items of
interest excludable from their gross income under Section 103(a) of the Code,
unless under the circumstances applicable to the particular shareowner,
exclusion would be disallowed. (See SAI under "Additional Information
Concerning Taxes.') If a Fund should hold certain private activity bonds issued
after August 7, 1986, shareowners must include, as an item of tax preference,
the portion of dividends paid by the Fund that is attributable to interest on
such bonds in their federal alternative minimum taxable income for purposes of
determining liability (if any) for the 26%-28% alternative minimum tax
applicable to individuals and the 20% alternative minimum tax and the
environmental tax applicable to corporations. Corporate shareowners also must
also take all exempt-interest dividends into account in determining certain
adjustments for federal alternative minimum tax purposes. Shareowners receiving
Social Security benefits should note that all exempt-interest dividends will be
taken into account in determining the taxability of such benefits.
Before purchasing Fund shares, the impact of dividend or capital gain
distributions which are expected to be declared or have been declared, but not
paid, should be carefully considered. Any dividend or distribution paid by the
Fund shortly after the purchase of shares of the Fund will have the effect of
reducing the per share net asset value by the per share amount of the dividend
or distribution. Such dividends or distributions, although in effect a return of
capital to shareowners, are subject to income taxes.
Each Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of the dividends or gross proceeds paid to any shareowner (i) who
has provided an incorrect taxpayer identification number or no number at all,
(ii) who is subject to backup withholding by the Internal Revenue Service for
failure to properly include on his return payments of interest or dividends or
(iii) who has failed, when required to do so, to certify that he is not subject
to backup withholding. Each Fund generally will also withhold and remit to the
U.S. Treasury 10% of all distributions from individual retirement accounts to
any investor unless the transfer agent receives a written request not to
withhold federal income tax from the investor prior to the distribution date;
withholding on distributions from other types of Retirement Plans may be
mandatory and may be at a higher rate.
A taxable gain or loss may be realized by a shareowner upon a redemption,
transfer or exchange of Fund shares, depending on the tax basis of the shares
and their price at the time of such disposition.
Certain income received by the International Equity Fund may be subject to
foreign taxes. If more than 50% in value of the Fund's total assets at the close
of any taxable year consists of stocks or securities of foreign corporations,
the Fund may elect to treat any foreign taxes paid by it as paid by its
shareowners. If the Fund makes this election, each shareowner generally will be
required to include in income his respective pro rata portions of foreign taxes
and, if he itemizes his deductions, will be entitled to deduct such respective
pro rata portions in computing his taxable income or, alternatively, to claim
foreign tax credits (subject, in either case, to certain limitations). Each year
that the Fund makes this election, it will report to its shareowners the amount
per share of foreign taxes it has elected to have treated as paid by its
shareowners. If the Fund's dividends exceed its taxable income in any year, as a
result of currency-related losses or otherwise, all or a portion of the Fund's
dividends may be treated as a return of capital to shareowners for tax purposes.
The foregoing is only a brief summary of some of the important federal income
tax considerations generally affecting the Funds and their shareowners and is
not intended as a substitute for careful tax planning and is based on tax laws
and regulations which are in effect on the date of this Prospectus. Such laws
and regulations may be changed by legislative or administrative action.
Accordingly, investors in the Funds should consult their tax advisers with
specific reference to their own tax situation. Shareowners will be advised at
least annually as to the federal income tax consequences of dividends and
distributions made each year.
STATE AND LOCAL
Investors are advised to consult their tax advisers concerning the application
of state and local tax laws, which may have different consequences from those of
the federal income tax law described above. In particular, although the U.S.
Treasury Money Market Fund intends to invest primarily in U.S. Treasury
obligations, the interest on which is generally exempt from state income
taxation, an investor should consult his or her own tax adviser to determine
whether distributions from the Fund are exempt from state taxation in the
investor's own situation. Similarly, dividends paid by the Money Market,
Institutional Money Market, U.S. Government Money Market, Tax-Exempt Money
Market and Tax-Exempt Intermediate Bond Funds may be taxable to investors under
state or local law as dividend income even though all or a portion of such
dividends may be derived from interest on obligations which, if realized
directly, would be exempt from such income taxes.
- -------------------------------------------------------------------------------
DESCRIPTION OF SHARES
The Company was incorporated under the laws of the State of Wisconsin on
February 15, 1988 and is registered with the SEC as an open-end management
company. The Company, formerly known as Portico Funds, Inc., changed its name
effective February 1, 1998. The Articles of Incorporation authorize the Board of
Directors to issue up to 150 billion full and fractional shares of common stock,
$.0001 par value per share. The Company currently has 18 classes representing
interests in 18 investment portfolios. Each class of the Funds is currently
divided into two separate series, an Institutional Series and a Retail Series,
representing interests in the same Fund. Of these authorized shares, 5 billion
shares have been classified for each Money Market Fund, 50 million shares for
the Institutional series of the MicroCap Fund, 100 million shares for the
Institutional series of the Emerging Growth Fund and 500 million shares for each
Institutional series of each remaining non-money market Fund discussed in this
Prospectus.
Shares of each series bear their pro rata portion of all operating expenses paid
by the Funds, except certain payments of up to 0.25% of the average daily net
assets of the Retail Shares under the Funds' Distribution and Service Plan and
Shareowner Servicing Plan applicable only to Retail Series Shares. Retail Shares
are offered in separate prospectuses and, subject to certain exceptions, are
sold with sales charges. Institutional Shares are only sold to and held by (i)
trust, agency or custodial accounts opened through trust companies or trust
departments affiliated with Firstar Corporation; (ii) employer-sponsored
qualified retirement plans; and (iii) clients of FIRMCO. Retail Shares are
available to any investor who does not fall within the three preceding
categories. Firstar Funds offers various services and privileges in connection
with Retail Shares that are not offered in connection with Institutional Shares,
including a Periodic Investment Plan, ConvertiFund(R) and a Systematic
Withdrawal Plan. A salesperson and any other person or Institution entitled to
receive compensation for selling or servicing shares may receive different
compensation with respect to different series of shares.
For information regarding the other funds and series, contact the Firstar Funds
Center at 1-800-982-8909 or 414-287-3710 (Milwaukee area) or your Institution.
Firstar does not presently intend to hold annual meetings of shareowners except
as required by the 1940 Act or other applicable law. Firstar will call a meeting
of shareowners for the purpose of voting upon the question of removal of a
member of the Board of Directors upon written request of shareowners owning at
least 10% of the outstanding shares of Firstar that are entitled to vote. To the
extent required by law, Firstar will assist in shareowner communication in such
matters.
Shareowners of each class of Funds are entitled to one vote for each full share
held and proportionate fractional votes for fractional shares held and will vote
in the aggregate and not by Fund except where otherwise required by law. It is
contemplated that the shareowners of a Fund will vote separately on matters
relating to its investment advisory agreement (or sub-advisory agreement with
respect to the International Equity Fund) and any changes in its fundamental
investment limitations. On any matter submitted to the vote of shareowners which
only pertains to agreements, liabilities or expenses applicable to the
Institutional Shares but not the Retail Shares of the same Fund, only the
Institutional Shares will be entitled to vote. Shares of Firstar have
noncumulative voting rights and, accordingly, the holders of more than 50% of
Firstar's outstanding shares (irrespective of Fund) may elect all of the
Directors. As of December 31, 1997, the Adviser and its affiliates held, on
behalf of their underlying accounts, approximately 75% of Firstar's shares that
were outstanding on that date.
Each Institutional Share of a non-money market Fund represents an equal
proportionate interest with other Institutional Shares in the non-money market
Fund. Each share of a Money Market Fund represents an equal proportionate
interest in that Fund. Shares are entitled to such dividends and distributions
earned on its assets as are declared at the discretion of the Board of
Directors. Shares of the Funds do not have preemptive rights. Each Fund is
classified as a diversified company under the 1940 Act.
- -------------------------------------------------------------------------------
NET ASSET VALUE AND DAYS OF OPERATION
MONEY MARKET FUNDS
The net asset value of the Money Market Funds for purposes of pricing purchase
and redemption orders is determined as of 11:30 a.m. Central Time (12:30 p.m.
Central Time for the Institutional Money Market Fund) and as of the close of
regular trading hours on the Exchange, normally 3:00 p.m. Central Time, on each
day on which both the Exchange is open for trading and the Federal Reserve
Banks' Fedline System is open. As a result, shares of the Funds will not be
priced on the days which the Exchange or Federal Reserve Banks observe: New
Year's Day, Martin Luther King, Jr. Birthday , Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day,
Thanksgiving Day and Christmas Day. Net asset value per share is calculated by
dividing the value of all securities and other assets owned by each Fund, less
the liabilities charged to the Fund, by the number of the Fund's outstanding
shares.
The Company intends to use its best efforts to maintain the net asset value of
each Money Market Fund at $1.00 per share, although there is no assurance that
it will be able to do so on a continuous basis. Net asset value is computed
using the amortized cost method. In connection with the use of this valuation
method Firstar limits its the dollar-weighted average maturity of each Fund to
not more than 90 days and the remaining maturity of each portfolio security to
not more than thirteen months with certain exceptions permitted by SEC rules.
NON-MONEY MARKET FUNDS
The net asset value of each non-money market Fund for purposes of pricing
purchase and redemption orders is determined as of the close of regular trading
hours on the Exchange, normally 3:00 p.m. Central Time, on each day the Exchange
is open for trading. As a result, shares of the Funds will not be priced on the
days which the Exchange observes: New Year's Day, Martin Luther King, Jr.
Birthday , Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day. Net asset value per Institutional Share
is calculated by dividing the value of all securities and other assets owned by
each Fund that are allocable to Institutional Shares, less the liabilities
charged to Institutional Shares, by the number of the Fund's outstanding
Institutional Shares.
Securities which are traded on a recognized domestic stock exchange are valued
at the last sale price on the securities exchange on which such securities are
primarily traded or at the last sale price on the national securities market.
Portfolio securities which are primarily traded on foreign securities exchanges
are generally valued at the preceding closing values of such securities on their
respective exchanges, except when an occurrence subsequent to the time a value
was so established is likely to have changed such value. In such an event, the
fair value of those securities will be determined through the consideration of
other factors by or under the direction of the Board of Directors. Exchange-
traded securities for which there were no transactions are valued on the average
of the current bid and asked prices for the International Equity Fund and at the
current bid prices for the other non-money market Funds. Securities traded on
only over-the-counter markets are valued on the basis of closing over-the-
counter bid prices. Restricted securities, securities for which market
quotations are not readily available and other assets are valued at fair value
by the Adviser under the supervision of the Board of Directors. Short-term
investments having a maturity of 60 days or less are valued at amortized cost,
unless the amortized cost does not approximate market value.
Each Fund's securities may be valued based on valuations provided by an
independent pricing service. These valuations are reviewed by the Adviser. If
the Adviser believes that a valuation received from the service does not
represent a fair value, it values the security by a method that the Board of
Directors believes will determine a fair value. Any pricing service used may
employ electronic data processing techniques, including a "matrix" system, to
determine valuations.
Quotations of foreign securities in foreign currency are converted to U.S.
dollar equivalents using the foreign exchange quotation in effect at the time
net asset value is computed. Foreign securities held by the International Equity
Fund may trade in their local markets on days the Fund is closed, and the Fund's
net asset value may, therefore, change on days when investors may not purchase
or redeem Fund shares.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE FUNDS' SAI
INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE OFFERING MADE BY THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS OR THEIR DISTRIBUTOR. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUNDS OR BY THEIR DISTRIBUTOR
IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE
EQUITY INDEX FUND, BY SHAREOWNERS OF THE FUND, BY ANY PERSON OR BY ANY ENTITY
FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN IN CONNECTION
WITH THE USE LICENSED BY THE FUND, OR FOR ANY OTHER USE. S&P MAKES NO EXPRESS OR
IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL SUCH WARRANTIES OR
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE FOR USE WITH RESPECT TO THE
S&P 500 INDEX OR DATA INCLUDED THEREIN. "STANDARD & POOR'S(R),"S&P(R),"
"S&P 500(R),"STANDARD & POOR'S 500(R)," AND "500(R)" ARE SERVICE MARKS OF
S&P AND HAVE BEEN LICENSED FOR USE BY FIRSTAR.
STATEMENT OF ADDITIONAL INFORMATION (SAI). Additional information about the
Funds, contained in a SAI has been filed with the Securities and Exchange
Commission and is available upon request. The SEC maintains a website
(http://www.sec.gov) that contains the SAI, material incorporated by reference
and other information regarding registrants that file electronically with the
SEC. The current SAI bears the same date as this Prospectus and is incorporated
by reference in its entirety into the Prospectus.
TO OPEN AN ACCOUNT OR REQUEST INFORMATION
1-800-982-8909
1-414-287-3710
FOR ACCOUNT BALANCES AND INVESTOR SERVICES
1-800-228-1024
1-414-287-3808
FIRSTAR FUNDS CENTER
615 East Michigan Street
P.O. Box 3011
Milwaukee, Wisconsin 53201-3011
www.firstarfunds.com
TO OPEN AN ACCOUNT OR REQUEST INFORMATION
1-800-982-8909
1-414-287-3710
FOR ACCOUNT BALANCES AND INVESTOR SERVICES
1-800-228-1024
1-414-287-3808
FIRSTAR FUNDS CENTER
615 EAST MICHIGAN STREET
P.O. BOX 3011
MILWAUKEE, WI 53201-3011
WWW.FIRSTARFUNDS.COM
TO GET THERE, START HERE.(SM)
FIRSTAR FUNDS (LOGO)
FORM# 40-0193
Xxxxx
FIRSTAR FUNDS, INC.
Statement of Additional Information
Short-Term Bond Market Fund Balanced Growth Fund Special Growth Fund
Intermediate Bond Market Fund Growth and Income International Equity
Tax-Exempt Intermediate Fund Fund
Bond Fund Emerging Growth Fund MicroCap Fund
Equity Index Fund Growth Fund
Bond IMMDEX/TM Fund
February 1, 1998
TABLE OF CONTENTS
Page
Firstar Funds, Inc..........................................2
Investment Objectives and Policies..........................2
Additional Information on Portfolio Instruments.............6
Net Asset Value............................................29
Additional Purchase and Redemption Information.............30
Description of Shares......................................34
Additional Information Concerning Taxes....................36
Management of the Company..................................39
Custodian, Transfer Agent and Accounting Services Agent....50
Expenses...................................................51
Independent Accountants....................................51
Counsel....................................................51
Performance Calculations...................................51
Performance History........................................56
Miscellaneous..............................................59
Appendix A................................................A-1
Appendix B................................................B-1
This Statement of Additional Information ("SAI") is meant to be read in
conjunction with Firstar Funds, Inc.'s prospectuses ("Prospectuses") dated
February 1, 1998, for the Institutional and Retail Shares of the Short-Term Bond
Market Fund, Intermediate Bond Market Fund, Tax-Exempt Intermediate Bond Fund,
Bond IMMDEX Fund, Balanced Growth Fund, Growth and Income Fund, Equity Index
Fund, Growth Fund, Special Growth Fund, Emerging Growth Fund, MicroCap Fund and
International Equity Fund (collectively referred to as the "Funds") and is
incorporated by reference in its entirety into the Prospectuses. Because this
SAI is not itself a prospectus, no investment in shares of these Funds should
be made solely upon the information contained herein. Copies of the
Prospectuses for the Funds may be obtained by writing the Firstar Funds
Center at 615 East Michigan Street, P.O. Box 3011, Milwaukee, WI
53201-3011 or by calling 1-800-982-8909 or 414-287-3710 (Milwaukee area).
Capitalized terms used but not defined herein have the same meanings as in
the Prospectuses.
SHARES OF THE FUNDS ARE NOT BANK DEPOSITS, AND ARE NEITHER ENDORSED BY,
INSURED BY, GUARANTEED BY, OBLIGATIONS OF, NOR OTHERWISE SUPPORTED BY THE FDIC,
THE FEDERAL RESERVE BOARD, FIRSTAR INVESTMENT RESEARCH & MANAGEMENT COMPANY,
LLC, FIRSTAR TRUST COMPANY, FIRSTAR CORPORATION, ITS AFFILIATES OR ANY OTHER
BANK, OR OTHER GOVERNMENTAL AGENCY. AN INVESTMENT IN THE FUNDS INVOLVES
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
FIRSTAR FUNDS, INC.
Firstar Funds, Inc. (the "Company") is a Wisconsin corporation which was
incorporated on February 15, 1988 as a management investment company. The
Company, formerly known as Portico Funds, Inc., changed its name effective
February 1, 1998. The Company is authorized to issue separate classes of shares
of Common Stock representing interests in separate investment portfolios. Each
class for the funds is currently divided into two series, a retail and
institutional series. This SAI pertains to Retail Series and Institutional
Series Shares of twelve diversified portfolios, the Short-Term Bond Market Fund,
Intermediate Bond Market Fund, Tax-Exempt Intermediate Bond Fund, Bond IMMDEX
Fund, Balanced Growth Fund, Growth and Income Fund, Equity Index Fund, Growth
Fund, Special Growth Fund, Emerging Growth Fund, MicroCap Fund and
International Equity Fund (collectively the "Funds"). The Short-Term Bond
Market Fund changed its name from Short-Intermediate Fixed Income Fund effective
January 1, 1993. The Growth and Income Fund changed its name from the Income
and Growth Fund effective August 16, 1993. The Growth Fund changed its name
from the MidCore Growth Fund effective May 30, 1997. The Balanced Growth Fund
changed its name from the Balanced Fund effective February 1, 1998 and commenced
operations on March 30, 1992. The Growth and Income Fund, Equity Index Fund,
Short-Term Bond Market Fund and Bond IMMDEX Fund commenced operations on
December 29, 1989; the Special Growth Fund commenced operations on December 28,
1989; the Growth Fund commenced operations on December 29, 1992; the
Intermediate Bond Market Fund commenced operations on January 5, 1993; the Tax-
Exempt Intermediate Bond Fund commenced operations on February 8, 1993; the
International Equity Fund commenced operations on April 28, 1994; the Emerging
Growth Fund commenced operations on August 15, 1997; and the MicroCap Fund
commenced operations on August 1, 1995. The Company also offers other
investment portfolios which are described in separate prospectuses and
statements of additional information. For information concerning these other
portfolios, contact the Firstar Funds Center at 1-800-982-8909 or write to 615
East Michigan Street, P.O. Box 3011, Milwaukee, Wisconsin 53201-3011.
[/R]
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of the Short-Term Bond Market Fund is to seek to
provide an annual rate of total return, before Fund expenses, comparable to the
annual rate of total return on the Lehman Brothers 1-3 Year Government Corporate
Bond Index. The investment objective of the Intermediate Bond Market Fund is to
seek to provide an annual rate of total return, before Fund expenses, comparable
to the annual rate of total return on the Lehman Brothers Intermediate
Government/Corporate Bond Index. The investment objective of the Tax-Exempt
Intermediate Bond Fund is to seek to provide current income that is
substantially exempt from federal income tax and emphasize total return with
relatively low volatility of principal. The investment objective of the Bond
IMMDEX Fund is to seek to provide an annual rate of total return, before Fund
expenses, comparable to the annual rate of total return on the Lehman Brothers
Government Corporate Bond Index. The investment objective of the Balanced
Growth Fund is to seek capital appreciation and current income with low
volatility of capital. The investment objective of the Growth and Income Fund
is to seek both reasonable income and long-term capital appreciation. The
investment objective of the Equity Index Fund is to seek returns, before Fund
expenses, comparable to the price and yield performance of publicly-traded
common stocks in the aggregate, as represented by the S&P 500. The investment
objective of the Growth Fund is to seek capital appreciation through investment
in securities of large-sized companies. The investment objective of the Special
Growth Fund is to seek capital appreciation through investment in securities of
medium-sized companies. The investment objective of the Emerging Growth Fund is
to seek capital appreciation through investment in securities of small-sized
companies. The investment objective of the MicroCap Fund is to seek capital
appreciation through investment in securities of small companies. The investment
objective of the International Equity Fund is to seek capital appreciation
through investment in foreign securities of companies and governments which
the Sub-Adviser believes are undervalued. There is no assurance, however, that
the Funds' investment objectives will in fact be attained. The following
policies supplement the Funds' respective investment objectives and policies as
set forth in the Prospectuses.
Portfolio Transactions
Subject to the general supervision of the Board of Directors, the Adviser
is responsible for, makes decisions with respect to, and places orders for all
purchases and sales of portfolio securities for each Fund except the
International Equity Fund. Subject to the general supervision of the Board of
Directors, the Adviser is responsible for the portfolio management of the
International Equity Fund. Pursuant to the terms of the Adviser's Advisory
Agreement with the Fund, the Adviser has delegated certain of its duties to
Hansberger Global Investors, Inc. (the "Sub-Adviser" or "Hansberger Global").
Within the framework of the investment objectives, policies and restrictions of
the Fund, and subject to the supervision of the Adviser, the Sub-Adviser is
responsible for, makes decisions with respect to, and places orders for all
purchases and sales of portfolio securities for the International Equity Fund.
The portfolio turnover rate for each Fund is calculated by dividing the
lesser of purchases or sales of portfolio securities for the reporting period by
the monthly average value of the portfolio securities owned during the reporting
period. The calculation excludes all securities, including options, whose
maturities or expiration dates at the time of acquisition are one year or less.
Portfolio turnover may vary greatly from year to year as well as within a
particular year, and may be affected by cash requirements for redemption of
shares and by requirements which enable the Funds to receive favorable tax
treatment. Portfolio turnover will not be a limiting factor in making portfolio
decisions, and each Fund may engage in short-term trading to achieve its
investment objective.
Transactions on U.S. stock exchanges involve the payment of negotiated
brokerage commissions. On exchanges on which commissions are negotiated, the
cost of transactions may vary among different brokers. Unlike transactions on
U.S. stock exchanges which involve the payment of negotiated brokerage
commissions, transactions in foreign securities generally involve the payment of
fixed brokerage commissions which are generally higher than those in the United
States.
Transactions in the over-the-counter market are generally principal
transactions with dealers and the costs of such transactions involve dealer
spreads rather than brokerage commissions. With respect to over-the-counter
transactions, the Adviser and Sub-Adviser will normally deal directly with
dealers who make a market in the securities involved except in those
circumstances where better prices and execution are available elsewhere or as
described below.
Fixed income securities purchased and sold by the Short-Term Bond Market
Fund, Intermediate Bond Market Fund, Tax-Exempt Intermediate Bond Fund and Bond
IMMDEX Fund are generally traded in the over-the-counter market on a net basis
(i.e., without commission) through dealers, or otherwise involve transactions
directly with the issuer of an instrument. The cost of securities purchased
from underwriters includes an underwriting commission or concession, and the
prices at which securities are purchased from and sold to dealers include a
dealer's mark-up or mark-down.
The Funds may participate, if and when practicable, in bidding for the
purchase of portfolio securities directly from an issuer in order to take
advantage of the lower purchase price available to members of a bidding group.
The Funds will engage in this practice, however, only when the Adviser or Sub-
Adviser, in its sole discretion, believes such practice to be in the Funds'
interests.
For the fiscal years ended October 31, 1997, 1996, and 1995 the Company
paid brokerage commissions of $403,426, $364,819 and $226,925 with respect to
the Growth and Income Fund; $965,454, $1,128,115 and $714,710 with respect to
the Special Growth Fund; and $101,524, $109,625 and $41,610 with respect to the
Equity Index Fund, respectively. For the same periods, the Short-Term Bond
Market, Intermediate Bond Market, Tax-Exempt Intermediate Bond, and Bond IMMDEX
Funds paid no brokerage commissions. For the fiscal years ended October 31,
1997, 1996 and 1995, the Company paid brokerage commissions of $178,114,
$161,362 and $128,583, with respect to the Balanced Growth Fund. For the fiscal
years ended October 31, 1997, 1996 and 1995, the Company paid brokerage
commissions of $263,875, $224,353 and $190,681, with respect to the Growth
Fund. For the fiscal years ended October 31, 1997, 1996 and 1995, the Company
paid brokerage commissions of $161,449, $40,498 and $23,067 with respect to the
International Equity Fund. For the fiscal period from August 15, 1997 through
October 31, 1997 the Company paid brokerage commissions of $34,150 with respect
to the Emerging Growth Fund. For the fiscal year ended October 31, 1997, and
fiscal periods July 1, 1996 through October 31, 1996 and August 1, 1995 through
June 30, 1996 the Company paid brokerage commissions of $132,772, $75,526 and
$62,266 with respect to the MicroCap Fund. None of the brokerage commissions
were paid to affiliates of the Company, the Adviser, Sub-Adviser or the Co-
Administrators.
The Advisory Agreement between the Company and the Adviser and with respect
to the International Equity Fund, the Sub-Advisory Agreement among the Company,
the Adviser and Sub-Adviser, provides that, in executing portfolio transactions
and selecting brokers or dealers, the Adviser and Sub-Adviser will seek to
obtain the best overall terms available. In assessing the best overall terms
available for any transaction, the Adviser or Sub-Adviser shall consider factors
it deems relevant, including the breadth of the market in the security, the
price of the security, the financial condition and execution capability of the
broker or dealer, and the reasonableness of the commissions, if any, both for
the specific transaction and on a continuing basis. In addition, the Agreements
authorize the Adviser and Sub-Adviser to cause the Funds to pay a broker-dealer
which furnishes brokerage and research services a higher commission than that
which might be charged by another broker-dealer for effecting the same
transaction, provided that the Adviser or Sub-Adviser determines in good faith
that such commission is reasonable in relation to the value of the brokerage and
research services provided by such broker-dealer, viewed in terms of either the
particular transaction or the overall responsibilities of the Adviser and Sub-
Adviser to the Funds. Such brokerage and research services might consist of
reports and statistics relating to specific companies or industries, general
summaries of groups of stocks or bonds and their comparative earnings and
yields, or broad overviews of the stock, bond and government securities markets
and the economy.
Supplementary research information so received is in addition to, and not
in lieu of, services required to be performed by the Adviser or Sub-Adviser and
does not reduce the advisory fees payable to it by the Funds. The Directors
will periodically review the commissions paid by the Funds to consider whether
the commissions paid over representative periods of time appear to be reasonable
in relation to the benefits inuring to the Funds. It is possible that certain
of the supplementary research or other services received will primarily benefit
one or more other investment companies or other accounts for which investment
discretion is exercised. Conversely, a Fund may be the primary beneficiary of
the research or services received as a result of portfolio transactions effected
for such other account or investment company.
Portfolio securities will not be purchased from or sold to (and savings
deposits will not be made in and repurchase and reverse repurchase agreements
will not be entered into with) the Adviser, the Sub-Adviser, and the Distributor
or an affiliated person of any of them (as such term is defined in the 1940 Act)
acting as principal. In addition, the Funds will not purchase securities during
the existence of any underwriting or selling group relating thereto of which the
Distributor or their Adviser or Sub-Adviser, or an affiliated person of any of
them, is a member, except to the extent permitted by the Securities and Exchange
Commission ("SEC").
Investment decisions for the Funds are made independently from those for
other investment companies and accounts advised or managed by their Adviser or
Sub-Adviser. Such other investment companies and accounts may also invest in
the same securities as the Funds. When a purchase or sale of the same security
is made at substantially the same time on behalf of a Fund and another
investment company or account, the transaction will be averaged as to price and
available investments allocated as to amount, in a manner which the Adviser or
Sub-Adviser believes to be equitable to the Fund and such other investment
company or account. In some instances, this investment procedure may adversely
affect the price paid or received by a Fund or the size of the position obtained
or sold by the Fund. To the extent permitted by law, the Adviser or Sub-Adviser
may aggregate the securities to be sold or purchased for a Fund with those to be
sold or purchased for other investment companies or accounts in executing
transactions.
As of October 31, 1997, the Company held securities of its regular brokers
or dealers (as defined under the 1940 Act) or their parents as follows: the
Short-Term Bond Market, Intermediate Bond Market, Bond IMMDEX , and Balanced
Growth Funds held securities of Lehman Brothers totaling $11,249,122,
$8,227,849, $17,683,977, and $1,428,398, respectively; the Intermediate Bond
Market, Bond IMMDEX, Balanced Growth and Institutional Money Market Funds held
securities of Goldman Sachs totaling $4,931,580, $9,863,159, $1,479,474, and
$34,926,033, respectively; the Institutional Money Market, Equity Index and
Short-Term Bond Market Funds held securities of Morgan Stanley totaling
$11,915,667, $1,507,534 and $1,577,602, respectively; and the Short-Term Bond
Market, Intermediate Bond Market, Institutional Money Market, Growth and Income
and Equity Index Funds held securities of Merrill Lynch totaling $1,290,149,
$130,038, $59,325,388, $15,616,200 and $1,142,863 respectively.
Additional Information On Portfolio Instruments
Ratings. The ratings of Standard & Poor's, Moody's and other nationally
recognized rating agencies represent their opinions as to the quality of debt
securities. It should be emphasized, however, that ratings are general and are
not absolute standards of quality, and debt securities with the same maturity,
interest rate and rating may have different yields while debt securities of the
same maturity and interest rate with different ratings may have the same yield.
The payment of principal and interest on most debt securities purchased by
a Fund will depend upon the ability of the issuers to meet their obligations.
An issuer's obligations under its debt securities are subject to the provisions
of bankruptcy, insolvency, and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Code, and laws, if any, which may be
enacted by federal or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations. The power or ability of an issuer to meet its obligations
for the payment of interest on, and principal of, its debt securities may be
materially adversely affected by litigation or other conditions.
Subsequent to its purchase by a Fund, a rated security may cease to be
rated or its rating may be reduced below the minimum rating required for
purchase by the Fund. The Adviser or Sub-Adviser will consider such an event in
determining whether the Fund involved should continue to hold the security. For
a more detailed description of ratings, see Appendix A.
Securities Lending. Although none of the Funds intend to during the
current fiscal year, each of the Funds may lend its portfolio securities to
unaffiliated domestic broker/dealers and other institutional investors pursuant
to agreements requiring that the loans be secured by collateral equal in value
to at least the market value of the securities loaned in order to increase
return on portfolio securities. Collateral for such loans may include cash,
securities of the U.S. Government, its agencies or instrumentalities, or an
irrevocable letter of credit issued by a bank which meets the investment
standards stated below under "Money Market Instruments," or any combination
thereof. There may be risks of delay in receiving additional collateral or in
recovering the securities loaned or even a loss of rights in the collateral
should the borrower of the securities fail financially. However, loans will be
made only to borrowers deemed by the Adviser (and Sub-Adviser in the case of the
International Equity Fund) to be of good standing and when, in the Adviser's
(and Sub-Adviser's in the case of the International Equity Fund) judgment, the
income to be earned from the loan justifies the attendant risks. When a Fund
lends its securities, it continues to receive interest or dividends on the
securities loaned and may simultaneously earn interest on the investment of the
cash collateral which will be invested in readily marketable, high-quality,
short-term obligations. Although voting rights, or rights to consent, attendant
to securities on loan pass to the borrower, such loans may be called at any time
and will be called so that the securities may be voted by a Fund if a material
event affecting the investment is to occur.
Securities lending arrangements with broker/dealers require that the loans
be secured by collateral equal in value to at least the market value of the
securities loaned. During the term of such arrangements, a Fund will maintain
such value by the daily marking-to-market of the collateral.
Money Market Instruments. As described in the Prospectuses, the Funds may
invest from time to time in "money market instruments," a term that includes,
among other things, bank obligations, commercial paper, variable amount master
demand notes and corporate bonds with remaining maturities of thirteen months or
less. The MicroCap Fund's investments in money market instruments under normal
market conditions are expected to represent less than 10% of the Fund's net
assets, but may increase to 30% during abnormal market conditions. The
International Equity Fund may reduce its holdings in equity and other securities
and may invest up to 100% of its assets in certain short-term (less than twelve
months to maturity) and medium-term (not greater than five years to maturity)
debt securities and in cash (U.S. dollars, foreign currencies, or multicurrency
units) for temporary defensive purposes, during periods in which the Adviser (or
the Sub-Adviser) believes changes in economic, financial or political conditions
make it advisable.
Bank obligations include bankers' acceptances, negotiable certificates of
deposit and non-negotiable time deposits, including U.S. dollar-denominated
instruments issued or supported by the credit of U.S. or foreign banks or
savings institutions. Although the Funds will invest in money market
obligations of foreign banks or foreign branches of U.S. banks only where the
Adviser (and Sub-Adviser in the case of the International Equity Fund)
determines the instrument to present minimal credit risks, such investments may
nevertheless entail risks that are different from those of investments in
domestic obligations of U.S. banks due to differences in political, regulatory
and economic systems and conditions. All investments in bank obligations are
limited to the obligations of financial institutions having more than $1 billion
in total assets at the time of purchase, and investments by each Fund in the
obligations of foreign banks and foreign branches of U.S. banks will not exceed
25% of such Fund's total assets at the time of purchase. The Funds may also
make interest-bearing savings deposits in commercial and savings banks in
amounts not in excess of 5% of its net assets.
Investments by a Fund in commercial paper will consist of issues rated at
the time A-1 and/or P-1 by Standard & Poor's, Moody's or similar rating by
another nationally recognized rating agency. In addition, the Funds may acquire
unrated commercial paper and corporate bonds that are determined by the Adviser
at the time of purchase to be of comparable quality to rated instruments that
may be acquired by such Fund as previously described.
The Funds may also purchase variable amount master demand notes which are
unsecured instruments that permit the indebtedness thereunder to vary and
provide for periodic adjustments in the interest rate. Although the notes are
not normally traded and there may be no secondary market in the notes, a Fund
may demand payment of the principal of the instrument at any time. The notes
are not typically rated by credit rating agencies, but issuers of variable
amount master demand notes must satisfy the same criteria as set forth above for
issuers of commercial paper. If an issuer of a variable amount master demand
note defaulted on its payment obligation, a Fund might be unable to dispose of
the note because of the absence of a secondary market and might, for this or
other reasons, suffer a loss to the extent of the default. The Funds invest in
variable amount master demand notes only when the Adviser (and Sub-Adviser in
the case of the International Equity Fund) deem the investment to involve
minimal credit risk.
Repurchase Agreements. Each Fund may agree to purchase securities from
financial institutions subject to the seller's agreement to repurchase them at
an agreed upon time and price ("repurchase agreements"). During the term of the
agreement, the Adviser (and Sub-Adviser in the case of the International Equity
Fund) will continue to monitor the creditworthiness of the seller and will
require the seller to maintain the value of the securities subject to the
agreement at not less than 102% of the repurchase price. Default or bankruptcy
of the seller would, however, expose the Fund to possible loss because of
adverse market action or delay in connection with the disposition of the
underlying securities. The securities held subject to a repurchase agreement
may have stated maturities exceeding one year, provided the repurchase agreement
itself matures in less than one year.
The repurchase price under the repurchase agreements described in the
Prospectuses generally equals the price paid by a Fund plus interest negotiated
on the basis of current short-term rates (which may be more or less than the
rate on the securities underlying the repurchase agreement). Securities subject
to repurchase agreements will be held by the Funds' custodian (or sub-custodian)
or in the Federal Reserve/Treasury book-entry system or other authorized
securities depository. Repurchase agreements are considered to be loans under
the 1940 Act.
Investment Companies. Each Fund currently intends to limit its investments
in securities issued by other investment companies so that, as determined
immediately after a purchase of such securities is made: (i) not more than 5%
of the value of the Fund's total assets will be invested in the securities of
any one investment company; (ii) not more than 10% of the value of its total
assets will be invested in the aggregate in securities of investment companies
as a group; and (iii) not more than 3% of the outstanding voting stock of any
one investment company will be owned by the Fund or by the Company as a whole.
The Funds may invest from time to time in securities issued by other
investment companies which invest in high-quality, short-term debt securities.
Securities of other investment companies will be acquired by the Funds within
the limits prescribed by the 1940 Act. As a shareowner of another investment
company, the Funds would bear, along with other shareowners, its pro rata
portion of the other investment company's expenses, including advisory fees, and
such fees and other expenses will be borne indirectly by the Fund's shareowners.
These expenses would be in addition to the advisory and other expenses that the
Funds bear directly in connection with their own operations.
U.S. Government Obligations. Examples of the types of U.S. Government
obligations that may be acquired by the Funds include U.S. Treasury bonds, notes
and bills and the 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, Central Bank for
Cooperatives, Federal Home Loan Mortgage Corporation, Federal Intermediate
Credit Banks, Maritime Administration, and Resolution Trust Corp.
Bank Obligations. For purposes of the Funds' investment policies with
respect to bank obligations, the assets of a bank or savings institution will be
deemed to include the assets of its domestic and foreign branches. A Fund's
investments in the obligations of foreign branches of U.S. banks and of foreign
banks may subject the Fund to investment risks (similar to those discussed below
under "Foreign Securities and American Depository Receipts") that are different
in some respects from those of investments in obligations of U.S. domestic
issuers. Such risks include future political and economic developments, the
possible imposition of withholding taxes on interest income, possible seizure or
nationalization of foreign deposits, the possible establishment of exchange
controls or the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal and interest of such obligations. In
addition, foreign branches of U.S. banks and foreign banks may be subject to
less stringent reserve requirements and to different accounting, auditing,
reporting and record keeping standards than those applicable to domestic
branches of U.S. banks.
Other Investment Considerations - Balanced Growth Fund, Growth Fund, Special
Growth Fund, Emerging Growth Fund, MicroCap Fund and International Equity Fund
The Balanced Growth, Growth, Special Growth, Emerging Growth, MicroCap and
International Equity Funds maintain a long-term investment horizon with respect
to investments in equity securities. However, when a company's growth in
earnings and valuation results in price appreciation that reaches a level which
meets the Fund's established return objective, the stock is normally sold.
Holdings are also sold if there has been significant deterioration in the
underlying fundamentals of the securities involved since their acquisition.
Sale proceeds are either re-invested in money market instruments or in other
securities which meet the respective Fund's investment criteria.
The increase or decrease of cash equivalents in a Fund is primarily the
residual effect of the research process. The portion of a Fund invested in cash
equivalents tends to rise when the pool of acceptable securities is limited and
tends to fall when the Fund's valuation screening process identifies a large
number of attractive securities. Short-term forecasts for the economy and
financial markets are not an important determinant of the level of cash
equivalents in a Fund. As stated in the Prospectuses, however, under normal
market conditions not more than 65% of the value of the Balanced Growth Fund's
and at least 50% of the value of the Growth Fund, Special Growth Fund and
Emerging Growth Fund's, and at least 65% of the value of the MicroCap Fund and
the International Equity Fund's total assets will be invested in equity
securities. The Funds do not attempt to "time" the securities market.
Certain securities owned by the Special Growth Fund, Emerging Growth Fund
and MicroCap Fund may be traded only in the over-the-counter market or on a
regional securities exchange, may be listed only in the quotation service
commonly known as the "pink sheets," and may not be traded every day or in the
volume typical of trading on a national securities exchange. As a result, there
may be a greater fluctuation in the value of redemptions or for other reasons,
to sell these securities at a discount from market prices, to sell during
periods when such disposition is not desirable, or to make many small sales over
a lengthy period of time.
When-Issued Purchases, Delayed Delivery and Forward Commitments. When any
Fund agrees to purchase securities on a when-issued or delayed delivery basis or
enter into a forward commitment to purchase securities, its custodian will set
aside cash or liquid high grade debt securities equal to the amount of the
commitment in a segregated account. Normally, the custodian will set aside
portfolio securities to satisfy a purchase commitment, and in such a case the
Fund may be required subsequently to place additional assets in the segregated
account in order to ensure that the value of the account remains equal to the
amount of the Fund's commitments. It may be expected that the market value of a
Fund's net assets will fluctuate to a greater degree when it sets aside
portfolio securities to cover such purchase commitments than when it sets aside
cash. Because a Fund will set aside cash or liquid assets to satisfy its
purchase commitments in the manner described, the Fund's liquidity and ability
to manage its portfolio might be affected in the event its commitments ever
exceeded 25% of the value of its assets. In the case of a forward commitment to
sell portfolio securities, the Funds' custodian will hold the portfolio
securities themselves in a segregated account while the commitment is
outstanding. When-issued and forward commitment transactions involve the risk
that the price or yield obtained in a transaction (and therefore the value of a
security) may be less favorable then the price or yield (and therefore the value
of a security) available in the market when the securities delivery takes place.
The Funds will make commitments to purchase securities on a when-issued
basis or to purchase or sell securities on a forward commitment basis only with
the intention of completing the transaction and actually purchasing or selling
the securities. If deemed advisable as a matter of investment strategy, however,
a Fund may dispose of or renegotiate a commitment after it is entered into, and
may sell securities it has committed to purchase before those securities are
delivered to the Fund on the settlement date. In these cases the Fund may
realize a capital gain or loss.
When these Funds engage in when-issued, delayed delivery and forward
commitment transactions, they rely on the other party to consummate the trade.
Failure of such party to do so may result in a Fund incurring a loss or missing
an opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a when-issued purchase or a
forward commitment to purchase securities, and any subsequent fluctuations in
their market value, are taken into account when determining the net asset value
of a Fund starting on the day the Fund agrees to purchase the securities. The
Fund does not earn interest on the securities it has committed to purchase until
they are paid for and delivered on the settlement date. When a Fund makes a
forward commitment to sell securities it owns, the proceeds to be received upon
settlement are included in the Fund's assets. Fluctuations in the market value
of the underlying securities are not reflected in the Fund's net asset value as
long as the commitment remains in effect.
Other Investment Considerations - International Equity Fund
Foreign Futures and Options on Futures. The Adviser and Sub-Adviser may
determine that it would be in the interest of the International Equity Fund to
purchase or sell futures contracts, including interest rate, index, and
currency futures, for the purpose of remaining fully invested and reducing
transactions costs. A stock index futures contract is a bilateral agreement
pursuant to which parties agree to take or make delivery of an amount of cash
equal to a specified dollar amount times the difference between the index value
(which assigns relative values to the securities included in the index) at the
close of the last trading day of the contract and the price at which the futures
contract is originally struck. No physical delivery of the underlying
securities in the index is made.
The International Equity Fund may also purchase put and call
options, and write covered put and call options, on futures in which it is
allowed to invest. The purchase of futures or call options thereon can serve as
a long hedge, and the sale of futures or the purchase of put options thereon can
serve as a short hedge. Writing covered call options on futures contracts can
serve as a limited short hedge, and writing covered put options on futures
contracts can serve as a limited long hedge, using a strategy similar to that
used for writing covered options in securities. The Fund's hedging may include
purchases of futures as an offset against the effect of expected increases in
securities prices or currency exchange rates and sales of futures as an offset
against the effect of expected declines in securities prices or currency
exchange rates. The Fund's futures transactions may be entered into for hedging
purposes or risk management. The Fund may also write put options on futures
contracts while at the same time purchasing call options on the same futures
contracts in order to create synthetically a long futures contract position.
Such options would have the same strike prices and expiration dates. The Fund
will engage in this strategy only when the Adviser (or the Sub-Adviser) believes
it is more advantageous to the Fund than is purchasing the futures contract.
The International Equity Fund intends to limit its transactions in futures
contracts and related options so that not more than 25% of its net assets are at
risk. In connection with a futures transaction, unless the transaction is
covered in accordance with SEC positions, the Fund will maintain a segregated
account with its custodian or sub-custodian consisting of cash or liquid high
grade debt securities equal to the entire amount at risk (less margin deposits)
on a continuous basis.
Futures purchased or sold by the International Equity Fund (and related
options) will normally be traded in foreign securities. Participation in
foreign futures and foreign options transactions involves the execution and
clearing of trades on or subject to the rules of a foreign board of trade.
Neither the National Futures Association nor any domestic exchange regulates
activities of any foreign boards of trade, including the execution, delivery and
clearing of transactions, or has the power to compel enforcement of the rules of
a foreign board of trade or any applicable foreign law. This is true even if
the exchange is formally linked to a domestic market so that a position taken on
the market may be liquidated by a transaction on another market. Moreover, such
laws or regulations will vary depending on the foreign country in which the
foreign futures or foreign options transaction occurs. For these reasons,
customers who trade foreign futures of foreign options contracts may not be
afforded certain of the protective measures provided by the Commodity Exchange
Act, the Commodity Futures Trading Commission's ("CFTC") regulations and the
rules of the National Futures Association and any domestic exchange, including
the right to use reparations proceedings before the CFTC and arbitration
proceedings provided by the National Futures Association or any domestic futures
exchange. In particular, the International Equity Fund's investments in foreign
futures or foreign options transactions may not be provided the same protections
in respect of transactions on United States futures exchanges. In addition, the
price of any foreign futures or foreign options contract and, therefore the
potential profit and loss thereon may be affected by any variance in the foreign
exchange rate between the time an order is placed and the time it is
liquidated, offset or exercised. For a further description of futures contracts
and related options, including a discussion of the limitations imposed by
federal tax law, See Appendix B.
Reverse Repurchase Agreements. The International Equity Fund may engage in
reverse repurchase agreements to facilitate portfolio liquidity, a practice
common in the mutual fund industry, for temporary purposes only. In a reverse
repurchase agreement, the Fund would sell a security and enter into an agreement
to repurchase the security at a specified future date and price. The Fund
generally retains the right to interest and principal payments on the security.
Since the Fund receives cash upon entering into a reverse repurchase agreement,
it may be considered a borrowing. (See "Borrowing" above.) When required by
guidelines of the SEC, the Fund will set aside permissible liquid assets in a
segregated account to secure its obligations to repurchase the security.
Forward Currency Contracts. The International Equity Fund may enter into
forward currency contracts; such transactions may serve as long hedges (for
example, if the Fund seeks to buy a security denominated in a foreign currency,
it may purchase a forward currency contract to lock in the $US price of the
security) or as short hedges (the Fund anticipates selling a security
denominated in a foreign currency may sell a forward currency contract to lock
in the $US equivalent of the anticipated sales proceeds).
The International Equity Fund may seek to hedge against changes in
the value of a particular currency by using forward contracts on another foreign
currency or a basket of currencies, the value of which the Adviser or Sub-
Adviser believes will have a positive correlation to the values of the currency
being hedged. In addition, the Fund may use forward currency contracts to shift
exposure to foreign currency fluctuations from one country to another. For
example, if the Fund owns securities denominated in a foreign currency and the
Adviser or Sub-Adviser believes that currency will decline relative to another
currency, it might enter into a forward contract to sell an appropriate amount
of the first foreign currency, with payment to be made in the second currency.
Transactions that use two foreign currencies are sometimes referred to as
"cross hedges". Use of different foreign currency magnifies the risk that
movements in the price of the instrument will not correlate or will correlate
unfavorably with the foreign currency being hedged.
The cost to the International Equity Fund of engaging in forward
currency contracts varies with factors such as the currency involved, the length
of the contract period and the market conditions then prevailing. Because
forward currency contracts are usually entered into on a principal basis, no
fees or commissions are involved. When the Fund enters into a forward currency
contract, it relies on the counterparty to make or take delivery of the
underlying currency at the maturity of the contract. Failure by the
counterparty to do so would result in the loss of any expected benefit of the
transaction.
As is the case with future contracts, holders and writers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures, by selling or purchasing, respectively, an
instrument identical to the instrument held or written. Secondary markets
generally do not exist for forward currency contracts, with the result that
closing transactions generally can be made for forward currency contacts only by
negotiating directly with the counterparty. Thus, there can be no assurance
that the International Equity Fund will in fact be able to close out a forward
currency contract at a favorable price prior to maturity. In addition, in the
event of insolvency of the counterparty, the Fund might be unable to close out a
forward currency contract at any time prior to maturity. In either event, the
Fund would continue to be subject to market risk with respect to the position,
and would continue to be required to maintain a position in securities
denominated in the foreign currency or to maintain cash or securities in a
segregated account.
The precise matching of forward currency contract amounts and the value of
the securities involved generally will not be possible because the value of such
securities, measured in the foreign currency, will change after the foreign
currency contract has been established. Thus, the International Equity Fund
might need to purchase or sell foreign currencies in the spot (cash) market to
the extent such foreign currency market movements is extremely difficult, and
the successful execution of a short-term hedging strategy is highly uncertain.
Foreign Currency Transactions. Although the International Equity Fund
values its assets daily in U.S. dollars, the Fund is not required to convert its
holdings of foreign currencies to U.S. dollars on a daily basis. The Fund's
foreign currencies generally will be held as "foreign currency call accounts"
at foreign branches of foreign or domestic banks. These accounts bear interest
at negotiated rates and are payable upon relatively short demand periods. If a
bank became insolvent, the Fund could suffer a loss of some or all of the
amounts deposited. The Fund may convert foreign currency to U.S. dollars from
time to time. Although foreign exchange dealers generally do not charge a
stated commission or fee for conversion, the prices posted generally include a
"spread," which is the difference between the prices at which the dealers are
buying and selling foreign currencies.
High Risk Debt Securities ("Junk Bonds"). As stated in the International
Equity Fund's Prospectus, the Fund may invest up to 5% of its net assets in
non-investment grade debt securities. Debt securities rated below Baa by
Moody's or BBB by S&P, or of comparable quality, are considered below
investment grade. Non-investment grade debt securities ("high risk debt
securities") may include (i) debt not in default but rated as low as C by
Moody's, S&P, or Fitch IBCA, Inc. ("Fitch IBCA"), CC by Thomson BankWatch
("TBW"), or CCC by Duff & Phelps, Inc. ("D&P"); (ii) commercial paper rated
as low as C (or D if in default) by S&P or Fitch IBCA, Not Prime by Moody's,
Duff 4 (or Duff 5 if in default) by Duff, TBW-4 by TBW; and (iii) unrated
debt securities of comparable quality. Each Fund may also buy debt in
default (rated D by S&P or TBW or Fitch IBCA, DD by Duff, or of comparable
quality) and commercial paper in default (rated D by S&P or Fitch IBCA,
Not Prime by Moody's, Duff 5 by Duff, TBW-4 by TBW, or of comparable quality).
Such securities, while generally offering higher yields than investment grade
securities with similar maturities, involve greater risks, including the
possibility of (or actual) default or bankruptcy. They are regarded as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal.
The market for high risk debt securities is relatively new and its growth
has paralleled a long economic expansion. It is not clear how this market would
withstand a prolonged recession or economic downturn, which could severely
disrupt this market and adversely affect the value of such securities.
Market values of high risk debt securities tend to reflect individual
corporate developments to a greater extent, and tend to be more sensitive to
economic conditions, than do higher rated securities. As a result, high risk
debt securities generally involve more credit risks than higher rated debt.
During an economic downturn or a sustained period of rising interest rates,
highly leveraged issuers of high risk debt may experience financial stress and
may not have sufficient revenues to meet their payment obligations. An issuer's
ability to service its debt obligations may also be adversely affected by
specific corporate developments, its own inability to meet specific projected
business forecasts, or unavailability of additional financing. The risk of loss
due to default by an issuer is significantly greater for high risk debt than for
higher rated debt because the high risk debt is generally unsecured and often
subordinated.
If the issuer of high risk debt defaulted, the International Equity Fund
might incur additional expenses in seeking recovery. Periods of economic
uncertainty and changes would also generally result in increased volatility in
the market prices of these securities and thus in the Fund's net asset value.
If the Fund invested in high risk debt experiences unexpected net
redemptions in a rising interest rate market, it may be forced to liquidate a
portion of its portfolio without regard to their investment merits. Due to the
limited liquidity of high risk debt securities, the Fund may be forced to
liquidate these securities at a substantial discount. Any such liquidation
would reduce the Fund's asset base over which expenses could be allocated and
could result in a reduced rate of return for the Fund.
During periods of falling interest rates, issuers of high risk debt
securities that contain redemption, call or prepayment provisions are likely to
redeem or repay the securities and refinance with other debt at a lower interest
rate. If the Fund holds debt securities that are refinanced or otherwise
redeemed, it may have to replace the securities with a lower yielding security,
which would result in a lower return.
Credit ratings evaluate safety of principal and interest payments, but do
not evaluate the market value risk of high risk securities and, therefore, may
not fully reflect the true risks of an investment. In addition, rating agencies
may not make timely changes in a rating to reflect changes in the economy or in
the condition of the issuer that affect the market value of the security.
Consequently, credit ratings are used only as a preliminary indicator of
investment quality. Investments in high risk securities will depend more
heavily on the Sub-Adviser's credit analysis than investment-grade debt
securities. The Adviser (or the Sub-Adviser) will monitor the Fund's
investments and evaluate whether to dispose of or retain high risk securities
whose credit quality may have changed.
The Fund may have difficulty disposing of certain high risk securities with
a thin trading market. Not all dealers maintain markets in all these
securities, and for many such securities there is no established retail
secondary market. The Adviser (or the Sub-Adviser) anticipates that such
securities may be sold only to a limited number of dealers or institutional
investors. To the extent a secondary trading market does exist, it is generally
not as liquid as that for higher-rated securities; a lack of a liquid secondary
market may adversely affect the market price of a security, which may in turn
affect the Fund's net asset value and ability to dispose of particular
securities in order to meet liquidity needs or to respond to a specific economic
event, or may make it difficult for the Fund to obtain accurate market
quotations for valuation purposes. Market quotations on many high risk
securities may be available only from a limited number of dealers and may not
necessarily represent firm bids or prices for actual sales. During periods of
thin trading, the spread between bid and asked prices is likely to increase
significantly, and adverse publicity and investor perceptions (whether or not
based on fundamental analysis) may decrease the value and liquidity of a high
risk security.
Legislation has from time to time been or may be proposed that is designed
to limit the use of certain high risk debt. It is not possible to predict the
effect of such legislation on the market for high risk debt. However, any
legislation that may be proposed or enacted could have a material adverse effect
on the value of these securities, the existence of a secondary trading market
for the securities and, as a result, the Fund's net asset values.
Sovereign Debt. The International Equity Fund may invest up to 5% of its
net assets in obligations of foreign countries and political entities
("Sovereign Debt"), which may trade at a substantial discount from face value.
The Fund may hold and trade Sovereign Debt of emerging market countries in
appropriate circumstances and to participate in debt conversion programs.
Emerging country Sovereign Debt involves a high degree of risk, is generally
lower-quality debt, and is considered speculative in nature. The issuer or
governmental authorities that control Sovereign Debt repayment ("Sovereign
Debtors") may be unable or unwilling to repay principal or interest when due in
accordance with the terms of the debt. A Sovereign Debtor's willingness or
ability to repay principal and interest due in a timely manner may be affected
by, among other factors, its cash flow situation, the extent of its foreign
reserves, the availability of sufficient foreign exchange on the date a payment
is due, the relative size of the debt service burden to the economy as a whole,
the Sovereign Debtor's policy towards the International Monetary Fund (the
"IMF") and the political constraints to which the Sovereign Debtor may be
subject. Sovereign Debtors may also be dependent on expected disbursements from
foreign governments, multilateral agencies and others abroad to reduce principal
and interest arrearage on their debt. The commitment of these third parties to
make such disbursements may be conditioned on the Sovereign Debtor's
implementation of economic reforms or economic performance and the timely
service of the debtor's obligations. The Sovereign Debtor's failure to meet
these conditions may cause these third parties to cancel their commitments to
provide funds to the Sovereign Debtor, which may further impair the debtor's
ability or willingness to timely service its debts. In certain instances, a Fund
may invest in Sovereign Debt that is in default as to payments of principal or
interest. A Fund holding non-performing Sovereign Debt may incur additional
expenses in connection with any restructuring of the issuer's obligations or in
otherwise enforcing its rights thereunder.
Brady Bonds. The International Equity Fund may invest up to 5% of its net
assets in Brady Bonds as part of its investment in Sovereign Debt of countries
that have restructured or are in the process of restructuring their Sovereign
Debt pursuant to the Brady Plan.
Brady Bonds are issued under the framework of the Brady Plan, an initiative
announced by former U.S. Treasury Secretary Nicholas F. Brady in 1989 as a
mechanism for debtor nations to restructure their outstanding external
indebtedness. The Brady Plan contemplates, among other things, the debtor
nation's adoption of certain economic reforms and the exchange of commercial
bank debt for newly issued bonds. In restructuring its external debt under the
Brady Plan framework, a debtor nation negotiates with its existing bank lenders
as well as the World Bank or IMF. The World Bank or IMF supports the
restructuring by providing funds pursuant to loan agreements or other
arrangements that enable the debtor nation to collateralize the new Brady Bonds
or to replenish reserves used to reduce outstanding bank debt. Under these loan
agreements or other arrangements with the World Bank or IMF, debtor nations have
been required to agree to implement certain domestic monetary and fiscal
reforms. The Brady Plan sets forth only general guiding principles for economic
reform and debt reduction, emphasizing that solutions must be negotiated on a
case-by-case basis between debtor nations and their creditors.
Brady Bonds are recent issues and do not have a long payment history.
Agreements implemented under the Brady Plan are designed to achieve debt and
debt-service reduction through specific options negotiated by a debtor nation
with its creditors. As a result, each country offers different financial
packages. Options have included the exchange of outstanding commercial bank debt
for bonds issued at 100% of face value of such debt, bonds issued at a discount
of face value of such debt, and bonds bearing an interest rate that increases
over time and the advancement of the new money for bonds. The principal of
certain Brady Bonds has been collateralized by U.S. Treasury zero coupon bonds
with a maturity equal to the final maturity of the Brady Bonds. Collateral
purchases are financed by the IMF, World Bank and the debtor nations' reserves.
Interest payments may also be collateralized in part in various ways.
Brady Bonds are often viewed as having three or four valuation components:
(i) the collateralized repayment of principal at final maturity; (ii) the
collateralized interest payments; (iii) the uncollateralized interest payments;
and (iv) any uncollateralized principal at maturity (these uncollateralized
amounts constitute the "residual risk"). In light of the residual risk of
Brady Bonds and, among other factors, the history of defaults with respect to
commercial bank loans by public and private entities of countries issuing Brady
Bonds, investments in Brady Bonds can be viewed as speculative.
Other Investment Considerations - Balanced Growth Fund, Short-Term Bond Market
Fund, Intermediate Bond Market Fund, and Bond IMMDEX Fund
Mortgage-Backed and Asset-Backed Securities. The Balanced Growth Fund,
Short-Term Bond Market Fund, Intermediate Bond Market Fund and Bond IMMDEX Fund
may purchase residential and commercial mortgage-backed as well as other asset-
backed securities (collectively called "asset-backed securities") that are
secured or backed by automobile loans, installment sale contracts, credit card
receivables or other assets and are issued by entities such as Government
National Mortgage Association ("GNMA"), Federal National Mortgage Association
("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"), commercial banks,
trusts, financial companies, finance subsidiaries of industrial companies,
savings and loan associations, mortgage banks and investment banks. These
securities represent interests in pools of assets in which periodic payments of
interest and/or principal on the securities are made, thus, in effect passing
through periodic payments made by the individual borrowers on the assets that
underlie the securities, net of any fees paid to the issuer or guarantor of the
securities. The average life of these securities varies with the maturities and
the prepayment experience of the underlying instruments.
There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage-backed securities
and among the securities that they issue. Mortgage-backed securities guaranteed
by GNMA include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie
Maes") which are guaranteed as to the timely payment of principal and interest
by GNMA and such guarantee is backed by the full faith and credit of the United
States. GNMA is a wholly owned U.S. Government corporation within the
Department of Housing and Urban Development. GNMA certificates also are
supported by the authority of GNMA to borrow funds from the U.S. Treasury to
make payments under its guarantee. Mortgage-backed securities issued by FNMA
include FNMA Guaranteed Mortgage Pass-Through Certificates (also known as
"Fannie Maes") which are solely the obligations of FNMA and are not backed by or
entitled to the full faith and credit of the United States, but are supported by
the right of the issuer to borrow from the Treasury. FNMA is a government-
sponsored organization owned entirely by private stockholders. Fannie Maes are
guaranteed as to timely payment of the principal and interest by FNMA.
Mortgage-backed securities issued by the FHLMC include FHLMC Mortgage
Participation Certificates (also known as "Freddie Macs" or "PCs"). FHLMC is a
corporate instrumentality of the United States, created pursuant to an Act of
Congress. Freddie Macs are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute a debt or obligation of the United
States or of any Federal Home Loan Bank. Freddie Macs entitle the holder to
timely payment of interest, which is guaranteed by the FHLMC. FHLMC guarantees
either ultimate collection or timely payment of all principal payments on the
underlying mortgage loans. When FHLMC does not guarantee timely payment of
principal, FHLMC may remit the amount due on account of its guarantee of
ultimate payment of principal at any time after default on an underlying
mortgage, but in no event later than one year after it becomes payable.
As stated in the Prospectuses for the Balanced Growth Fund, Short-Term
Bond Market Fund, Intermediate Bond Market Fund and Bond IMMDEX Fund, mortgage-
backed securities such as CMOs may be purchased. CMOs are issued in multiple
classes and their relative payment rights may be structured in many ways. In
many cases, however, payments of principal are applied to the CMO classes in
order of their respective maturities, so that no principal payments will be made
on a CMO class until all other classes having an earlier maturity date are paid
in full. The classes may include accrual certificates (also known as "Z-
Bonds"), which do not accrue interest at a specified rate until other specified
classes have been retired and are converted thereafter to interest-paying
securities. They may also include planned amortization classes ("PACs") which
generally require, within certain limits, that specified amounts of principal be
applied to each payment date, and generally exhibit less yield and market
volatility than other classes. Investments in CMO certificates can expose the
Fund to greater volatility and interest rate risk than other types of mortgage-
backed obligations. Prepayments on mortgage-backed securities generally
increase with falling interest rates and decrease with rising interest rates;
furthermore, prepayment rates are influenced by a variety of economic and social
factors.
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 may reduce yield to maturity, while a prepayment rate that is slower
than expected may have the opposite effect of increasing yield to maturity.
Conversely, if an asset-backed security is purchased at a discount, faster than
expected prepayments may increase, while slower than expected prepayments may
decrease, yield to maturity.
In general, the collateral supporting non-mortgage asset-backed securities
is of shorter maturity than mortgage loans. Like other fixed-income securities,
when interest rates rise the value of an asset-backed security generally will
decline; however, when interest rates decline, the value of an asset-backed
security with prepayment features may not increase as much as that of other
fixed-income securities.
Variable Rate Medium Term Notes. The Funds may purchase variable rate
medium term notes which provide for periodic adjustments in the interest rates.
The adjustments in interest rates reflect changes in an index (which may be the
Lehman Brothers 1-3 Year Government/Corporate Bond Index, the Lehman Brothers
Intermediate Government/Corporate Bond Index or the Lehman Brothers
Government/Corporate Bond Index).
Other Investment Considerations - Tax-Exempt Intermediate Bond Fund
Municipal Obligations. Municipal Obligations which may be acquired by the
Tax-Exempt Intermediate Bond Fund include debt obligations issued by
governmental entities to obtain funds for various public purposes, including the
construction of a wide range of public facilities, the refunding of outstanding
obligations, the payment of general operating expenses and the extension of
loans to public institutions and facilities.
Certain of the Municipal Obligations held by the Fund may be insured at the
time of issuance as to the timely payment of principal and interest. The
insurance policies will usually be obtained by the issuer of the Municipal
Obligation at the time of its original issuance. In the event that the issuer
defaults on interest or principal payment, the insurer will be notified and will
be required to make payment to the bondholders. There is, however, no guarantee
that the insurer will meet its obligations. In addition, such insurance will
not protect against market fluctuations caused by changes in interest rates and
other factors, including credit downgrades, supply and demand. The Fund may,
from time to time, invest more than 25% of its assets in Municipal Obligations
covered by insurance policies.
The payment of principal and interest on most securities purchased by the
Fund will depend upon the ability of the issuers to meet their obligations. An
issuer's obligations under its Municipal Obligations are subject to the
provisions of bankruptcy, insolvency, and other laws affecting the rights and
remedies of creditors, such as the Federal Bankruptcy Code, and laws, if any,
which may be enacted by federal or state legislatures extending the time for
payment of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations or upon the ability of municipalities to levy
taxes. The power or ability of an issuer to meet its obligations for the
payment of interest on, and principal of, its Municipal Obligations may be
materially adversely affected by litigation or other conditions.
Certain types of Municipal Obligations (private activity bonds) have been
or are issued to obtain funds to provide privately operated housing facilities,
pollution control facilities, convention or trade show facilities, mass transit,
airport, port or parking facilities and certain local facilities for water
supply, gas, electricity or sewage or solid waste disposal. Private activity
bonds are also issued on behalf of privately held or publicly owned corporations
in the financing of commercial or industrial facilities. State and local
governments are authorized in most states to issue private activity bonds for
such purposes in order to encourage corporations to locate within their
communities. The principal and interest on these obligations may be payable
from the general revenues of the users of such facilities.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Obligations. For example, under the Tax Reform Act of
1986, interest on certain private activity bonds must be included in an
investor's alternative minimum taxable income, and corporate investors must
include all tax-exempt interest in their federal alternative minimum taxable
income. The Company cannot, of course, predict what legislation, if any, may be
proposed in the future as regards the income tax status of interest on Municipal
Obligations, or which proposals, if any, might be enacted. Such proposals,
while pending or if enacted, might materially and adversely affect the
availability of Municipal Obligations for investment by the Fund and the
liquidity and value of the Fund's portfolio. In such an event, the Company
would reevaluate the Fund's investment objective and policies and consider
possible changes in its structure or possible dissolution.
Municipal Lease Obligations. As stated in the Prospectus, the Fund may
acquire municipal lease obligations which are issued by a state or local
government authority to acquire land and a wide variety of equipment and
facilities. In making a determination that a municipal lease obligation is
liquid, the Adviser may consider, among other things (i) whether the lease can
be canceled; (ii) the likelihood that the assets represented by the lease can be
sold; (iii) the strength of the lessee's general credit; (iv) the likelihood
that the municipality will discontinue appropriating funds for the leased
property because the property is no longer deemed essential to the operations of
the municipality; and (v) availability of legal recourse in the event of failure
to appropriate.
Stand-By Commitments. The Tax-Exempt Intermediate Bond Fund may acquire
"stand-by commitments" with respect to Municipal Obligations held in its
portfolio. Under a "stand-by commitment," a dealer agrees to buy from the Fund,
at the Fund's option, specified Municipal Obligations at a specified price.
"Stand-by commitments" acquired by the Fund may also be referred to in this
Statement of Additional Information as "put" options.
The amount payable to the Fund upon its exercise of a "stand-by commitment"
is normally (i) the Fund's acquisition cost of the Municipal Obligations
(excluding any accrued interest which the Fund paid on their acquisition), less
any amortized market premium or plus any amortized market or original issue
discount during the period the Fund owned the securities, plus (ii) all interest
accrued on the securities since the last interest payment date during that
period. A stand-by commitment may be sold, transferred or assigned by the Fund
only with the instrument involved.
The Fund expects that "stand-by commitments" will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, the Fund may pay for a "stand-by commitment" either
separately in cash or by paying a higher price for the portfolio securities
which are acquired subject to the commitment (thus reducing the yield to
maturity otherwise available for the same securities). The total amount paid in
either manner for outstanding "stand-by commitments" held by the Fund will not
exceed 1/2 of 1% of the value of its total assets calculated immediately after
each "stand-by commitment" is acquired.
The Fund intends to enter into "stand-by commitments" only with dealers,
banks and broker/dealers which, in the investment adviser's opinion, present
minimal credit risks. The Fund's reliance upon the credit of these dealers,
banks and broker/dealers is secured by the value of the underlying Municipal
Obligations that are subject to a commitment.
The Fund would acquire "stand-by commitments" solely to facilitate
portfolio liquidity and does not intend to exercise its rights thereunder for
trading purposes. The acquisition of a "stand-by commitment" would not affect
the valuation or assumed maturity of the underlying Municipal Securities, which
would continue to be valued in accordance with the ordinary method of valuation
employed by the Fund. "Stand-by commitments" which would be acquired by the
Fund would be valued at zero in determining net asset value. Where the Fund
paid any consideration directly or indirectly for a "stand-by commitment," its
cost would be reflected as unrealized depreciation for the period during which
the commitment was held by the Fund.
Variable and Floating Rate Instruments. With respect to the variable and
floating rate instruments that may be acquired by the Tax-Exempt Intermediate
Bond Fund as described in its Prospectus, the Adviser will consider the earning
power, cash flows and other liquidity ratios of the issuers and guarantors of
such instruments and, if the instrument is subject to a demand feature, will
monitor their financial status to meet payment on demand. In determining
average weighted portfolio maturity, an instrument will usually be deemed to
have a maturity equal to the longer of the period remaining to the next interest
rate adjustment or the time the Fund can recover payment of principal as
specified in the instrument. Variable U.S. Government obligations held by the
Fund, however, will be deemed to have maturities equal to the period remaining
until the next interest rate adjustment.
Equity Index Fund Management Techniques When purchasing securities for the
Equity Index Fund's portfolio, the Adviser will consider initially the relative
market capitalization weightings of the stocks included in the S&P 500 Index.
The weighted capitalization of an issuer is determined by dividing the issuer's
market capitalization by the total market capitalizations of all issuers
included in the S&P 500 Index.
The Adviser will then compare the industry sector diversification of the
stocks in the Fund, acquired solely on the basis of their weighted
capitalizations, with the industry sector diversification of all issuers
included in the S&P 500 Index. This comparison is made because the Adviser
believes, unless the Fund holds all stocks included in the S&P 500 Index, that
the selection of stocks for purchase by the Fund solely on the basis of their
weighted market capitalizations would tend to place heavier concentration (as
compared to the S&P 500 Index) in certain industry sectors that are dominated by
the larger corporations, such as communications, automobile, oil and energy. As
a result, events disproportionately affecting such industries could affect the
performance of the S&P 500 Index. Conversely, if smaller companies were not
purchased by the Fund, industries included in the S&P 500 Index that are
dominated by smaller market-capitalized companies would be underrepresented (as
compared to the S&P 500 Index).
For these reasons, the Adviser will identify the sectors which are (or,
except for sector balancing, would be) most underrepresented in the Fund's
portfolio and will purchase balancing securities in these sectors until the
portfolio's sector weightings closely match that of the S&P 500 Index. This
process continues until the portfolio is fully invested (except for cash
holdings).
The IMMDEX Model. The IMMDEX model has been developed and is maintained
by Capital Management Sciences ("Capital Management") under the "IMMDEX "
trademark. Capital Management is neither a sponsor of the Bond IMMDEX Fund nor
affiliated in any way with the Bond IMMDEX Fund or the Adviser. Neither is
Capital Management in any way affiliated with Lehman Brothers which claims no
interest in the model or its ability to effectively or accurately replicate the
Lehman Brothers Government/Corporate Bond Index. Further, Capital Management is
not responsible for the management or results of the Bond IMMDEX Fund's
portfolio. Rather, the Adviser will use the IMMDEX model and the other
investment techniques described in the Prospectus in choosing portfolio
securities and executing transactions in an effort to produce an annual rate of
total return for the Bond IMMDEX Fund that is comparable, before Fund expenses,
to that of the Lehman Brothers Government/Corporate Bond Index.
Other Portfolio Information
Options Trading. As stated in the Prospectuses, the Short-Term Bond Market
Fund, Intermediate Bond Market Fund, Tax-Exempt Intermediate Bond Fund, Bond
IMMDEXTM Fund, Growth and Income Fund, Equity Index Fund, MicroCap Fund and
International Equity Fund may purchase put and (with the exception of the Tax-
Exempt Intermediate Bond Fund) call options. Option purchases by a Fund (except
the International Equity Fund) will not exceed 5% of its net assets and the
International Equity Fund may purchase put and call options without limit. Such
options may relate to particular securities or to various indices. (In the case
of the Equity Index Fund, such options will relate only to stock indices.) This
is a highly specialized activity which entails greater than ordinary investment
risks. Regardless of how much the market price of the underlying security or
index increases or decreases, the option buyer's risk is limited to the amount
of the original investment for the purchase of the option. However, options may
be more volatile than the underlying securities or indices, and therefore, on a
percentage basis, an investment in options may be subject to greater fluctuation
than an investment in the underlying securities. In contrast to an option on a
particular security, an option on an index provides the holder with the right to
make or receive a cash settlement upon exercise of the option. The amount of
this settlement will be equal to the difference between the closing price of the
index at the time of exercise and the exercise price of the option expressed in
dollars, times a specified multiple. The Tax-Exempt Intermediate Bond Fund will
only purchase put options on Municipal Obligations, and will do so only to
enhance liquidity, shorten the maturity of the related municipal security or
permit the Fund to invest its assets at more favorable rates.
A call option gives the purchaser of the option the right to buy, and a
writer the obligation to sell, the underlying security or index at the stated
exercise price at any time prior to the expiration of the option, regardless of
the market price of the security. The premium paid to the writer is in
consideration for undertaking the obligations under the option contract. A put
option gives the purchaser the right to sell the underlying security or index at
the stated exercise price at any time prior to the expiration date of the
option, regardless of the market price of the security or index. Put and call
options purchased by a Fund will be valued at the last sale price or, in the
absence of such a price, at the mean between bid and asked prices.
These Funds (with the exception of the Tax-Exempt Intermediate Bond Fund)
may also sell covered call options listed on a national securities exchange.
Such options may relate to particular securities or to various indices. (In the
case of the Equity Index Fund, such options will relate only to stock indices.)
A call option on a security is covered if a Fund owns the security underlying
the call or has an absolute and immediate right to acquire that security without
additional cash consideration (or, if additional cash consideration is required,
cash or cash equivalents in such amount as required are held in a segregated
account by its custodian) upon conversion or exchange of other securities held
by it. A call option on an index is covered if a Fund maintains with its
custodian cash or cash equivalents equal to the contract value. A call option
is also covered if a Fund holds a call on the same security or index as the call
written where the exercise price of the call held is (i) equal to or less than
the exercise price of the call written, or (ii) greater than the exercise price
of the call written provided the difference is maintained by a Fund in cash or
cash equivalents in a segregated account with its custodian.
A Fund's obligation under a covered call option written by it may be
terminated prior to the expiration date of the option by the Fund's executing a
closing purchase transaction, which is effected by purchasing on an exchange an
option of the same series (i.e., same underlying security or index, exercise
price and expiration date) as the option previously written. Such a purchase
does not result in the ownership of an option. A closing purchase transaction
will ordinarily be effected to realize a profit on an outstanding option, to
prevent an underlying security from being called, to permit the sale of the
underlying security or to permit the writing of a new option containing
different terms. The cost of such a liquidation purchase plus transactions
costs may be greater than the premium received upon the original option, in
which event a Fund will have incurred a loss in the transaction. An option
position may be closed out only on an exchange which provides a secondary market
for an option of the same series. There is no assurance that a liquid secondary
market on an exchange will exist for any particular option. A covered call
option writer, unable to effect a closing purchase transaction, will not be able
to sell an underlying security until the option expires or the underlying
security is delivered upon exercise with the result that the writer in such
circumstances will be subject to the risk of market decline during such period.
A Fund will write an option on a particular security only if the Adviser
believes that a liquid secondary market will exist on an exchange for options of
the same series which will permit the Fund to make a closing purchase
transaction in order to close out its position.
When a Fund writes a covered call option, an amount equal to the net
premium (the premium less the commission) received by the Fund is included in
the liability section of the Fund's statement of assets and liabilities. The
amount of the liability will be subsequently marked-to-market to reflect the
current value of the option written. The current value of the traded option is
the last sale price or, in the absence of a sale, the average of the closing bid
and asked prices. If an option expires on the stipulated expiration date or if
the Fund enters into a closing purchase transaction, it will realize a gain (or
loss if the cost of a closing purchase transaction exceeds the net premium
received when the option is sold) and the liability related to such option will
be eliminated. Any gain on a covered call option on a security may be offset by
a decline in the market price of the underlying security during the option
period. If a covered call option on a security is exercised, the Fund may
deliver the underlying security held by it or purchase the underlying security
in the open market. In either event, the proceeds of the sale will be increased
by the net premium originally received, and the Fund will realize a gain or
loss. Premiums from expired options written by a Fund and net gains from
closing purchase transactions are treated as short-term capital gains for
federal income tax purposes, and losses on closing purchase transactions are
short-term capital losses.
The International Equity Fund may also write (i.e., sell) covered put
options on securities and various securities indices. The writer of a put
incurs an obligation to buy the security underlying the option from the put's
purchaser at the exercise price at any time on or before the termination date, a
the purchaser's election(certain options the Fund writes will be exercisable by
the purchaser only on a specific date). Generally, a put is "covered" if the
Fund maintains cash, U.S. government securities or other liquid high grade debt
obligations equal to the exercise price o the option or if the Fund holds a put
on the same underlying security with a similar or higher exercise price. By
writing a covered put option on a security, the Fund receives a premium for
writing the option; however, the Fund assumes the risk that the value of the
security will decline before the exercise dates in which event, the Fund may
incur a loss in excess of the premium received when the put is exercised.
As noted previously, there are several risks associated with transactions
in options on securities and indices. For example, there are significant
differences between the securities and options markets that could result in an
imperfect correlation between these markets, causing a given transaction not to
achieve its objectives. A decision as to whether, when and how to use options
involves the exercise of skill and judgment, and a transaction may be
unsuccessful to some degree because of market behavior or unexpected events.
Futures Contracts and Related Options. The Adviser may determine that it
would be in the interest of the Short-Term Bond Market Fund, Intermediate Bond
Market Fund, Bond IMMDEXTM Fund, Growth and Income Fund, Equity Index Fund and
MicroCap Fund to purchase or sell futures contracts, or options thereon, as a
hedge against changes resulting from market conditions in the value of the
securities held by a Fund, or of securities which it intends to purchase. The
International Equity Fund may engage in foreign futures and options (see "Other
Investment Considerations - International Equity Fund - Foreign Futures and
Options on Futures'). In addition, the Equity Index Fund will purchase and sell
futures and related options (based only on the S&P 500 Index) to maintain cash
reserves while simulating full investment in the stocks underlying the S&P 500
Index to keep substantially all of its assets exposed to the market (as
represented by the S&P 500 Index) and to reduce transaction costs. For example,
a Fund may enter into transactions involving an index futures contract, which is
a bilateral agreement pursuant to which the parties agree to take or make
delivery of an amount of cash equal to a specified dollar amount times the
difference between the index value (which assigns relative values to the
securities included in the index) at the close of the last trading day of the
contract and the price at which the futures contract is originally struck. No
physical delivery of the underlying securities in the index is made. The
International Equity Fund will only enter into futures contracts and futures
options which are standardized and traded on a U.S. or foreign exchange, board
of trade or similar entity, or in the case of futures options, for which an
established over-the-counter market exists. The Sub-Adviser of the
International Equity Fund anticipates engaging in transactions from time to time
in foreign stock index futures such as the ALL-ORDS (Australia), CAC-40
(France), TOPIX (Japan) and the FTSE-100 (United Kingdom).
In connection with a futures transaction, unless the transaction is covered
in accordance with SEC positions, the Fund will maintain a segregated account
with its custodian or sub-custodian consisting of cash or liquid high grade debt
securities equal to the entire amount at risk (less margin deposits) on a
continuous basis. For a more detailed description of futures contracts and
related options, including a discussion of the limitations imposed by federal
tax law, see Appendix B.
Foreign Securities and American Depository Receipts ("ADRs"). The Short-
Term Bond Market, Intermediate Bond Market, Bond IMMDEX , Balanced Growth,
Growth and Income, Growth, Special Growth, Emerging Growth, MicroCap and
International Equity Funds may invest in sponsored ADRs. The International
Equity Fund may also invest in unsponsored ADRs. ADRs are receipts issued by an
American bank or trust company evidencing ownership of underlying securities
issued by a foreign issuer. ADRs may be listed on a national securities
exchange or may trade in the over-the-counter market. ADR prices are
denominated in U.S. dollars; the underlying security may be denominated in a
foreign currency. The underlying security may be subject to foreign government
taxes which would reduce the yield on such securities. Investments in foreign
securities and ADRs also involve certain inherent risks, such as political or
economic instability of the country of issue, the difficulty of predicting
international trade patterns and the possibility of imposition of exchange
controls. Such securities may also be subject to greater fluctuations in price
than securities of domestic corporations. In addition, there may be less
publicly available information about a foreign company than about a domestic
company. Foreign companies generally are not subject to uniform accounting,
auditing and financial reporting standards comparable to those applicable to
domestic companies. With respect to certain foreign countries, there is a
possibility of expropriation or confiscatory taxation, or diplomatic
developments which could affect investment in those countries.
While "sponsored" and "unsponsored" ADR programs are similar, there are
differences regarding ADR holders' rights and obligations and the practices of
market participants. A depository may establish an unsponsored facility without
participation by (or acquiescence of) the underlying issuer; typically, however,
the depository requests a letter of non-objection from the underlying issuer
prior to establishing the facility. Holders of unsponsored ADRs generally bear
all the costs of the ADR facility. The depository usually charges fees upon the
deposit and withdrawal of the underlying securities, the conversion of dividends
into U.S. dollars, the disposition of non-cash distribution, and the performance
of other services. The depository of an unsponsored facility frequently is
under no obligation to distribute shareholder communications received from the
underlying issuer or to pass through voting rights to ADR holders in respect of
the underlying securities.
Sponsored ADR facilities are created in generally the same manner as
unsponsored facilities, except that sponsored ADRs are established jointly by a
depository and the underlying issuer through a deposit agreement. The deposit
agreement sets out the rights and responsibilities of the underlying issuer, the
depository and the ADR holders. With sponsored facilities, the underlying
issuer typically bears some of the costs of the ADR (such as dividend payment
fees of the depository), although ADR holders may bear costs such as deposit and
withdrawal fees. Depositories of most sponsored ADRs agree to distribute
notices of shareholder meetings, voting instructions, and other shareholder
communications and information to the ADR holders at the underlying issuer's
request.
Zero Coupon Bonds. Zero coupon obligations have greater price volatility
than coupon obligations and will not result in the payment of interest until
maturity, provided that a Fund will purchase such zero coupon obligations only
if the likely relative greater price volatility of such zero coupon obligations
is not inconsistent with the Fund's investment objective. Although zero coupon
securities pay no interest to holders prior to maturity, interest on these
securities is reported as income to a Fund and distributed to its shareowners.
These distributions must be made from a Fund's cash assets or, if necessary,
from the proceeds of sales of portfolio securities. Additional income producing
securities may not be able to be purchased with cash used to make such
distributions and its current income ultimately may be reduced as a result.
Convertible Securities. The Balanced Growth, Growth and Income, Growth,
Special Growth, Emerging Growth, MicroCap and International Equity Funds may
hold convertible securities. Convertible securities entitle the holder to
receive interest paid or accrued on debt or the dividend paid on preferred stock
until the securities mature or are redeemed, converted or exchanged. Prior to
conversion, convertible securities have characteristics similar to ordinary debt
securities in that they normally provide a stable stream of income with
generally higher yields than those of common stock of the same or similar
issuers. Convertible securities rank senior to common stock in a corporation's
capital structure and therefore generally entail less risk than the
corporation's common stock, although the extent to which such risk is reduced
depends in large measure upon the degree to which the convertible security sells
above its value as a fixed income security.
As described in the Prospectuses, the Funds may invest a portion of their
assets in convertible securities that are rated below investment grade.
Warrants. Warrants basically are options to purchase equity securities at
a specific price valid for a specific period of time. They do not represent
ownership of the securities, but only the right to buy them. They have no
voting rights, pay no dividends and have no rights with respect to the assets of
the company issuing them. Warrants differ from call options in that warrants
are issued by the issuer of the security which may be purchased on their
exercise, whereas call options may be written or issued by anyone. The prices
of warrants do not necessarily move parallel to the prices of the underlying
securities.
Short Sales. The MicroCap Fund may engage in short sales. If the MicroCap
Fund engages in short sales, it need not segregate Fund assets if it "covers"
the position. A position is "covered" if, at the time the Fund sells the
security or thereafter, the Fund also owns that security or holds a call option
on that security with a strike price no higher than the price at which the
security was sold. For federal tax purposes, a short sale is considered
consummated upon delivery of securities to close the short sale. The gains or
losses realized by the Fund from short sale transactions normally will be
characterized as capital gains or losses although short sales that are part of
certain hedging transactions or straddles may receive different tax treatment.
Special rules generally operate to prevent the use of short sales to convert
short-term capital gain into long-term capital gain and long-term capital loss
into short-term capital loss. As a result, these transactions may increase the
amount of short-term capital gain realized by the Fund which is taxed as
ordinary income when distributed to its shareowners and may reduce the Fund's
short-term capital loss available to reduce its ordinary income. The impact of
the tax consequences of short sale transactions engaged in by the Fund on
distributions to shareowners will be closely monitored.
Additional Investment Limitations
Each Fund is subject to the investment limitations enumerated in this
subsection which may be changed with respect to a particular Fund only by a vote
of the holders of a majority of such Fund's outstanding shares (as defined under
"Miscellaneous" below).
No Fund may:
1. Make loans, except that a Fund 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 30% of
its total assets.
2. Purchase securities of companies for the purpose of exercising
control.
3. Purchase or sell real estate or with respect to the International
Equity Fund, real estate limited partnerships, except that each Fund may
purchase securities of issuers which deal in real estate and may purchase
securities which are secured by interests in real estate.
4. Acquire any other investment company or investment company security
except in connection with a merger, consolidation, reorganization or acquisition
of assets or where otherwise permitted by the 1940 Act.
5. Act as an underwriter of securities within the meaning of the
Securities Act of 1933 except insofar as a Fund might be deemed to be an
underwriter upon the disposition of portfolio securities acquired within the
limitation on purchases of restricted securities and except to the extent that
the purchase of securities directly from the issuer thereof in accordance with
the Fund's investment objective, policies and limitations may be deemed to be
underwriting.
6. Write or sell put options, call options, straddles, spreads, or any
combination thereof, except for transactions in options on securities, indices
of securities, futures contracts and options on futures contracts.
7. Purchase securities on margin, make short sales of securities or
maintain a short position (in an amount exceeding one-third of the Fund's net
assets, with respect to the MicroCap Fund), except that (a) this investment
limitation shall not apply to a Fund's transactions in futures contracts and
related options and, with respect to MicroCap Fund, short sales against the box,
and (b) a Fund may obtain short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities.
8. Purchase or sell commodity contracts, or invest in oil, gas or mineral
exploration or development programs, except that each Fund may, to the extent
appropriate to its investment objective, purchase publicly traded securities of
companies engaging in whole or in part in such activities and may enter into
futures contracts and related options.
In addition, as summarized in the Prospectuses, no Fund may:
9. 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 the Fund's 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 the Fund or the
Company, except that up to 25% of the value of the Fund's total assets may be
invested without regard to these limitations. For purposes of this limitation,
a security is considered to be issued by the entity (or entities) whose assets
and revenues back the security. A guarantee of a security shall not be deemed
to be a security issued by the guarantor when the value of all securities issued
and guaranteed by the guarantor, and owned by the Fund, does not exceed 10% of
the value of the Fund's total assets.
10. Purchase any securities which would cause 25% or more of the value of
the Fund's 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) with regard to all Funds except the Tax-Exempt
Intermediate Bond Fund, there is no limitation with respect to instruments
issued or guaranteed by the United States, its agencies or instrumentalities and
repurchase agreements secured by such instruments; (b) with regard to the Tax-
Exempt Intermediate Bond Fund, there is no limitation with respect to
instruments issued or guaranteed by the United States, any state, territory or
possession of the United States, the District of Columbia or any of their
authorities, agencies, instrumentalities or political subdivisions and
repurchase agreements secured by such instruments; (c) 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; and
(d) 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.
11. Borrow money or issue senior securities, except that each Fund may
borrow from banks and enter into reverse repurchase agreements for temporary
purposes in amounts up to 10% of the value of the total assets (one-third of the
value of the total assets, with respect to the MicroCap Fund) at the time of
such borrowing; or mortgage, pledge or hypothecate any assets, except in
connection with any such borrowing and in amounts not in excess of the lesser of
the dollar amounts borrowed or 10% of the value of the Fund's total assets (one-
third of the value of the total assets, with respect to the MicroCap Fund) at
the time of such borrowing. A Fund will not purchase securities while its
borrowings (including reverse repurchase agreements) in excess of 5% of its
total assets are outstanding. The MicroCap Fund may not enter into reverse
repurchase agreements exceeding in the aggregate one-third of its total assets.
Securities held in escrow or separate accounts in connection with the Fund's
investment practices described in this SAI or in the Prospectuses are not deemed
to be pledged for purposes of this limitation.
12. With respect to the Tax-Exempt Intermediate Bond Fund, invest less
than 80% of its net assets in securities the interest on which is exempt from
federal income tax except during defensive periods or during unusual market
conditions. For purposes of this fundamental policy, Municipal Obligations that
are subject to federal alternative minimum tax are considered taxable.
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
the Fund's portfolio securities will not constitute a violation of such
limitation.
If due to market fluctuations or other reasons, the amount of borrowings
and reverse repurchase agreements exceed the limit stated above, the Funds
(except the MicroCap Fund) will promptly reduce such amount. With respect to
the MicroCap Fund, if due to market fluctuations or other reasons, the total
assets of the Fund fall below 300% of its borrowings, the Fund will reduce its
borrowings in compliance with the 1940 Act. Except as otherwise provided in
Investment Restriction No. 10 above, for the purpose of such restriction, in
determining industry classification with respect to the International Equity
Fund, the Company intends to use the Morgan Stanley Capital International
classification titles.
With respect to investment limitation No. 3 under "Additional Investment
Limitations' as it relates to the Tax-Exempt Intermediate Bond Fund, real
estate shall include real estate mortgages. Although the foregoing investment
limitations would permit the Tax-Exempt Intermediate Bond Fund to invest in
options, futures contracts, options on futures contracts and engage in
securities lending, the Fund, during the current fiscal year, does not intend to
trade in such instruments (except that the Fund may purchase put options on
Municipal Obligations as described in the Prospectus) or lend portfolio
securities. Prior to engaging in any such transactions, the Fund will provide
its shareowners with notice and add any additional descriptions concerning the
instruments to the Prospectus and this SAI as may be required. With respect to
investment limitation No. 10 under "Additional Investment Limitations," asset-
backed securities will be divided according to the type of assets underlying the
security. For example, automobile loans, credit card receivables and
installment sales contracts will each be considered a separate industry.
NET ASSET VALUE
The net asset value per share of each Fund is calculated separately for the
Institutional Series and Retail Series by adding the value of all portfolio
securities and other assets belonging to the particular Fund that are allocated
to a particular series, subtracting the liabilities charged to that series, and
dividing the result by the number of outstanding shares of that series. Assets
belonging to a Fund consist of the consideration received upon the issuance of
shares of the particular Fund together with all net investment income, realized
gains/losses and proceeds derived from the investment thereof, including any
proceeds from the sale of such investments, any funds or payments derived from
any reinvestment of such proceeds, and a portion of any general assets of the
Company not belonging to a particular investment portfolio. The liabilities that
are charged to a Fund are borne by each share of the Fund, except for certain
payments under the Funds' Distribution and Service Plan and Shareowner Servicing
Plan applicable only to Retail Series Shares. Subject to the provisions of the
Articles of Incorporation, determinations by the Board of Directors as to the
direct and allocable liabilities, and the allocable portion of any general
assets, with respect to a particular Fund are conclusive.
The value of a Fund's portfolio securities that are traded on stock
exchanges outside the United States are based upon the price on the exchange as
of the close of business of the exchange immediately preceding the time of
valuation, except when an occurrence subsequent to the time a value was so
established is likely to have changed such value. Securities trading in over-
the-counter markets in European and Pacific Basin countries is normally
completed well before 3:00 P.M. Central Time. In addition, European and Pacific
Basin securities trading may not take place on all business days. Furthermore,
trading takes place in Japanese markets on certain Saturdays and in various
foreign markets on days which are not business days in New York and on which the
net asset value of a Fund, including the International Equity Fund, is not
calculated. The calculation of the net asset value of a Fund, including the
International Equity Fund, may not take place contemporaneously with the
determination of the prices of portfolio securities used in such calculation.
Events affecting the values of portfolio securities that occur between the time
their prices are determined and 3:00 P.M. Central Time, and at other times, may
not be reflected in the calculation of net asset value of a Fund.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Computation of Offering Price of the Funds. An illustration of the
computation of the initial offering price per share of the Retail Shares of the
Short-Term Bond Market, Intermediate Bond Market, Tax-Exempt Intermediate Bond,
Bond IMMDEX , Balanced Growth, Growth and Income, Equity Index, Growth, Special
Growth, Emerging Growth, MicroCap and International Equity Funds based on the
value of each such Fund's net assets and number of outstanding securities at
October 31, 1997, follows:
Short-Term Intermediate Tax-Exempt Bond
Bond Market Bond Market Intermediate IMMDEX
Fund Fund Bond Fund Fund
Net Assets(000s) $65,567 $20,691 $19,199 $64,144
Number of Shares
Outstanding (000s) 6,383 2,007 1,854 2,278
Net Asset Value
Per Share $10.27 $10.31 $10.35 $28.16
Sales Charge, 2.00%
of offering price
(2.04% of net
asset value per share) 0.21 0.21 0.21 0.57
Public Offering $10.48 $10.52 $10.56 $28.73
Price
Balanced Growth and Equity Index Growth
Growth Fund Income Fund Fund Fund
Net Assets (000s) $44,026 $128,070 $76,866 $25,043
Number of Shares
Outstanding 1,444 3,264 1,218 710
(000s)
Net Asset Value
Per Share $30.48 $39.24 $63.11 $35.27
Sales Charge, 4.00%
of offering price
(4.16% of net
asset value per share) 1.27 1.64 2.63 1.47
Public Offering $31.75 $40.88 $65.74 $36.74
Price
Special Emerging Growth MicroCap International
Growth Fund Fund Equity
Fund Fund
Net Assets (000s) $147,396 $5,355 $16,793 $6,502
Number of Shares
Outstanding 3,323 519 961 350
(000s)
Net Asset Value
Per Share $44.36 $10.31 $17.47 $18.58
Sales Charge, 4.00%
of offering price
(4.16% of net
asset value per share) 1.85 0.43 0.73 0.77
Public Offering $46.21 $10.74 $18.20 $19.35
Price
Prior to January 9, 1995, the Funds offered only one class of shares to
both institutional and retail investors. On that date, the Funds began offering
Institutional Shares to institutional investors and Retail Shares to retail
investors.
Retail Shares are sold with a front-end sales charge. A front-end sales
charge will not be imposed on reinvested dividends or distributions. Likewise,
there is no front-end sales charge (provided the status of the investment is
explained at the time of investment) on purchases of Retail Shares if (a) you
were a Firstar shareowner as of January 1, 1995 and have continuously maintained
a shareowner account with the Company; (b) you open an account within 60 days of
a redemption of Firstar Institutional Shares; (c) you are an employee, director
or retiree of Firstar Corporation or its affiliates or of Firstar; (d) you
maintain a personal trust account with an affiliate of Firstar Corporation at
the time of purchase; (e) you open an account within 60 days of a termination of
a personal trust account or corporate sponsored qualified retirement plan for
which Firstar Trust Company serves as administrator; (f) you make any purchase
for your medical savings account for which an affiliate of Firstar Corporation
serves in a custodial capacity; (g) you make any purchase within 60 days of a
redemption of a mutual fund on which you paid an initial sales charge or a
contingent deferred sales charge; (h) you are a registered investment adviser
that has entered into an agreement with the Distributor to purchase shares for
your own account or for discretionary client accounts; (i) you are a spouse,
parent or child of an individual who falls within the preceding categories (a)
or (d) above; (j) you are a spouse, parent, sibling or child of an individual
who falls within the preceding category (c) above; or (k) you make any purchase
for your Individual Retirement Account that was opened between February 28, 1997
and January 31,1998. These exemptions to the imposition of a front-end sales
charge are due to the nature of the investors and/or the reduced sales efforts
that will be needed in obtaining such investments.
Shareowner Organizations or Institutions may be paid by the Funds for
advertising, distribution or shareowner services. Depending on the terms of the
particular account, Shareowner Organizations or Institutions also may charge
their customers fees for automatic investment, redemption and other services
provided. Such fees may include, for example, account maintenance fees,
compensating balance requirements or fees based upon account transactions,
assets or income. Shareowner Organizations or Institutions are responsible for
providing information concerning these services and any charges to any customer
who must authorize the purchase of Fund shares prior to such purchase.
Shares of any Fund for which a redemption order is received in proper form
by the transfer agent or Firstar Investment Service, Inc. ("FIS") before the
close of the Exchange (normally 3:00 p.m. Central Time) on a business day will
be redeemed as of the determination of net asset value on that day. Orders for
a redemption received on a business day after the close of the Exchange or on a
non-business day will be priced as of the determination of net asset value on
the next day on which shares of the particular Fund are priced. If a shareowner
requests that redemption proceeds be paid by federal funds wire, the proceeds
will be wired to a correspondent member bank if the investor's designated bank
is not a member of the Federal Reserve System.
Under the 1940 Act, the Funds may suspend the right of redemption or
postpone the date of payment for shares during any period when (a) trading on
the Exchange is restricted by applicable rules and regulations of the SEC; (b)
the Exchange is closed for other than customary weekend and holiday closings;
(c) the SEC has by order permitted such suspension; or (d) an emergency exists
as determined by the SEC. (The Funds may also suspend or postpone the recording
of the transfer of their shares upon the occurrence of any of the foregoing
conditions.)
The Company's Articles of Incorporation permit a Fund to redeem an account
involuntarily, upon sixty days' notice, if redemptions cause the account's net
asset value to remain at less than $1,000.
In addition to the situations described in the Funds' Prospectuses under
"Redemption of Shares," the Funds may redeem shares involuntarily to reimburse
the Funds for any loss sustained by reason of the failure of a shareowner to
make full payment for shares purchased by the shareowner or to collect any
charge relating to a transaction effected for the benefit of a shareowner which
is applicable to Fund shares as provided in the Prospectus from time to time.
Exchange Privilege. By use of the exchange privilege, shareowners authorize
the transfer agent to act on telephonic or written exchange instructions from
any person representing himself to be the shareowner or in some cases, the
shareowner's registered representative or account representative of record, and
believed by the transfer agent to be genuine. The transfer agent's records of
such instructions are binding. The exchange privilege may be modified or
terminated at any time upon notice to shareowners.
Exchange transactions described in paragraphs A, B, and C below will be
made on the basis of the relative net asset values per share of the Funds
involved in the transaction.
A. Retail Shares of any Fund purchased with a sales charge may be exchanged
without a sales charge for Retail Shares of any other Fund offered by the
Company with a sales charge.
B. Shares of any Fund offered by the Company acquired by a previous
exchange transaction involving Retail Shares on which a sales charge has
directly or indirectly been paid (e.g. shares purchased with a sales charge or
issued in connection with an exchange involving shares that had been purchased
with a sales charge) as well as additional Shares acquired through reinvestment
of dividends or distributions on such Shares may be exchanged without a sales
charge for Retail Shares of any other Fund offered by the Company with a sales
charge. To accomplish an exchange under the provisions of this paragraph,
investors must notify the transfer agent of their prior ownership of Retail
Shares and their account number.
C. Shares of any Fund offered by the Company may be exchanged without a
sales charge for Shares of any other Fund of the Company that is offered without
a sales charge.
Except as stated above, a sales charge will be imposed when Shares of a
Fund that were purchased or otherwise acquired without a sales charge are
redeemed and the proceeds are used to purchase Retail Shares of another Fund of
the Company with a sales charge.
Shares in a Fund from which the shareowner is withdrawing an investment
will be redeemed at the net asset value per share next determined on the date of
receipt. Shares of the new Fund into which the shareowner is investing will be
purchased at the net asset value per share next determined (plus any applicable
sales charge) after acceptance of the request by the Company in accordance with
the policies for accepting investments. Exchanges of Shares will be available
only in states where they may legally be made.
For federal income tax purposes, share exchanges are treated as sales on
which the shareowner may realize a gain or loss, depending upon whether the
value of the shares to be given up in exchange is more or less than the basis in
such shares at the time of the exchange. Investors exercising the exchange
privilege should request and review the Prospectus for the shares to be acquired
in the exchange prior to making an exchange.
Additional Information Regarding Shareowner Services for Retail Shares
The Retail Shares of the Funds offer a Periodic Investment Plan whereby a
shareowner may automatically make purchases of shares of a Fund on a regular,
monthly basis ($50 minimum per transaction). Under the Periodic Investment
Plan, a shareowner's designated bank or other financial institution debits a
preauthorized amount on the shareowner's account each month and applies the
amount to the purchase of Retail Shares. The Periodic Investment Plan must be
implemented with a financial institution that is a member of the Automated
Clearing House. No service fee is currently charged by a Fund for participation
in the Periodic Investment Plan. A $20 fee will be imposed by the transfer agent
if sufficient funds are not available in the shareowner's account or the
shareowner's account has been closed at the time of the automatic transaction.
The Periodic Investment Plan permits an investor to use "Dollar Cost
Averaging' in making investments. Instead of trying to time market
performance, a fixed dollar amount is invested in Retail Shares at predetermined
intervals. This may help investors to reduce their average cost per share
because the agreed upon fixed investment amount allows more Retail Shares to be
purchased during periods of lower Retail Share prices and fewer Retail Shares to
be purchased during periods of higher Retail Share prices. In order to be
effective, Dollar Cost Averaging should usually be followed on a sustained,
consistent basis. Investors should be aware, however, that Retail Shares bought
using Dollar Cost Averaging are purchased without regard to their price on the
day of investment or to market trends. Dollar Cost Averaging does not assure a
profit and does not protect against losses in a declining market. In addition,
while investors may find Dollar Cost Averaging to be beneficial, it will not
prevent a loss if an investor ultimately redeems his Retail Shares at a price
which is lower than their purchase price. An investor may want to consider his
financial ability to continue purchases through periods of low price levels.
The Retail Shares of the Funds permit shareowners to effect ConvertiFundR
transactions, an automated method by which a Retail shareowner may invest
proceeds from one account to another account of the Retail Shares of the Firstar
family of funds. Such proceeds include dividend distribution, capital gain
distributions and systematic withdrawals. ConvertiFundR transactions may be used
to invest funds from a regular account to another regular account, from a
qualified plan account to another qualified plan account, or from a qualified
plan account to a regular account.
The Retail Shares of the Funds offer shareowners a Systematic Withdrawal
Plan, which allows a shareowner who owns shares of a Fund worth at least $5,000
at current net asset value at the time the shareowner initiates the Systematic
Withdrawal Plan to designate that a fixed sum ($50 minimum per transaction) be
distributed to the shareowner or as otherwise directed at regular intervals.
Special Procedures for In-Kind Payments
Payment for shares of a Fund may, in the discretion of the Fund, be made in
the form of securities that are permissible investments for the Fund as
described in its Prospectus. For further information about this form of
payment, contact Investor Services at 414-287-3710. In connection with an
in-kind securities payment, a Fund will require, among other things, that the
securities be valued on the day of purchase in accordance with the pricing
methods used by the Fund; that the Fund receive satisfactory assurances that it
will have good and marketable title to the securities received by it; that the
securities be in proper form for transfer to the Fund; that adequate information
be provided to the Fund concerning the basis and other tax matters relating to
the securities; and that the amount of the purchase be at least $1,000,000.
DESCRIPTION OF SHARES
The Company's Articles of Incorporation authorize the Board of Directors to
issue up to 150,000,000,000 full and fractional shares of common stock, $.0001
par value per share, which is divided into thirty classes (each, a "class" or
"fund"). Each class below is divided into two series designated as
Institutional Series and Series A/Retail Series (each, a "Series") and
consists of the number of shares set forth next to its Fund name in the table
below:
Class-Series of Fund in which Stock Number of Authorized
Common Stock Represents Interest Shares in Each Series
6-Institutional Special Growth 500 Million
6-A 500 Million
7-Institutional Bond IMMDEX 500 Million
7-A 500 Million
8-Institutional Equity Index 500 Million
8-A 500 Million
9-Institutional Growth and Income 500 Million
9-A 500 Million
10-Institutional Short-Term Bond Market 500 Million
10-A 500 Million
11-Institutional Balanced Growth 500 Million
11-A 500 Million
12-Institutional Growth 500 Million
12-A 500 Million
13-Institutional Intermediate Bond 500 Million
Market
13-A 500 Million
14-Institutional Tax-Exempt 500 Million
Intermediate Bond
14-A 500 Million
15-Institutional International Equity 500 Million
15-A 500 Million
16-Institutional MicroCap 50 Million
16-A 50 Million
18-Institutional Emerging Growth 100 Million
18-A 100 Million
The Board of Directors has also authorized the issuance of classes 1
through 5 and class 17 common stock representing interests in six other separate
investment portfolios which are described in separate prospectuses and
statements of additional information. The remaining authorized shares are
classified into twelve additional classes representing interests in other
potential future investment portfolios of the Company. The Directors may
similarly classify or reclassify any particular class of shares into one or more
additional series.
In the event of a liquidation or dissolution of the Company or an
individual Fund, shareowners of a particular Fund would be entitled to receive
the assets available for distribution belonging to such Fund, and a
proportionate distribution, based upon the relative assets of the Company's
respective investment portfolios, of any general assets not belonging to any
particular portfolio which are available for distribution. Subject to the
allocation of certain costs, expenses, charges and reserves attributed to the
operation of a particular series as described in the Funds' Prospectuses,
shareowners of a Fund are entitled to participate equally in the net
distributable assets of the particular Fund involved on liquidation, based on
the number of shares of the Fund that are held by each shareowner.
Shareowners of the Funds, as well as those of any other investment
portfolio offered by the Company, will vote together in the aggregate and not
separately on a portfolio-by -portfolio basis, except as otherwise required by
law or when the Board of Directors determines that the matter to be voted upon
affects only the interests of the shareowners of a particular class or a
particular series within a class. Rule 18f-2 under the 1940 Act provides that
any matter required to be submitted to the holders of the outstanding voting
securities of an investment company such as the Company shall not be deemed to
have been effectively acted upon unless approved by the shareowners of each
portfolio affected by the matter. A portfolio is affected by a matter unless it
is clear that the interests of each portfolio in the matter are substantially
identical or that the matter does not affect any interest of the portfolio.
Under the Rule, the approval of an investment advisory agreement or any change
in a fundamental investment policy would be effectively acted upon with respect
to a portfolio only if approved by a majority of the outstanding shares of such
portfolio. However, the Rule also provides that the ratification of the
appointment of independent accountants, the approval of principal underwriting
contracts and the election of Directors may be effectively acted upon by
shareowners of the Company voting together in the aggregate without regard to
particular portfolios. Similarly, on any matter submitted to the vote of
shareowners which only pertains to agreements, liabilities or expenses
applicable to one series of a Fund (such as the Distribution and Service Plan
applicable to Retail Shares) but not the other series of the same Fund, only the
affected series will be entitled to vote.
When issued for payment as described in the Funds' Prospectuses and this
SAI, shares of the Funds will be fully paid and non-assessable by the Company,
except as provided in Section 180.0622(2)(b) of the Wisconsin Business
Corporation Law, as amended, which in general provides for personal liability on
the part of a corporation's shareowners for unpaid wages of employees. The
Company does not intend to have any employees and, to that extent, the foregoing
statute will be inapplicable to holders of Fund shares and will not have a
material effect on the Company.
The Articles of Incorporation authorize the Board of Directors, without
shareowner approval (unless otherwise required by applicable law), to: (a) sell
and convey the assets belonging to a series of shares to another management
investment company for consideration which may include securities issued by the
purchaser and, in connection therewith, to cause all outstanding shares of such
series to be redeemed at a price which is equal to their net asset value and
which may be paid in cash or by distribution of the securities or other
consideration received from the sale and conveyance; (b) sell and convert the
assets belonging to a series of shares into money and, in connection therewith,
to cause all outstanding shares of such series to be redeemed at their net asset
value; or (c) combine the assets belonging to a series of shares with the assets
belonging to one or more other series of shares if the Board of Directors
reasonably determines that such combination will not have a material adverse
effect on the shareowners of any series participating in such combination and,
in connection therewith, to cause all outstanding shares of any such series to
be redeemed or converted into shares of another series of shares at their net
asset value.
ADDITIONAL INFORMATION CONCERNING TAXES
Each Fund is treated as a separate tax entity under the Code. Although
each Fund expects to qualify as a "regulated investment company" (by satisfying
certain income and distribution requirements in accordance with the code) and
to be relieved of all or substantially all federal income taxes, depending upon
the extent of the Company's activities in states and localities, the Funds may
be subject to the tax laws of such states or localities. In addition, in those
states and localities which have income tax laws, the treatment of the Funds and
their shareowners under such laws may differ from their treatment under federal
income tax laws.
The following is only a summary of certain additional tax considerations
generally affecting the Funds and their shareowners that are not described in
the Funds' Prospectuses. No attempt is made to present a detailed explanation of
the tax treatment of the Funds or their shareowners, and the discussion here and
in the Prospectus is not intended as a substitute for careful tax planning.
Investors are advised to consult their tax advisers with specific reference to
their own tax situations.
A 4% non-deductible excise tax is imposed on regulated investment companies
that fail to distribute specified percentages of their ordinary taxable income
and capital gain net income (excess of capital gains over capital losses) with
respect to each calendar year. The Funds intend to make sufficient
distributions or deemed distributions out of their ordinary taxable income and
any capital gain net income with respect to each calendar year to avoid
liability for this excise tax.
If the Funds qualify as regulated investment companies under the Code,
shareowners, unless otherwise exempt, will pay income or capital gains taxes on
amounts distributed (except distributions that are treated as a return of
capital) regardless of whether such distributions are paid in cash or reinvested
in additional shares.
Distributions out of the net capital gain, (the excess of net long-term
capital gain over net short-term capital loss), if any, of any Fund will be
taxed to shareowners as long-term capital gain, regardless of the length of
time a shareowner has held his or her shares or whether such gain was
reflected in the price paid for the shares. Such long-term capital gain will
be 20% or 28% rate gain, depending upon the funds holding period for the assets
the sale of which generated the capital gain. The Funds will designate the tax
status of capital gain distributions in a written notice mailed to shareowners
within 60 days after the close of the Fund's taxable year.
If for any taxable year a Fund does not qualify for the special federal
income tax treatment afforded regulated investment companies, all of its taxable
income will be subject to federal income tax at regular corporate rates (without
any deduction for distributions to its shareowners). In such event, dividend
distributions would be taxable as ordinary income to shareowners to the extent
of the Fund's current and accumulated earnings and profits and would be eligible
for the dividends received deduction in the case of corporate shareowners.
Income received by a Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes. If more than 50% of the value of the International Equity Fund's total
assets at the close of its taxable year consists of stock or securities of
foreign corporations, the Fund will be eligible to elect to "pass-through" to
its shareowners the amount of foreign income and similar taxes paid by the Fund.
If this election is made, a shareowner will be required to include in gross
income (in addition to taxable dividends actually received) his or her pro rata
share of foreign income and similar taxes paid by the Fund, and will be entitled
either to deduct (provided the shareowner itemizes deductions) his or her pro
rata share of foreign income and similar taxes in computing his taxable income
or to use it (subject to limitations) as a foreign tax credit against his or her
U.S. Federal income tax liability. Foreign taxes generally are not deductible in
computing alternative minimum taxable income. Each shareowner of the
International Equity Fund will be notified within 60 days after the close of the
Fund's taxable year if the foreign income and similar taxes paid by the Fund
will "pass-through" for that year.
Generally, a credit for foreign taxes is subject to the limitation that it
may not exceed the shareowner's U.S. tax attributable to his or her total
foreign source taxable income. For this purpose, if the pass-through election
is made, the source of the International Equity Fund's income will flow to
shareowners of the Fund. With respect to the Fund, gains from the sale of
securities will be treated as derived from U.S. sources and certain currency
fluctuation gains, including fluctuation gains from foreign currency denominated
debt securities, receivables and payables, will be treated as ordinary income
derived from U.S. sources. The limitation on the foreign tax credit is applied
separately to foreign source passive income, and to certain other types of
income. Shareowners may be unable to claim a credit for the full amount of
their proportionate share of foreign taxes paid by the International Equity
Fund. Certain additional limitations are imposed on the use of foreign tax
credits to offset liability for the alternative minimum tax.
If a Fund invests in certain "passive foreign investment companies"
("PFICs") which do not distribute their income on a regular basis, it
generally will be subject to "deferred" federal income tax (and possibly
additional interest charges) on a portion of any "excess distribution"
received with respect to such shares or any gain recognized upon a disposition
of such investments even if it distributes the income to its shareowners. If
the Fund qualifies and elects to treat the PFIC as a "qualified electing fund"
("QEF") and the PFIC furnishes certain financial information in the required
form, the Fund would instead be required to include in income each year a
ratable portion of the ordinary earnings and net capital gains of the QEF,
whether or not received in the Fund. Any such QEF inclusions would have to be
taken into account by a Fund for purposes of qualifying as a regulated
investment company and satisfying the excise tax distribution requirement. In
addition, another election is available to mark to market the Fund's PFIC
holdings at the end of each taxable year (and on certain other dates
prescribed in the Code). Unrealized gains are treated as ordinary income.
Unrealized losses are allowed only to the extent of any net mark-to-market gains
with respect to the stock and treated as ordinary deductions. If this election
is made, the tax described above at the fund level under the PFIC rules
generally would be eliminated, but such deemed gains will be taken
into account for purposes of qualifying as a regulated investment company and
satisfying the excise tax distribution requirement. The mark-to-market
provision will generally apply to the Fund's taxable years begining after
December 31, 1997 and may apply to past years.
The Tax-Exempt Intermediate Bond Fund is designed to provide investors with
current tax-exempt interest income. The Fund is not intended to constitute a
balanced investment program and is not designed for investors seeking capital
appreciation or maximum tax-exempt income irrespective of fluctuations in
principal. Shares of the Fund may not be suitable for tax-exempt institutions,
or for retirement plans qualified under Section 401 of the Internal Revenue Code
of 1986 (the "Code"), H.R. 10 plans and individual retirement accounts because
such plans and accounts are generally tax-exempt and, therefore, not only would
not gain any additional benefit from the Fund's dividends being tax-exempt, but
such dividends ultimately would be taxable to the beneficiaries when distributed
to them. In addition, the Fund may not be an appropriate investment for
entities which are "substantial users" of facilities financed by private
activity bonds or "related persons" thereof. "Substantial user" is defined
under U.S. Treasury Regulations to include a non-exempt person who regularly
uses a part of such facilities in his trade or business and whose gross revenues
derived with respect to the facilities financed by the issuance of bonds are
more than 5% of the total revenues derived by all users of such facilities, who
occupies more than 5% of the usable area of such facilities ,or for whom such
facilities, or a part thereof were specifically constructed, reconstructed or
acquired. "Related persons" include certain related natural persons, affiliated
corporations, a partnership and its partners and an S Corporation and its
shareowners.
The percentage of total dividends paid by the Tax-Exempt Intermediate Bond
Fund with respect to any taxable year which qualifies as federal exempt-interest
dividends will be the same for all shareowners receiving dividends for such
year. In order for the Fund to pay exempt-interest dividends during any taxable
year, at the close of each fiscal quarter at least 50% of the aggregate value of
the Fund's portfolio must consist of federal tax-exempt obligations. Within 60
days of the close of its taxable year, the Fund will notify shareowners of the
portion of the dividends paid by the Fund which constitutes an exempt-interest
dividend with respect to such taxable year. However, the aggregate amount of
dividends so designated cannot exceed the excess of the amount of interest
exempt from tax under Section 103 of the Code received by the Fund during the
taxable year over any amounts disallowed as deductions under Sections 265 and
171(a)(2) of the Code.
Interest on indebtedness incurred by a shareowner to purchase or carry
shares of the Tax-Exempt Intermediate Bond Fund is generally not deductible for
federal income tax purposes if the Fund distributes exempt-interest dividends
during the shareowner's taxable year. If a shareowner holds shares of the Fund
for six months or less, any loss on the sale or exchange of those shares will be
disallowed to the extent of the amount of exempt-interest dividends received
with respect to the shares. The Treasury Department, however, is authorized to
issue regulations reducing the six-month holding requirement to a period of not
less than the greater of 31 days or the period between regular distributions for
investment companies that regularly distribute at least 90% of their net tax-
exempt interest. No such regulations had been issued as of the date of this
SAI.
The foregoing discussion is based on federal tax laws and regulations which
are in effect on the date of this SAI; such laws and regulations may be changed
by legislative or administrative action.
MANAGEMENT OF THE COMPANY
Directors and Officers
The Directors and Officers of the Company, their addresses, principal
occupations during the past five years and other affiliations are as follows:
Position Principal Occupations During
Name, Address & with the Past 5 Years and Other
Age Company Affiliations
Steven R. Parish* Director, Executive Vice President of
W290 N3967 Dry President Trust and Investments, Firstar
Creek Ct. and Corporation since 1996, Vice
Pewaukee, WI Treasurer President and Portfolio
53072 Manager, FIRMCO 1991-1994;
Age: 40 Director, Firstar Funds,
Inc.since September
1997, Director, Firstar Trust
Company since April 1996,
Director, Firstar Information
Services Corp., since April 1996,
Director, Firstar Investment
Services, since April 1996,
Director, Firstar Insurance
Services, since April 1997,
Director, United Way, since
June 1997.
James M. Wade Chairman of Vice President and Chief
2802 Wind Bluff the Board Financial Officer, Johnson
Circle Controls, Inc. (a controls
Wilmington, NC manufacturing company)
28409 January 1987-May 1991.
Age: 54
Glen R. Bomberger Director Executive Vice President,
One Park Plaza Chief Financial Officer and
11270 West Park Director, A.O. Smith
Place Corporation (a diversified
Milwaukee, WI manufacturing company) since
53224-3690 January 1987; Director of
Age: 60 companies affiliated with A.O.
Smith Corporation; Chief
Financial Officer, Director
and Vice President, Smith
Investment Company; Officer
and Director of companies
affiliated with Smith
Investment Company.
Jerry G. Remmel Director Vice President, Treasurer and
16650A Lake Circle Chief Financial Officer of
Brookfield, WI Wisconsin Energy Corporation
53005 1994-1996; Treasurer of
Age: 66 Wisconsin Electric Power
Company 1973-1996; Director of
Wisconsin Electric Power
Company 1989-1996; Senior Vice
President, Wisconsin Electric
Power Company 1988 - 1994;
Chief Financial Officer,
Wisconsin Electric Power
Company 1983-1996; Vice
President and Treasurer,
Wisconsin Electric Power
Company, 1983 - 1989.
Richard K. Director President and Chief Executive
Riederer Officer of Weirton Steel since 1995;
400 Three Springs Director of Weirton Steel 1993;
Drive Executive Vice President and
Weirton, WV Chief Financial Officer,
26062-4989 Weirton Steel January 1994 -
Age: 53 1995; Vice President of
Finance and Chief Financial
Officer, Weirton Steel January
1989-1994; Member, Board of
Directors of American Iron and
Steel Institute since 1995;
Member, Board of Directors,
National Association of
Manufacturers since 1995.
Member, Board of Director,
WESBANCO since September 1997.
Charles R. Roy* Director Vice President - Finance,
14245 Heatherwood Chief Financial Officer and
Court Secretary, Rexnord Corporation
Elm Grove, WI (an equipment manufacturing
53122 company), 1988 - 1992; Vice
Age: 67 President - Finance and
Administration, Rexnord Inc.,
1982 - 1988; Officer and
Director of several Rexnord
subsidiaries until 1992.
Mary Ellen Stanek Vice President and Chief Operating
777 E. Wisconsin President Officer, FIRMCO since 1994;
Avenue, Director of FIRMCO since 1992
Suite 800 and Director Fixed Income
Milwaukee, WI Securities of FIRMCO since
53202 1990.
Age: 41
W. Bruce McConnel, Partner of the law firm of
III Secretary Drinker Biddle & Reath LLP.
Philadelphia
National Bank
Building
1345 Chestnut
Street
Philadelphia, PA
19107
Age: 54
* Messrs. Parish and Roy are considered by the Company to be "interested
persons" of the Company as defined in the 1940 Act.
The following chart provides certain information about the Director fees
for the year ended October 31, 1997 of the Company's Directors.
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM
BENEFITS ESTIMATED COMPANY
AGGREGATE ACCRUED AS ANNUAL AND FUND
NAME OF COMPENSATION PART OF BENEFITS COMPLEX*
PERSON/ FROM THE FUND UPON PAID TO
POSITION COMPANY EXPENSES RETIREMENT DIRECTORS
James M.
Wade
Chairman of
the Board $16,875 $0 $0 $16,875
Glen R.
Bomberger
Director $13,750+ $0 $0 $13,750
Jerry G.
Remmel
Director $13,750 $0 $0 $13,750
Richard K.
Riederer
Director $13,750 $0 $0 $13,750
Charles R.
Roy
Director $13,750 $0 $0 $13,750
*The "Fund Complex" includes only the Company.
+Includes $13,750 which Mr. Bomberger elected to defer under the Company's
deferred compensation plan.
Each Director receives an annual fee of $10,000, a $1,000 per meeting
attendance fee and reimbursement of expenses incurred as a Director. The
Chairman of the Board is entitled to receive an additional $3,500 per annum for
services in such capacity. For the fiscal year ended October 31, 1997, the
Directors and Officers received aggregate fees and reimbursed expenses of
$74,320. Mr. Parish and Ms. Stanek receive no fees from the Company for their
services as President and Vice President, respectively, although FIRMCO, of
which Ms. Stanek is President, receives fees from the Company for advisory
services. FIRMCO is a wholly owned subsidiary of Firstar Corporation, of which
Mr. Parish is Executive Vice President. Drinker Biddle & Reath LLP, of which
Mr. McConnel is a partner, receives legal fees as counsel to the Company. As of
the date of this SAI, the Directors and Officers of the Company, as a group,
owned less than 1% of the outstanding shares of each Fund.
Advisory Services
FIRMCO became the investment adviser to the Short-Term Bond Market Fund,
Special Growth Fund, Bond IMMDEX Fund and Equity Index Fund as of February 3,
1992 and became the investment adviser to the Growth and Income Fund effective
June 17, 1993. Prior thereto, investment advisory services were provided by
Firstar Trust Company, an affiliate of FIRMCO. Firstar Trust Company has
guaranteed all obligations incurred by FIRMCO in connection with its Investment
Advisory Agreement. FIRMCO is also the investment adviser to the Growth Fund,
Intermediate Bond Market Fund, Balanced Growth Fund, Tax-Exempt Intermediate
Bond Fund, Emerging Growth Fund, MicroCap Fund and International Equity Fund.
In its Investment Advisory Agreement, the Adviser has agreed to pay all expenses
incurred by it in connection with its advisory activities, other than the cost
of securities and other investments, including brokerage commissions and other
transaction charges, if any, purchased or sold for the Funds.
In addition to the compensation stated in the Prospectuses, the Adviser is
entitled to 4/10ths of the gross income earned by each Fund on each loan of its
securities, excluding capital gains or losses, if any. Pursuant to current
policy of the SEC, the Adviser does not intend to receive compensation
for such securities lending activity. The Adviser may voluntarily waive
advisory fees otherwise payable by the Funds.
For the services provided and expenses assumed by the Adviser under its
Investment Advisory Agreement in effect for the fiscal years ended October 31,
1997, 1996,and 1995, the Adviser earned and waived advisory fees as follows:
Advisory Fees Earned (Advisory Fees Waived)
1997 1996 1995
Short-Term Bond $669,603 (605,038) $552,764 (556,286) $330,777(436,239)
Market Fund
Special Growth 5,168,254 (0) 4,279,091 (250) 3,291,584(48,415)
Fund
Bond IMMDEX Fund 1,294,766 (0) 1,074,956 (1,673) 831,690 (0)
Equity Index Fund 815,050 (0) 555,115 (0) 319,929 (0)
Intermediate Bond 778,669 (345,403) 562,082 (288,147) 299,128 (238,251)
Market Fund
Growth Fund 1,470,245 (2,052) 1,245,050 (8,639) 894,728 (61,640)
Balanced Growth 1,056,380 (334,926) 789,896 (309,983) 560,913 (267,253)
Fund
Growth and Income 3,086,069 (45) 1,870,213 (18,262) 1,281,117 (69,004)
Fund
Tax-Exempt 109,101 (176,855) 40,050 (159,121) 22,909 (128,234)
Intermediate Bond
Fund
International 422,050 (370,710) 302,570 (332,273) 119,342 (311,670)
Equity Fund
Emerging Growth 46,258 (28,226)<F1>
Fund
MicroCap Fund 1,318,931 (33) 609,196 (72,149)<F2> 356,130 (135)
<F1>From inception (August 15, 1997) to October 31, 1997.
<F2> For the fiscal periods August 1, 1995 through June 30, 1996 and July 1,
1996 through October 31, 1996.
Under its Investment Advisory Agreement, the Adviser is not liable for any
error of judgment or mistake of law or for any loss suffered by the Funds in
connection with the performance of such Agreement, except a loss resulting from
a breach of fiduciary duty with respect to the receipt of compensation for
services or a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of the Adviser in the performance of its duties or from
its reckless disregard of its duties and obligations under the Agreement.
With regard to the International Equity Fund, under the Investment Advisory
Agreement, the Adviser is authorized to delegate its responsibilities to another
adviser. The Adviser has appointed Hansberger Global Investors, Inc. as Sub-
Adviser to the International Equity Fund. The Sub-Adviser determines the
securities to be purchased, retained or sold by the Fund. See "Sub-Adviser"
below.
Sub-Adviser. The International Equity Fund receives sub-advisory services
from Hansberger Global Investors, Inc. (the "Sub-Adviser"). Under the terms
of the Sub-Advisory Agreement between the Adviser and Sub-Adviser, the Sub-
Adviser furnishes investment advisory and portfolio management services to the
International Equity Fund with respect to its investments. The Sub-Adviser is
responsible for decisions to buy and sell the International Equity Fund's
investments and all other transactions related to investment therein. The Sub-
Adviser negotiates brokerage commissions and places orders of purchases and
sales of the International Equity Fund's portfolio securities. During the term
of the Sub-Advisory Agreement, the Sub-Adviser will bear all expenses incurred
by it in connection with its services under such agreement.
Pursuant to the Sub-Advisory Agreement, in the absence of willful
misfeasance, bad faith or gross negligence on the part of the Sub-Adviser or
reckless disregard of its obligations and duties thereunder, or loss resulting
from a breach of fiduciary duty with respect to the receipt of compensation for
services, the Sub-Adviser will not be subject to any liability to the Adviser,
the International Equity Fund or the Company, or to any shareowner of the
International Equity Fund or the Company, for any act or omission in the course
of, or connected with, rendering services under the Sub-Advisory Agreement. See
"Banking Laws and Regulations" below for information regarding certain banking
laws and regulations and their applicability to the Sub-Adviser and its services
under the Sub-Adviser agreement.
Prior to September 2, 1997, State Street Bank and Trust Company served as
sub-adviser to the International Equity Fund. For the services provided under
the sub-advisory agreements in effect for the fiscal years ended October 31,
1997, October 31, 1996 and October 31, 1995, the Sub-Adviser and State Street
Bank and Trust Company earned and waived sub-advisory fees as follows:
Sub-Advisory Fees Earned (Sub-Advisory Fees Waived)
1997 1996 1995
International 227,372 (0) 161,584 (0) 113,176 (0)
Equity Fund
Banking Laws and Regulations. Banking laws and regulations, including the
Glass-Steagall Act as presently interpreted by the Board of Governors of the
Federal Reserve System, presently (a) prohibit a bank holding company registered
under the Federal Bank Holding Company Act of 1956 or any bank or non-bank
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 (b) do not prohibit such a bank holding company or affiliate or
banks generally from acting as investment adviser, transfer agent or custodian
to such an investment company or from purchasing shares of such a company as
agent and upon order of a customer. In 1971, the United States Supreme Court
held in Investment Company Institute vs. Camp that the Glass-Steagall Act
prohibits a national bank from operating a fund for the collective investment of
managing agency accounts. Subsequently, the Board of Governors of the Federal
Reserve System (the "Board") issued a regulation and interpretation to the
effect that the Glass-Steagall Act and such decision forbid a bank holding
company registered under the Federal Bank Holding Company Act of 1956 (the
"Holding Company Act"), or any non-bank affiliate thereof from sponsoring,
organizing or controlling a registered, open-end investment company continuously
engaged in the issuance of its shares, but did not prohibit such a holding
company or affiliate from acting as investment adviser, transfer agent and
custodian to such an investment company. In 1981, the United States Supreme
Court held in Board of Governors of the Federal Reserve System v. Investment
Company Institute that the Board did not exceed its authority under the Holding
Company Act when it adopted its regulation and interpretation authorizing bank
holding companies and their non-bank affiliates to act as investment advisers to
registered closed-end investment companies. FIRMCO and Firstar Trust Company
("Firstar Trust") are subject to such banking laws and regulations.
FIRMCO and Firstar Trust believe that they may perform the services for the
Funds contemplated by their respective agreements with the Company without
violation of the Glass-Steagall Act or other applicable banking laws or
regulations. These companies further believe that, if the question were
properly presented, a court should hold that these companies may each perform
such activities without violation of the Glass-Steagall Act or other applicable
banking laws and or regulations. It should be noted, however, there have been
no cases deciding whether banks and their affiliates may perform services
comparable to those performed by these companies, and future changes in either
federal or state statutes and regulations relating to permissible activities of
banks or trust companies and their subsidiaries or affiliates, as well as
further judicial or administrative decisions or interpretations of present and
future statutes and regulations, could prevent such companies from continuing to
perform such services for the Funds. If the companies were prohibited from
continuing to perform advisory, accounting, shareowner servicing and custody
services for the Funds, it is expected that the Board of Directors would
recommend that the Funds enter into new agreements or would consider the
possible termination of the Funds. Any new advisory or sub-advisory agreement
would be subject to shareowner approval.
Shares of the Funds are not bank deposits, are neither endorsed by, insured
by, or guaranteed by, obligations of, nor otherwise supported by the FDIC, the
Federal Reserve Board, Firstar Trust or FIRMCO, their affiliates or any other
bank, or any other governmental agency. An investment in the Funds involves
risks including possible loss of principal.
Administration and Distribution Services
Firstar Trust became a Co-Administrator to the Funds on September 1, 1994,
and B. C. Ziegler and Company ("Ziegler") became a Co-Administrator to the
Funds on January 1, 1995. Under the Co-Administration Agreement, the following
administrative services are provided jointly by the Co-Administrators: assist in
maintaining office facilities, furnish clerical services, stationery and office
supplies; monitor the company's arrangements with respect to services provided
by Shareowner Organizations and Institutions; and generally assist in the Funds'
operations. The following administrative services are provided by Ziegler:
review and comment upon the registration statement and amendments thereto
prepared by Firstar Trust or counsel to the Company, as requested by Firstar
Trust; review and comment upon sales literature and advertising relating to the
Company, as requested by Firstar Trust; assist in the administration of the
marketing budget; periodically review Blue Sky registration and sales reports
for the Funds; attend meetings of the Board of Directors, as requested by the
Board of Directors of the Company; and such other services as may be requested
in writing and expressly agreed to by Ziegler. The following administrative
services are provided by Firstar Trust: compile data for and prepare, with
respect to the Funds, timely Notices to the SEC required pursuant to Rule 24f-2
under the 1940 Act and Semi-Annual Reports on Form N-SAR; coordinate execution
and filing by the Company of all federal and state tax returns and required tax
filings other than those required to be made by the Company's custodian and
transfer agent; prepare compliance filings and Blue Sky registrations pursuant
to state securities laws with the advice of the Company's counsel; assist to the
extent requested by the Company with the Company's preparation of Annual and
Semi-Annual reports to Fund shareowners and Registration Statements for the
Funds; monitor each Fund's expense accruals and cause all appropriate expenses
to be paid on proper authorization from each Fund; monitor each Fund's status as
a regulated investment company under Subchapter M of the Code; maintain each
Fund's fidelity bond as required by the 1940 Act; and monitor compliance with
the policies and limitations of each Fund as set forth in the Prospectuses, SAI,
By-laws and Articles of Incorporation.
Each of the Co-Administrators has agreed to pay all expenses incurred by
it in connection with its administrative activities. Under the Co-
Administration Agreement, the Co-Administrators are not liable for any error of
judgment or mistake of law or for any loss suffered by the Funds in connection
with the performance of the Co-Administration Agreement, except a loss resulting
from willful misfeasance, bad faith or gross negligence on the part of the Co-
Administrators in the performance of their respective duties or from their
reckless disregard of their duties and obligations under the Agreement.
The Distributor provides distribution services for each Fund as described
in the Funds' Prospectuses pursuant to a Distribution Agreement with the Funds
under which the Distributor, as agent, sells shares of each Fund on a continuous
basis. The Distributor has agreed to use its best efforts to solicit orders for
the sale of shares, although it is not obliged to sell any particular amount of
shares. The Distributor causes expenses to be paid for the cost of printing and
distributing prospectuses to persons who are not shareowners of the Funds
(excluding preparation and printing expenses necessary for the continued
registration of the Funds' shares) and of printing and distributing all sales
literature. For the fiscal year ended October 31, 1997, 1996 and 1995, Ziegler
received no fees for its distribution services.
For its administrative services for the fiscal years ended October 31,
1997, 1996 and 1995, the Co-Administrators earned and waived the following
administrative fees:
Administration Fees Earned (Administration
Fees Waived)
1997 1996 1995
Short-Term Bond $86,550 (149,862) $83,969 (127,339) $59,323 (95,852)
Market Fund
Special Growth 245,929 (521,369) 257,995 (394,054) 194,656 (345,563)
Fund
Bond IMMDEX Fund 167,223 (318,234) 159,028 (251,337) 151,431 (174,586)
Equity Index Fund 134,156 (401,774) 93,843 (160,223) 57,944 (97,841)
Intermediate Bond 79,413 (171,118) 78,123 (116,341) 49,597 (80,727)
Market Fund
Growth Fund 71,750 (146,715) 75,054 (115,984) 64,612 (90,089)
Balanced Growth 73,298 (133,271) 65,092 (102,563) 51,415 (82,629)
Fund
Growth and Income 171,898 (286,778) 113,216 (174,799) 82,730 (134,204)
Fund
Tax-Exempt 22,619 (41,122) 20,315 (25,259) 14,551 (22,137)
Intermediate Bond
Fund
International 20,840 (38,741) 20,015 (30,231) 14,701 (20,395)
Equity Fund
MicroCap Fund 29,709 (68,284) 23,766 (30,742)<F1>
Emerging Growth 3,488 (7,567)<F2> 12,113 (12,058)
Fund
<F1> For the fiscal periods August 1, 1995 through June 30, 1996 and July 1,
1996 through October 31, 1996.
<F2> From inception (August 15, 1997) to October 31, 1997.
Shareowner Organizations
As stated in the Funds' Prospectus for Retail Shares the Funds intend to
enter into agreements from time to time with Shareowner Organizations providing
for support and/or distribution services to customers of the Shareowner
Organizations who are the beneficial owners of Retail Shares of the Fund. Under
the agreements, the Funds may pay Shareowner Organizations up to 0.25% (on an
annualized basis) of the average daily net asset value of Retail Shares
beneficially owned by their customers. Support services provided by Shareowner
Organizations under their Service Agreements or Distribution and Service
Agreements may include: (i) processing dividend and distribution payments from
a Fund; (ii) providing information periodically to customers showing their share
positions; (iii) arranging for bank wires; (iv) responding to customer
inquiries; (v) providing sub-accounting with respect to shares beneficially
owned by customers or the information necessary for sub-accounting; (vi)
forwarding shareowner communications; (vii) assisting in processing share
purchase, exchange and redemption requests from customers; (viii) assisting
customers in changing dividend options, account designations and addresses; and
(ix) other similar services requested by the Funds. In addition, Shareowner
Organizations, under the Distribution and Service Plan, may provide assistance
(such as the forwarding of sales literature and advertising to their customers)
in connection with the distribution of Retail Shares. All fees paid under these
agreements are borne exclusively by the Funds' Retail Shares.
The Funds' arrangements with Shareowner Organizations under the agreements
are governed by two Plans (a Service Plan and a Distribution and Service Plan),
which have been adopted by the Board of Directors. Because the Distribution and
Service Plan contemplates the provision of services related to the distribution
of Retail Shares (in addition to support services), that Plan has been adopted
in accordance with Rule 12b-1 under the 1940 Act In accordance with the Plans,
the Board of Directors reviews, at least quarterly, a written report of the
amounts expended in connection with the Funds' arrangements with Shareowner
Organizations and the purposes for which the expenditures were made. In
addition, the Funds' arrangements with Shareowner Organizations must be approved
annually by a majority of the Directors, including a majority of the Directors
who are not "interested persons" of the Funds, as defined in the 1940 Act, and
have no direct or indirect financial interest in such arrangements (the
"Disinterested Directors").
The Funds believe that there is a reasonable likelihood that their
arrangements with Shareowner Organizations will benefit each Fund and the
holders of Retail Shares as a way of allowing Shareowner Organizations to
participate with the Funds in the provision of support and distribution services
to customers of the Shareowner Organization who own Retail Shares. Any material
amendment to the arrangements with Shareowner Organizations under the agreements
must be approved by a majority of the Board of Directors (including a majority
of the Disinterested Directors), and any amendment to increase materially the
costs under the Distribution and Service Plan with respect to a Fund must be
approved by the holders of a majority of the outstanding Retail Shares of the
Fund involved. So long as the Plans are in effect, the selection and nomination
of the members of the Board of Directors who are not "interested persons" (as
defined in the 1940 Act) of the Funds will be committed to the discretion of
such Disinterested Directors.
The Funds paid fees to Shareowner Organizations, none of which were
affiliated with the Adviser, pursuant to the Service Plan for the fiscal year
ended October 31, 1997 as follows:
Fees Earned by Non-Affiliated
Shareowner Organizations
Short-Term Bond Market Fund $ 830
Special Growth Fund 1,837
Bond IMMDEX/TM Fund 0
Equity Index Fund 3,368
Intermediate Bond Market Fund 70
Growth Fund 0
Balanced Growth Fund 45
Growth and Income Fund 665
Tax-Exempt Intermediate Bond Fund 2
International Equity Fund 0
MicroCap Fund 0
Emerging Growth Fund 0
The Funds paid fees to Shareowner Organizations, all of which were
affiliated with the Adviser, pursuant to the Service Plan for the fiscal year
ended October 31, 1997 as follows:
Fees Earned by Affiliated
Shareowner Organizations
Short-Term Bond Market Fund $154,460
Special Growth Fund 329,198
Bond IMMDEX/TM Fund 130,101
Equity Index Fund 143,498
Intermediate Bond Market Fund 47,818
Growth Fund 54,413
Balanced Growth Fund 87,924
Growth and Income Fund 248,657
Tax-Exempt Intermediate Bond Fund 35,659
International Equity Fund 12,012
MicroCap Fund 27,979
Emerging Growth Fund 1,653
CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES AGENT
Firstar Trust serves as custodian of all the Funds' assets. Under the
Custody Agreement, Firstar Trust has agreed to (i) maintain a separate account
in the name of each Fund, (ii) make receipts and disbursements of money on
behalf of each Fund, (iii) collect and receive all income and other payments and
distributions on account of each Fund's portfolio investments, (iv) respond to
correspondence from shareowners, security brokers and others relating to its
duties and (v) make periodic reports to the Company concerning each Fund's
operations. Firstar Trust may, at its own expense, open and maintain a custody
account or accounts on behalf of each Fund with other banks or trust companies,
provided that Firstar Trust shall remain liable for the performance of all of
its duties under the Custody Agreement notwithstanding any delegation. For its
services as custodian, Firstar Trust is entitled to receive a fee, payable
monthly, based on the annual rate of 0.02% of the company's first $2 billion of
assets, plus 0.015% of the company's next $2 billion of assets, and 0.01%
of the company's total assets in excess of $4 billion. In addition,
Firstar Trust, as custodian, is entitled to certain charges for securities
transactions and reimbursement for expenses. The Chase Manhattan Bank performs
certain foreign custodial services related to the International Equity Fund.
Firstar Trust also serves as transfer agent and dividend disbursing agent
for each Fund under a Shareowner Servicing Agent Agreement. As transfer and
dividend disbursing agent, Firstar Trust has agreed to (i) issue and redeem
shares of the Funds, (ii) make dividend and other distributions to shareowners
of the Funds, (iii) respond to correspondence by Fund shareowners and others
relating to its duties, (iv) maintain shareowner accounts, and (v) make periodic
reports to the Funds. For its transfer agency and dividend disbursing services,
Firstar Trust is entitled to receive a fee at the rate of $15.00 per shareowner
account with an annual minimum of $24,000 per Fund, plus certain other
transaction charges and reimbursement for expenses.
In addition, all of the Funds have entered into a Fund Accounting Servicing
Agreement with Firstar Trust pursuant to which Firstar Trust has agreed to
maintain the financial accounts and records of the Funds in compliance with the
1940 Act and to provide other accounting services to the Funds. For its
accounting services, Firstar Trust is entitled to receive fees, payable monthly,
at the following annual rates of the market value of each Fund's assets:
Balanced Growth Fund, Growth and Income Fund, Equity Index Fund, Growth Fund,
Special Growth Fund, Emerging Growth Fund, MicroCap Fund -- $27,500 on the first
$40 million, 0.0125% on the next $200 million, and 0.00625% on the balance, plus
out-of-pocket expenses, including pricing expenses; and Short-Term Bond Market
Fund, Intermediate Bond Market Fund, Tax-Exempt Intermediate Bond Fund, Bond
IMMDEX Fund and International Equity Fund -- $31,250 on the first $40 million,
0.025% on the next $200 million, 0.0125% on the next $200 million,
0.00625% on the balance, plus out-of-pocket expenses, including pricing
expenses.
EXPENSES
Operating expenses of the Funds include taxes, interest, fees and expenses
of Directors and officers, SEC fees, state securities and qualification fees,
advisory fees, administrative fees, Shareowner Organization fees (Retail Shares
only), charges of the custodian and transfer agent, dividend disbursing agent
and accounting services agent, certain insurance premiums, auditing and legal
expenses, costs of preparing and printing prospectuses for regulatory purposes
and for distribution to shareowners, costs of shareowner reports and meetings,
membership fees in the Investment Company Institute, and any extraordinary
expenses. The Funds also pay any brokerage fees, commissions and other
transactions charges (if any) incurred in connection with the purchase or sale
of portfolio securities.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, independent accountants, 100 East Wisconsin Avenue,
Suite 1500, Milwaukee, Wisconsin, 53202, serve as auditors for the Company. The
financial statements and notes thereto contained in each Fund's Annual Report
for the fiscal year ended October 31, 1997 are incorporated herein by reference.
No other part of the Annual Report is incorporated herein by reference. Such
financial statements have been incorporated herein in reliance on the report of
Price Waterhouse LLP, independent accountants, given as authority of said firm
as experts in auditing and accounting.
COUNSEL
Drinker Biddle & Reath LLP (of which Mr. McConnel, Secretary of the
Company, is a partner), Philadelphia National Bank Building, 1345 Chestnut
Street, Philadelphia, Pennsylvania 19107, serve as counsel to the Company and
will pass upon the legality of the shares offered by the Funds' Prospectuses.
PERFORMANCE CALCULATIONS
From time to time, the total return of the Retail Shares and Institutional
Shares of each Fund and the yields of such shares of the Short-Term Bond Market
Fund, Intermediate Bond Market Fund, Tax-Exempt Intermediate Bond Fund and Bond
IMMDEX Fund (each, a "Bond Fund") may be quoted in advertisements,
shareowner reports or other communications to shareowners. Performance
information is generally available by calling the Firstar Funds Center at 1-800-
982-8909.
Yield Calculations.
Yield is computed based on the net income of a series of shares of a Bond
Fund during a 30-day (or one-month) period, which will be identified in
connection with the particular yield quotation, more specifically, the yield of
a series of shares is calculated by dividing the net investment income per share
for that series (as described below) earned during a 30-day (or one-month)
period by the net asset value per share for that series (including the maximum
front end sales charge of 2.00% for the Retail Shares of the Bond Funds) on the
last day of the period and annualizing the result on a semiannual basis by
adding one to the quotient, raising the sum to the power of six, subtracting one
from the result and then doubling the difference. Net investment income per
share earned during the period attributable to that series is based on the
average daily number of shares of the series outstanding during the period
entitled to receive dividends and includes dividends and interest earned during
the period attributable to that series minus expenses accrued for the period,
attributable to that series net of reimbursements.
This calculation can be expressed as follows:
a-b
Yield = 2 [(----- + 1)6 - 1]
c x d
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = Maximum offering price per share on the last day of the
period.
For the purpose of determining net investment income earned during the
period (variable "a" in the formula), dividend income on equity securities held
by a Fund is recognized by accruing 1/360 of the stated dividend rate of the
security each day that the security is in the portfolio. A Fund calculates
interest earned on any debt obligations held in its portfolio by computing the
yield to maturity of each obligation held by it based on the market value of the
obligation (including actual accrued interest) at the close of business on the
last business day of each month, or, with respect to obligations purchased
during the month, the purchase price (plus actual accrued interest) and dividing
the result by 360 and multiplying the quotient by the market value of the obli-
gation (including actual accrued interest) in order to determine the interest
income on the obligation for each day of the subsequent month that the
obligation is in the portfolio. For purposes of this calculation, it is assumed
that each month contains 30 days. The maturity of an obligation with a call
provision is the next call date on which the obligation reasonably may be
expected to be called or, if none, the maturity date. With respect to debt
obligations purchased at a discount or premium, the formula generally calls for
amortization of the discount or premium. The amortization schedule will be
adjusted monthly to reflect changes in the market values of such debt
obligations.
Interest earned on tax-exempt obligations of the Tax-Exempt Intermediate
Bond Fund that are issued without original issue discount and have a current
market discount is calculated by using the coupon rate of interest instead of
the yield to maturity. In the case of tax-exempt obligations that are issued
with original issue discount but which have discounts based on current market
value that exceed the then-remaining portion of the original issue discount
(market discount), the yield to maturity is the imputed rate based on the
original issue discount calculation. On the other hand, in the case of tax-
exempt obligations that are issued with original issue discount but which have
the discounts based on current market value that are less than the then-
remaining portion of the original issue discount (market premium), the yield to
maturity is based on the market value.
With respect to mortgage or other receivables-backed obligations which are
expected to be subject to monthly payments of principal and interest ("pay
downs"), (a) gain or loss attributable to actual monthly pay downs are accounted
for as an increase or decrease to interest income during the period; and (b) a
Fund may elect either (i) to amortize the discount and premium on the remaining
security, based on the cost of the security, to the weighted average maturity
date, if such information is available, or to the remaining term of the
security, if any, if the weighted average maturity date is not available, or
(ii) not to amortize discount or premium on the remaining security.
Undeclared earned income may be subtracted from the net asset value per
share (variable "d" in the formula). Undeclared earned income is the net
investment income which, at the end of the 30-day base period, has not been
declared as a dividend, but is reasonably expected to be and is declared as a
dividend shortly thereafter.
In addition, the Tax-Exempt Intermediate Bond Fund may advertise a "tax-
equivalent yield" which shows the level of taxable yield needed to produce an
after-tax equivalent to the tax-free yield of the Fund. This is done by
increasing the yield of the series of shares (calculated as stated above) by the
amount necessary to reflect the payment of federal income taxes at a stated
rate. This is computed by: (a) dividing the portion of the Fund's yield for a
particular series (as calculated above) that is exempt from federal income tax
by one minus a stated federal income tax rate; and (b) adding the figure
resulting from (a) above to that portion, if any, of the Fund's yield that is
not exempt from federal income tax. The "tax-equivalent" yield will always be
higher than the "yield of the Fund.
For the 30-day period ended October 31, 1997, the annualized yields for
Institutional Shares of the Short-Term Bond Market Fund, Intermediate Bond
Market Fund, Tax-Exempt Intermediate Bond Fund and Bond IMMDEX Fund were 6.02%,
-
5.94%, 4.09% and 6.24%, respectively. Without fees waived by the Adviser and
the Co-Administrators during such period, the annualized yields would have been
5.66%, 5.68%, 3.75% and 6.12%, respectively. For the same period, the tax-
equivalent annualized yield for the Tax-Exempt Intermediate Bond Fund same
period would have been 5.93% (assuming a federal income tax rate of 31%).
Without fees waived by the Adviser and Co-Administrators during such period, the
tax-equivalent annualized yield for such Fund would have been 5.43%.
For the 30-day period ended October 31, 1997, the annualized yields,
assuming the maximum sales charge, for Retail Shares of the Short-Term Bond
Market Fund, Intermediate Bond Market Fund, Tax-Exempt Intermediate Bond Fund
and Bond IMMDEX Fund were 5.65%, 5.58%, 3.76% and 5.86%, respectively. Without
fees waived by the Adviser and the Co-Administrators during such period, the
annualized yields would have been 5.30%, 5.32%, 3.43% and 5.75%, respectively.
For the same period, the tax-equivalent annualized yield for the Tax-Exempt
Intermediate Bond Fund would have been 5.45% (assuming a federal income tax rate
of 31%). Without fees waived by the Adviser and Co-Administrators during such
period, the tax-equivalent annualized yield for such Fund would have been 4.97%.
For the 30-day period ended October 31, 1997 , the annualized yields for
Retail Shares of the Short-Term Bond Market Fund, Intermediate Bond Market Fund,
Tax-Exempt Intermediate Bond Fund and Bond IMMDEX Fund purchased without a
front-end sales charge were 5.77%, 5.69%, 3.84% and 5.98%, respectively.
Without fees waived by the Adviser and the Co-Administrators during such period,
the annualized yields would have been 5.41%, 5.43%, 3.50% and 5.87%,
respectively. For the same period, the tax-equivalent annualized yield for the
Tax-Exempt Intermediate Bond Fund purchased without a front-end sales charge
would have been 5.57% (assuming a federal income tax rate of 31%). Without fees
waived by the Adviser and Co-Administrators during such period, the tax-
equivalent annualized yield for such Fund would have been 5.07%.
Total Return Calculations.
Each Fund computes "average annual total return" separately for its Retail
and Institutional Shares. Average annual total return reflects the average
annual percentage change in value of an investment in shares of a series over
the measuring period. This is computed by determining the average annual
compounded rates of return during specified periods that equate the initial
amount invested in a particular series to the ending redeemable value of such
investment in the series. This is done by dividing the ending redeemable value
of a hypothetical $1,000 initial payment by $1,000 and raising the quotient to a
power equal to one divided by the number of years (or fractional portion
thereof) covered by the computation and subtracting one from the result. This
calculation can be expressed as follows:
ERV 1/n
T = [(-----) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value at the end of the period
covered by the computation of a hypothetical $1,000
payment made at the beginning of the period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in terms
of years.
The Funds may compute aggregate total return, which reflects the total
percentage change in value over the measuring period. The Funds compute their
aggregate total returns separately for the Retail and Institutional Series, by
determining the aggregate rates of return during specified periods that likewise
equate the initial amount invested in a particular series to the ending
redeemable value of such investment in the series. The formula for calculating
aggregate total return is as follows:
ERV
T = [(-----) - 1]
P
The calculations of average annual total return and aggregate total return
assume the reinvestment of all dividends and capital gain distributions on the
reinvestment dates during the period. The ending redeemable value (variable
"ERV" in each formula) is determined by assuming complete redemption of the
hypothetical investment and the deduction of all nonrecurring charges at the end
of the period covered by the computations. In addition, the Funds' average
annual total return and aggregate total return reflect the deduction of the 4%
maximum front-end sales charge for equity funds and 2% maximum front end sales
charge for fixed income funds in connection with the purchase of Retail Shares.
The Funds may also advertise total return data without reflecting sales charges
in accordance with the rules of the Securities and Exchange Commission.
Quotations that do not reflect the sales charge will, of course, be higher than
quotations that do reflect the sales charge.
The total return and yield of a Fund's Shares may be compared to
those of other mutual funds with similar investment objectives and to stock,
bond 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 total return and yield, as appropriate, of a
Fund's shares may be compared to data prepared by Lipper Analytical Services,
Inc. The total return of a bond or balanced Fund's shares may be compared to
the Lehman Brothers 1-3 Year Government/Corporate Bond Index; the Merrill Lynch
1-2.99 U.S. Treasury Bond Index; the Lehman Brothers Intermediate
Government/Corporate Bond Index; the Lehman Brothers 5-Year General Obligation
Bond Index; the Lehman Brothers Government/Corporate Bond Index; and the
Consumer Price Index. In addition, the total return of an equity Fund's shares
may be compared to the S&P 500 Index; the S&P MidCap 400 Index, the S&P SmallCap
600 Index, the NASDAQ Composite Index, an index of unmanaged groups of common
stocks of domestic companies that are quoted on the National Association of
Securities Quotation System; the Dow Jones Industrial Average, a recognized
unmanaged index of common stocks of 30 industrial companies listed on the New
York Stock Exchange; the Wilshire Top 750 Index, an index of all domestic equity
issues which are traded over the national exchanges; the Russell 2000 Index; the
Value Line Composite Index, an unmanaged index of nearly 1,700 stocks reviewed
in Ratings & Reports; the Russell MidCap; the Wilshire Next 1750 Index; the
Wilshire MidCap 750 Index; and the Consumer Price Index. In addition, the
total return of a series of shares of the International Equity Fund will be
compared to the GDP EAFE Index and may be compared to the Salomon-Russell
Indices, Russell Universe Indices, Lipper International Indices, and the
domestic indices listed above. Total return and yield data as reported in
national financial publications, such as Money Magazine, Forbes, Barron's,
Morningstar Mutual Funds, Mutual Funds Magazine, Kiplinger's Personal Finance
Magazine, 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 the
Funds.
Performance quotations represent past performance, and should not
be considered as representative of future results. The investment return and
principal value of an investment in a Fund's series of shares will fluctuate so
that an investor's shares, when redeemed, may be worth more or less than their
original cost. Since performance will fluctuate, performance data for a Fund
cannot necessarily be used to compare an investment in a Fund's series of shares
with bank deposits, savings accounts and similar investment alternatives which
often provide an agreed or guaranteed fixed yield for a stated period of time.
Investors should remember that performance is generally a function of the kind
and quality of the investments held in a portfolio, portfolio maturity,
operating expenses and market conditions. Any fees charged by Institutions
directly to their customer accounts in connection with investments in a Fund
will not be included in the Fund's calculations of yield and total return and
will reduce the yield and total return received by the accounts.
PERFORMANCE HISTORY
AVERAGE ANNUAL TOTAL RETURN*
INSTITUTIONAL SHARES
Since inception
1 Year 5 Years 10 Years (inception date)
SHORT-TERM BOND 6.47% 5.84% 7.48% N/A
MARKET
INTERMEDIATE BOND 7.36% - - 6.59% (Jan. 5, 1993)
MARKET
TAX-EXEMPT 5.96% - - 5.02% (Feb. 8, 1993)
INTERMEDIATE BOND
BOND IMMDEX/TM 8.90% 7.75% 8.90% N/A
BALANCED GROWTH 18.39% 12.40% - 11.75% (Mar. 30, 1992)
GROWTH AND INCOME 30.83% 18.35% - 14.40% (Dec. 29, 1989)
EQUITY INDEX 31.38% 19.24% 16.60% N/A
GROWTH 21.56% - - 13.77% (Dec. 29, 1992)
SPECIAL GROWTH 22.44% 15.65% - 16.13% (Dec. 28, 1989)
FIRMCO'S COLLECTIVE**
INVESTMENT "B FUND" 29.66% 17.51% 18.42% N/A
EMERGING GROWTH* - - - 3.10%(Aug. 15, 1997)
MICROCAP 30.12% - - 42.97%(Aug. 1, 1995)
INTERNATIONAL EQUITY (5.10)% --- --- (0.34)% (Apr. 28, 1994)
AVERAGE ANNUAL TOTAL RETURN*
RETAIL SHARES
Since inception
1 Year 5 Years 10 Years (inception date)
SHORT-TERM BOND 4.08% 5.27% 7.20% N/A
MARKET
INTERMEDIATE BOND 4.93% - - 6.00% (Jan. 5, 1993)
MARKET
TAX-EXEMPT 3.47% - - 4.41% (Feb. 8, 1993)
INTERMEDIATE BOND
BOND IMMDEX/TM 6.51% 7.17% 8.61% N/A
BALANCED GROWTH 13.33% 11.34% - 10.80% (Mar. 30, 1992)
GROWTH AND INCOME 25.24% 17.24% - 13.70% (Dec. 29, 1989)
EQUITY INDEX 25.83% 18.12% 16.05% N/A
GROWTH 16.46% - - 12.66% (Dec. 29, 1992)
SPECIAL GROWTH 17.30% 14.56% - 15.42% (Dec. 28, 1989)
FIRMCO'S COLLECTIVE**
INVESTMENT "B FUND" 24.23% 16.30% 17.68%
EMERGING GROWTH* - - - (1.06)%(Aug. 15, 1997)
MICROCAP 24.61% - - 39.97%(Aug. 1, 1995)
INTERNATIONAL EQUITY (9.08)% - - (1.68)% (Apr. 28, 1994)
* Average annual total return calculations are for periods ended
October 31, 1997. The return for the Emerging Growth Fund represents its
cumulative return since inception and is not annualized. Share performance
of the Retail Series reflects the decution of the current maximum sales
charge of 2.00% and 4.00% for the Bond and Equity Funds, respectively.
** FIRMCO'S Collective Investment "B Fund" is a private account managed using
substantially the same investment objective, policies and restrictions as
the Firstar Special Growth Fund.
The performance of the Short-Term Bond Market, Bond IMMDEX/TM and Equity
Index Funds for the period prior to December 29, 1989 is represented by the
performance of collective investment funds which operated prior to the
effectiveness of the registration statement of the Firstar Short-Term Bond
Market, Bond IMMDEX/TM and Equity Index Funds. At the time of the Firstar
Short-Term Bond Market, Bond IMMDEX/TM and Equity Index Funds' inception, each
collective investment fund was operated using materially equivalent investment
objectives, policies, guidlines and restrictions as its corresponding Firstar
fund. In connection with the Firstar Short-Term Bond Market, Bond IMMDEX/TM and
Equity Index Funds' commencement of operations, on December 29, 1989, each
collective investment fund transferred its assets to its Firstar Fund
equivalent. At the time of the transfer, the Adviser did not manage any
other collective investment or common trust funds using materially
equivalent objectives, policies, guidelines and restrictions to those of
the Short-Term Bond Market, Bond IMMDEX/TM and Equity Index Funds.
The Special Growth Fund is managed by FIRMCO using substantially
the same investment objectives, policies and restrictions as the FIRMCO managed
collective investment fund Special Equity Growth Fund B (the "B Fund").
During the period prior to August 1997, the Special Growth Fund was managed
with an investment focus which differed from that of the B Fund. At that time,
the Special Growth Fund's prior focus on small- to medium-sized companies
was shifted to a focus on companies with a slightly larger minimim
capitalization, with a slightly higher range of anticipated median
capitalizations for the Fund. As a result of this shift, the Special Growth
Fund currently focuses on companies meeting the same capitalization size
criteria as those for the B Fund is relevant to a shareholder in the Firstar
Special Growth Fund.
The collective investment funds were not and the B Fund is not registered
under the 1940 Act and were and are not subject to certain restrictions that
are imposed by the 1940 Act and the Internal Revenue Code. If the collective
investment funds and the B Fund had been registered under the 1940 Act,
performance may have been adversely affected. Performance of the collective
investment funds has been restated to reflect the Firstar Short-Term Bond
Market, Bond IMMDEXTM and Equity Index Funds' respective actual expenses during
each such Fund's first fiscal year. The performance of the B Fund has been
restated to reflect the Special Growth Fund's current expenses for retail shares
and its maximum 4.00% sales charge and for institutional shares. Performance
quotations of each Collective Investment Fund and of the B Fund present past
performance of the FIRMCO managed collective funds, which are separate and
distinct from Firstar Special Growth Fund, Short-Term Bond Market Fund, Bond
IMMDEX Fund and Equity Index Fund, do not represent past performance o those
Funds and should not be considered as representative of future results of those
Funds.
Prior to January 10, 1995, the Funds offered to retail and institutional
investors one series of shares with neither a sales charge nor a 0.25% service
organization fee. Retail Share performance reflects the deduction of the
current maximum sales charge of 4.00% for equity funds and 2.00% for fixed
income funds, but for periods prior to January 10, 1995, Retail Share
performance does not reflect service organization fees. If service organization
fees had been reflected, performance would be reduced.
Performance assumes the reinvestment of all net investment income and
capital gains and reflects fee waivers. In the absence of fee waivers,
performance would be reduced. Performance quotations represent past
performance, and should not be considered as representative of future results.
The Funds may also from time to time include discussions or illustrations
of the effects of compounding in advertisements. "Compounding" refers to the
fact that, if dividends or other distributions on a Fund investment are
reinvested by being paid in additional Fund shares, any future income or capital
appreciation of a Fund would increase the value, not only of the original Fund
investment, but also of the additional Fund shares received through
reinvestment. As a result, the value of the Fund investment would increase more
quickly than if dividends or other distribution had been paid in cash. The
Funds may also include discussions or illustrations of the potential investment
goals of a prospective investor, investment management techniques, policies or
investment suitability of a Fund, conditions, the effects of inflation
and historical performance of various asset classes, including but not limited
to, stocks, bonds and Treasury bills. From time to time advertisements or
communications to shareowners may summarize the substance of information
contained in shareowner reports (including the investment composition of a
Fund), as well as the views of the Adviser or Sub-Adviser as to market,
economic, trade and interest trends, legislative, regulatory and monetary
developments, investment strategies and related matters believed to be of
relevance to a Fund. The Funds may also include in advertisements, charts,
graphs or drawings which illustrate the potential risks and rewards of
investment in various investment vehicles, including but not limited to stocks,
bonds, treasury bills and shares of a Fund. In addition, advertisement or
shareowner communications may include a discussion of certain attributes or
benefits to be derived by an investment in a Fund. Such advertisements or
communications may include symbols, headlines or other materials which highlight
or summarize the information discussed in more detail therein.
MISCELLANEOUS
As used in this SAI and in the Funds' Prospectuses, a majority of the
outstanding shares of a Fund or portfolio means, with respect to the approval of
an investment advisory agreement or a charge in a fundamental investment policy,
the lesser of (1) 67% of the shares of the particular Fund or portfolio
represented at a meeting at which the holders of more than 50% of the
outstanding shares of such Fund or portfolio are present in person or by proxy,
or (2) more than 50% of the outstanding shares of such Fund or portfolio.
As of December 31,1997, the Adviser and its affiliates held of record
substantially all of the outstanding shares of each of the Company's investment
portfolios as agent, custodian, trustee or investment adviser on behalf of their
customers. At such date, Firstar Trust, P.O. Box 2054, Milwaukee, Wisconsin
53201, and its affiliated banks held as beneficial owner five percent or more of
the outstanding shares of the following investment portfolios of the Company
because they possessed sole voting or investment power with respect to such
shares: Money Market Fund: 10%; Institutional Money Market Fund: 91%; Tax-Exempt
Money Market Fund: 61%; U.S. Treasury Money Market Fund: 44 %; U.S. Government
Money Market Fund: 66%; Growth and Income Fund: 67%; Short-Term Bond Market
Fund: 56%; Special Growth Fund: 73%; Bond IMMDEX Fund: 79%; Equity Index Fund:
76%; Balanced Growth Fund: 76%; Intermediate Bond Market Fund: 81%; Growth Fund:
83%; Tax-Exempt Intermediate Bond Fund: 63%; International Equity Fund: 88%;
MicroCap Fund: 81%, and Emerging Growth Fund: 87%. At such date, no other
person was known by the Company to hold of record or beneficially 5% or more of
the outstanding shares of any investment portfolio of the Company.
APPENDIX A
Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. The following summarizes the rating categories used by Standard and
Poor's for commercial paper.
"A-1" - Issue's degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are
denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory. However,
the relative degree of safety is not as high as for issues designated "A-1."
"A-3" - Issue has an adequate capacity for timely payment. It is
however, somewhat more vulnerable to the adverse effects of changes and
circumstances than an obligation carrying a higher designation.
"B"- Issue has only a speculative capacity for timely payment.
"C" - Issue has a doubtful capacity for payment.
"D" - 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 following summarizes the rating categories used by
Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are considered to
have a superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
"Prime-2" - Issuer or related supporting institutions are considered to
have a strong capacity for repayment of short-term promissory obligations.
This will normally be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound, will be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternative
liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an acceptable
capacity for repayment of short-term promissory obligations. The effects of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D- 1," "D- 2" and "D- 3." Duff
& Phelps employs three designations, "D- 1+," " D- 1" and "D- 1-," within
the highest rating category. The following summarizes the rating categories
used by Duff & Phelps for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental protection factors.
Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty for timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity, and other protection
factors qualify issue as investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer failed to meet scheduled principal and/or interest
payments.
Fitch IBCA short-term ratings apply to debt obligations that are payable
on demand or have original maturities of generally up to three years. The
following summarizes the rating categories used by Fitch IBCA for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit quality. Issues
assigned this rating are regarded as having the strongest degree of assurance
for timely payment.
"F-1" - Securities possess highest credit quality. Issues assigned this
rating reflect an assurance of timely payment only slightly less in degree than
issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues assigned this
rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues assigned this
rating have characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
"B" - Securities are speculative. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for timely payment and
are vulnerable to near-term adverse changes in financial and economic
conditions.
"C" - Default is a real possibility for these securities. Capacity for
meeting financial commitments is solely reliant upon a sustained, favorable
business and economic environment.
"D" - Securities are in actual or imminent payment default.
Fitch IBCA may also use the symbol "LOC" with its short-term ratings to
indicate that the rating is based upon a letter of credit issued by a
commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of an untimely
payment of principal or interest of unsubordinated instruments having a
maturity of one year or less which is issued by United States commercial banks,
thrifts and non-bank banks; non-United States banks; and broker-dealers. The
following summarizes the ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest rating
category and indicates a very high likelihood that principal and interest will
be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of safety
regarding timely repayment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
the capacity to service principal and interest in a timely fashion is
considered adequate.
"TBW-4" - This designation indicates that the debt is regarded as non-
investment grade and therefore speculative.
Corporate and Municipal Long-Term Debt Ratings
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - This designation represents the highest rating assigned by
Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay interest
and repay principal and differs from AAA issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay interest and
repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt
in higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay interest
and repay principal. Whereas such issues normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC," and "C" - Debt is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation.
While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"CI" - This rating is reserved for income bonds on which no interest is
being paid.
"D" - Debt is in payment default. This rating is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes such payments will
be made during such grace period. Rating is also used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid, and
certain other obligations that S & P believes may experience high volatility or
high variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged.' Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as high-
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing;
"Ca" represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds
may be in default.
Con. ( ) - Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting
condition attaches. Parenthetical rating denotes the probable credit stature
upon completion of construction or elimination of basis of condition.
(P) - When applied to forward delivery bonds, indicates that the rating is
provisional pending delivery of the bonds. The ratings may be revised prior to
delivery if changes occur in the legal documents or the underlying credit
quality of the bonds.
Moody's applies numerical modifiers 1, 2 and 3 in each generic
classification from "Aa" to "B" in its bond rating system. The modifier 1
indicates that the issuer 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 issuer ranks at the lower end of its generic rating
category.
The following summarizes the long-term debt ratings used by Duff & Phelps
for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high quality. Protection factors are
strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but adequate.
However, risk factors are more variable and greater in periods of economic
stress.
"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when
due. Debt rated "B" possesses the risk that obligations will not be met when
due. Debt rated "CCC" is well below investment grade and has considerable
uncertainty as to timely payment of principal, interest or preferred dividends.
Debt rated "DD" is a defaulted debt obligation, and the rating "DP"
represents preferred stock with dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+)
or minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by Fitch IBCA for
corporate and municipal bonds:
"AAA" - bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds
rated in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated "F-1+."
"A" - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of good credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
To provide more detailed indications of credit quality, the Fitch IBCA
ratings from and including "AA" to "BBB" may be modified by the addition of
a plus (+) or minus (-) sign to show relative standing within these major
rating categories.
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long-term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes
the rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is very high.
"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis with limited incremental risk versus
issues rated in the highest category.
"A" - This designation indicates that the ability to repay principal and
interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC" - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree
of speculation and "CC" the highest degree of speculation.
"D" - this designation indicates that the long-term debt is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may include
a plus or minus sign designation which indicates where within the respective
category the issue is placed.
Municipal Note Ratings
A Standard and Poor's rating reflects the liquidity concerns and market
access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Rating Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term loans
are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1" / "VMIG-1" - Loans bearing this designation are of the best
quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2" / ""VMIG-2" - Loans bearing this designation are of high
quality, with margins of protection ample although not so large as in the
preceding group.
"MIG-3" / "VMIG-3" - Loans bearing this designation are of favorable
quality, with all security elements accounted for but lacking the undeniable
strength of the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well established.
"MIG-4" / "VMIG-4" - Loans bearing this designation are of adequate
quality, carrying specific risk but having protection commonly regarded as
required of an investment security and not distinctly or predominantly
speculative.
"SG" - Loans bearing this designation are of speculative quality and
lack margins of protection.
Duff & Phelps and Fitch IBCA use the short-term ratings described under
commercial Paper Ratings for Municipal notes.
APPENDIX B
ADDITIONAL INFORMATION CONCERNING FUTURES AND RELATED
OPTIONS
As stated in the Prospectuses, certain of the Funds may enter into futures
contracts and options for hedging or other purposes. Such transactions are
described in this Appendix.
I. Interest Rate Futures Contracts
Use of Interest Rate Futures Contracts. Bond prices are established in
both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the
future for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, a Fund may use interest rate futures
as a defense, or hedge, against anticipated interest rate changes and not for
speculation. As described below, this would include the use of futures
contract sales to protect against expected increases in interest rates and
futures contract purchases to offset the impact of interest rate declines.
A Fund presently could accomplish a similar result to that which they hope
to achieve through the use of futures contracts by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase, or conversely, selling short-term bonds and investing in
long-term bonds when interest rates are expected to decline. However, because
of the liquidity that is often available in the futures market the protection
is more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by a Fund, through using futures contracts.
Description of Interest Rate Futures Contracts. An interest rate futures
contract sale would create an obligation by a Fund as seller, to deliver the
specific type of financial instrument called for in the contract at a specific
future time for a specified price. A futures contract purchase would create an
obligation by a Fund, as purchaser, to take delivery of the specific type of
financial instrument at a specific future time at a specific price. The
specific securities delivered or taken, respectively, at settlement date, would
not be determined until at or near that date. The determination would be in
accordance with the rules of the exchange on which the futures contract sale or
purchase was made.
Although interest rate futures contracts by their terms call for actual
delivery or acceptance of securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery of
securities. Closing out a futures contract sale is effected by a Fund's
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
in the sale exceeds the price in the offsetting purchase, the Fund is paid the
difference and thus realizes a gain. If the offsetting purchase price exceeds
the sale price, the Fund pays the difference and realizes a loss. Similarly,
the closing out of a futures contract purchase is effected by a Fund's entering
into a futures contract sale. If the offsetting sale price exceeds the
purchase price, the Fund realizes a gain, and if the purchase price exceeds the
offsetting sale price, the Fund realizes a loss.
Interest rate futures contracts are traded in an auction environment on
the floors of several exchanges - principally, the Chicago Board of Trade, the
Chicago Mercantile Exchange and the New York Futures Exchange. The Funds would
deal only in standardized contracts on recognized exchanges. Each exchange
guarantees performance under contract provisions through a clearing
corporation, a nonprofit organization managed by the exchange membership.
A public market now exists in futures contracts covering various financial
instruments including long-term U.S. Treasury Bonds and Notes; Government
National Mortgage Association (GNMA) modified pass-through mortgage-backed
securities; three-month U.S. Treasury Bills; and ninety-day commercial paper. A
Fund may trade in any futures contract for which there exists a public market,
including, without limitation, the foregoing instruments.
Examples of Futures Contract Sale. A Fund would engage in an interest
rate futures contract sale to maintain the income advantage from continued
holding of a long-term bond while endeavoring to avoid part or all of the loss
in market value that would otherwise accompany a decline in long-term
securities prices. Assume that the market value of a certain security in a
Fund's portfolio tends to move in concert with the futures market prices of
long-term U.S. Treasury bonds (`Treasury bonds''). The Adviser wishes to fix
the current market value of this portfolio security until some point in the
future. Assume the portfolio security has a market value of 100, and the
Adviser believes that, because of an anticipated rise in interest rates, the
value will decline to 95. The Fund might enter into futures contract sales of
Treasury bonds for an equivalent of 98. If the market value of the portfolio
security does indeed decline from 100 to 95, the equivalent futures market
price for the Treasury bonds might also decline from 98 to 93.
In that case, the five-point loss in the market value of the portfolio
security would be offset by the five-point gain realized by closing out the
futures contract sale. Of course, the futures market price of Treasury bonds
might well decline to more than 93 or to less than 93 because of the imperfect
correlation between cash and futures prices mentioned below.
The Adviser could be wrong in its forecast of interest rates and the
equivalent futures market price could rise above 98. In this case, the market
value of the portfolio securities, including the portfolio security being
protected, would increase. The benefit of this increase would be reduced by
the loss realized on closing out the futures contract sale.
If interest rate levels did not change, the Fund in the above example
might incur a loss of 2 points (which might be reduced by an offsetting
transaction prior to the settlement date). In each transaction, transaction
expenses would also be incurred.
Examples of Futures Contract Purchase. A Fund might engage in an
interest rate futures contract purchase when it is not fully invested in long-
term bonds but wishes to defer for a time the purchase of long-term bonds in
light of the availability of advantageous interim investments, e.g., shorter-
term securities whose yields are greater than those available on long-term
bonds. A Fund's basic motivation would be to maintain for a time the income
advantage from investment in the short-term securities; the Fund would be
endeavoring at the same time to eliminate the effect of all or part of an
expected increase in market price of the long-term bonds that the fund may
purchase.
For example, assume that the market price of a long-term bond that the
Fund may purchase, currently yielding 10%, tends to move in concert with
futures market prices of Treasury bonds. The Adviser wishes to fix the current
market price (and thus 10% yield) of the long-term bond until the time (four
months away in this example) when it may purchase the bond. Assume the long-
term bond has a market price of 100, and the Adviser believes that, because of
an anticipated fall in interest rates, the price will have risen to 105 (and
the yield will have dropped to about 9 1/2%) in four months. The Fund might
enter into futures contracts purchases of Treasury bonds for an equivalent
price of 98. At the same time, the Fund could, for example, assign a pool of
investments in short-term securities that are either maturing in four months or
earmarked for sale in four months, for purchase of the long-term bond at an
assumed market price of 100. Assume these short-term securities are yielding
15%. If the market price of the long-term bond does indeed rise from 100 to
105, the equivalent futures market price for Treasury bonds might also rise
from 98 to 103. In that case, the 5-point increase in the price that the Fund
pays for the long-term bond would be offset by the 5-point gain realized by
closing out the futures contract purchase.
The Adviser could be wrong in its forecast of interest rates; long-term
interest rates might rise to above 10%; and the equivalent futures market price
could fall below 98. If short-term rates at the same time fall to 10% or
below, it is possible that the Fund would continue with its purchase program
for long-term bonds. The market price of available long-term bonds would have
decreased. The benefit of this price decrease, and thus yield increase, will
be reduced by the loss realized on closing out the futures contract purchase.
If, however, short-term rates remained above available long-term rates, it
is possible that the Fund would discontinue its purchase program for long-term
bonds. The yield on short-term securities in the portfolio, including those
originally in the pool assigned to the particular long-term bond, would remain
higher than yields on long-term bonds. The benefit of this continued
incremental income will be reduced by the loss realized on closing out the
futures contract purchase.
In each transaction, expenses would also be incurred.
II. Index Futures Contracts.
A stock or bond index assigns relative values to the stocks or bonds
included in the index and the index fluctuates with changes in the market
values of the stocks or bonds included. Some stock index futures contracts are
based on broad market indexes, such as the Standard & Poor's 500 or the New
York Stock Exchange Composite Index. In contrast, certain exchanges offer
futures contracts on narrower market indexes, such as the Standard & Poor's 100
or indexes based on an industry or market segment, such as oil and gas stocks.
Futures contracts are traded on organized exchanges regulated by the Commodity
Futures Trading Commission. Transactions on such exchanges are cleared through
a clearing corporation, which guarantees the performance of the parties to each
contract.
A Fund may sell index futures contracts as set forth in the Prospectuses.
A Fund may do so either to hedge the value of its portfolio as a whole, or to
protect against declines, occurring prior to sales of securities, in the value
of the securities to be sold. Conversely, a Fund may purchase index futures
contracts. In a substantial majority of these transactions, a Fund will
purchase such securities upon termination of the long futures position, but a
long futures position may be terminated without a corresponding purchase of
securities.
In addition, a Fund may utilize index futures contracts in anticipation of
changes in the composition of its portfolio holdings. For example, in the
event that a Fund expects to narrow the range of industry groups represented in
its holdings it may, prior to making purchases of the actual securities,
establish a long futures position based on a more restricted index, such as an
index comprised of securities of a particular industry group. A Fund may also
sell futures contracts in connection with this strategy, in order to protect
against the possibility that the value of the securities to be sold as part of
the restructuring of the portfolio will decline prior to the time of sale.
The following are examples of transactions in stock index futures (net of
commissions and premiums, if any).
ANTICIPATORY PURCHASE HEDGE: Buy the Future Hedge
Objective: Protect Against Increasing Price
Portfolio Futures
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures at 125
Equity Portfolio Value of Futures=$62,500/Contract
-Day Hedge is Lifted-
Buy Equity Portfolio with Sell 1 Index Futures at 130
Actual Cost = $65,000 Value of Futures = $65,000/Contract
Increase in Purchase Price = $2,500 Gain on Futures = $2,500
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Portfolio
Factors:
Value of Stock Portfolio = $1,000,000
7
Value of Futures Contract = 125 x $500 = $62,500
Portfolio Beta Relative to the Index = 1.0
Portfolio Futures
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Equity Portfolio Value of Futures = $1,000,000
-Day Hedge is Lifted-
Equity Portfolio - Own Buy 16 Index Futures at 120
Stock with Value = $960,000 Value of Futures = $960,000
Loss in Portfolio Value = $40,000 Gain on Futures = $40,000
If however, the market moved in the opposite direction, that is, market value
decreased and the Fund had entered into an anticipatory purchase hedge, or
market value increased and the Fund had hedged its stock portfolio, the results
of the Fund's transactions in stock index futures would be as set forth below.
Portfolio Futures
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures at 125
Equity Portfolio Value of Futures=$62,500/Contract
Portfolio Futures
-Day Hedge is Lifted-
Buy Equity Portfolio with Sell 1 Index Futures at 120
Actual Cost - $60,000 Value of Futures = $60,000/Contract
Decrease in Purchase Price = $2,500 Loss on Futures = $2,500
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Portfolio
Factors:
Value of Stock Portfolio = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Portfolio Beta Relative to the Index = 1.0
Portfolio Futures
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Equity Portfolio Value of Futures = $1,000,000
-Day Hedge is Lifted-
Equity Portfolio - Own Buy 16 Index Futures at 130
Stock with Value = $1,040,000 Value of Futures = $1,040,000
Gain in Portfolio Value = $40,000 Loss on Futures = $40,000
III. Futures Contracts on Foreign Currencies
A futures contract on foreign currency creates a binding obligation on
one party to deliver, and a corresponding obligation on another party to accept
delivery of, a stated quantity of foreign currency for an amount fixed in U.S.
dollars. Foreign currency futures may be used by the International Equity Fund
to hedge against exposure to flucuations in exchange rates between the U.S.
dollar and other currencies arising from multinational transactions.
IV. Margin Payments.
Unlike when a Fund purchases or sells a security, no price is paid or
received by the Fund upon the purchase or sale of a futures contract.
Initially, in accordance with the terms of the exchange on which such futures
contract is traded, the Fund may be required to deposit with the broker or in a
segregated account with the Fund's custodian an amount of cash or cash
equivalents, the value of which may vary but is generally equal to 10% or less
of the value of the contract. This amount is known as initial margin. The
nature of initial margin in futures transactions is different from that of
margin in security transactions in that futures contract margin does not
involve the borrowing of funds by the customer to finance the transactions.
Rather, the initial margin is in the nature of a performance bond or good faith
deposit on the contract which is returned to the Fund upon termination of the
futures contract assuming all contractual obligations have been satisfied.
Subsequent payments, called variation margin, to and from the broker, will be
made on a daily basis as the price of the underlying security or index
fluctuates making the long and short positions in the futures contract more or
less valuable, a process known as marking to the market. For example, when a
Fund has purchased a futures contract and the price of the contract has risen
in response to a rise in the underlying instruments, that position will have
increased in value and the Fund will be entitled to receive from the broker a
variation margin payment equal to that increase in value. Conversely, where a
Fund has purchased a futures contract and the price of the future contract has
declined in response to a decrease in the underlying instruments, the position
would be less valuable and the Fund would be required to make a variation
margin payment to the broker. At any time prior to expiration of the futures
contract, the Adviser and, where applicable, the Sub-Adviser may elect to close
the position by taking an opposite position, subject to the availability of a
secondary market, which will operate to terminate the Fund's position in the
futures contract. A final determination of variation margin is then made,
additional cash is required to be paid by or released to the Fund, and the Fund
realizes a loss or gain.
V. Risks of Transactions in Futures Contracts.
There are several risks in connection with the use of futures by a Fund as
a hedging device. One risk arises because of the imperfect correlation between
movements in the price of the future and movements in the price of the
securities which are the subject of the hedge. The price of the future may
move more than or less than the price of the securities being hedged. If the
price of the future moves less than the price of the securities which are the
subject of the hedge, the hedge will not be fully effective but, if the price
of the securities being hedged has moved in an unfavorable direction, the Fund
would be in a better position than if it had not hedged at all. If the price
of the securities being hedged has moved in a favorable direction, this
advantage will be partially offset by the loss on the future. If the price of
the future moves more than the price of the hedged securities, the Fund
involved will experience either a loss or gain on the future which will not be
completely offset by movements in the price of the securities which are the
subject of the hedge. To compensate for the imperfect correlation of movements
in the price of securities being hedged and movements in the price of futures
contracts, a Fund may buy or sell futures contracts in a greater dollar amount
than the dollar amount of securities being hedged if the volatility over a
particular time period of the prices of such securities has been greater than
the volatility over such time period of the future, or if otherwise deemed to
be appropriate by the Adviser. Conversely, a Fund may buy or sell fewer
futures contracts if the volatility over a particular time period of the prices
of the securities being hedged is less than the volatility over such time
period of the futures contract being used, or if otherwise deemed to be
appropriate by the Adviser. It is also possible that, where a Fund has sold
futures to hedge its portfolio against a decline in the market, the market may
advance and the value of securities held by the Fund may decline. If this
occurred, the Fund would lose money on the future and also experience a decline
in value in its portfolio securities.
Where futures are purchased to hedge against a possible increase in the
price of securities before a Fund is able to invest its cash (or cash
equivalents) in securities (or options) in an orderly fashion, it is possible
that the market may decline instead; if the Fund then concludes not to invest
in securities or options at that time because of concern as to possible further
market decline or for other reasons, the Fund will realize a loss on the
futures contract that is not offset by a reduction in the price of securities
purchased.
In instances involving the purchase of futures contracts by a Fund, an
amount of cash and cash equivalents, equal to the market value of the futures
contracts, will be deposited in a segregated account with the Fund's custodian
and/or in a margin account with a broker to collateralize the position and
thereby insure that the use of such futures is unleveraged.
In addition to the possibility that there may be an imperfect correlation,
or no correlation at all, between movements in the futures and the securities
being hedged, the price of futures may not correlate perfectly with movement in
the cash market due to certain market distortions. Rather than meeting
additional margin deposit requirements, investors may close futures contracts
through off-setting transactions which could distort the normal relationship
between the cash and futures markets. Second, with respect to financial
futures contracts, the liquidity of the futures market depends on participants
entering into off-setting transactions rather than making or taking delivery.
To the extent participants decide to make or take delivery, liquidity in the
futures market could be reduced thus producing distortions. Third, from the
point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortion in the
futures market, and because of the imperfect correlation between the movements
in the cash market and movements in the price of futures, a correct forecast of
general market trends or interest rate movements by the Adviser and, where
applicable, Sub-Adviser may still not result in a successful hedging
transaction over a short time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although a Fund
intends to purchase or sell futures only on exchanges or boards of trade where
there appear to be active secondary markets, there is no assurance that a
liquid secondary market on any exchange or board of trade will exist for any
particular contract or at any particular time. In such event, it may not be
possible to close a futures investment position, and in the event of adverse
price movements, a Fund would continue to be required to make daily cash
payments of variation margin. However, in the event futures contracts have
been used to hedge portfolio securities, such securities will not be sold until
the futures contract can be terminated. In such circumstances, an increase in
the price of the securities, if any, may partially or completely offset losses
on the futures contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary market in a
futures contract may be adversely affected by `daily price fluctuation
limits' established by commodity exchanges which limit the amount of
fluctuation in a futures contract price during a single trading day. Once the
daily limit has been reached in the contract, no trades may be entered into at
a price beyond the limit, thus preventing the liquidation of open futures
positions. The trading of futures contracts is also subject to the risk of
trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal activity, which could at times make it difficult or
impossible to liquidate existing positions or to recover excess variation
margin payments.
Successful use of futures by a Fund is also subject to the Adviser's or,
where applicable, the Sub-Adviser's ability to predict correctly movements in
the direction of the market. For example, if a Fund has hedged against the
possibility of a decline in the market adversely affecting securities held in
its portfolio and securities prices increase instead, the Fund will lose part
or all of the benefit to the increased value of its securities which it has
hedged because it will have offsetting losses in its futures positions. In
addition, in such situations, if the Fund has insufficient cash, it may have to
sell securities to meet daily variation margin requirements. Such sales of
securities may be, but will not necessarily be, at increased prices which
reflect the rising market. A Fund may have to sell securities at a time when
it may be disadvantageous to do so.
VI. Options on Futures Contracts.
A Fund may purchase options on the futures contracts described above and,
if permitted by its investment objective and policies, may also write options
on futures contracts. A futures option gives the holder, in return for the
premium paid, the right to buy (call) from or sell (put) to the writer of the
option a futures contract at a specified price at any time during the period of
the option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer,
of an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing, an option of the same
series, at which time the person entering into the closing transaction will
realize a gain or loss. A Fund will be required to deposit initial margin and
variation margin with respect to put and call options on futures contracts
written by it pursuant to brokers' requirements similar to those described
above. Net option premiums received will be included as initial margin
deposits. As an example, in anticipation of a decline in interest rates, a
Fund may purchase call options on futures contracts as a substitute for the
purchase of futures contracts to hedge against a possible increase in the price
of securities which the Fund intends to purchase. Similarly, if the value of
the securities held by a Fund is expected to decline as a result of an increase
in interest rates, the Fund might purchase put options or write call options on
futures contracts rather than sell futures contracts.
Investments in futures options involve some of the same considerations
that are involved in connection with investments in futures contracts (for
example, the existence of a liquid secondary market). In addition, the
purchase or sale of an option also entails the risk that changes in the value
of the underlying futures contract will not be fully reflected in the value of
the option purchased. Depending on the pricing of the option compared to
either the futures contract upon which it is based, or upon the price of the
securities being hedged, an option may or may not be less risky than ownership
of the futures contract or such securities. In general, the market prices of
options can be expected to be more volatile than the market prices on the
underlying futures contract. Compared to the purchase or sale of futures
contracts, however, the purchase of call or put options on futures contracts
may frequently involve less potential risk to a Fund because the maximum amount
at risk is the premium paid for the options (plus transaction costs). Although
permitted by their fundamental investment policies, the Funds do not currently
intend to write futures options, and will not do so in the future absent any
necessary regulatory approvals.
VII. Accounting and Tax Treatment.
Accounting for futures contracts and options will be in accordance with
generally accepted accounting principles.
Generally, futures contracts held by a Fund at the close of the Fund's
taxable year will be treated for federal income tax purposes as sold for their
fair market value on the last business day of such year, a process known as
"mark-to-market." Forty percent of any gain or loss resulting from such
constructive sale will be treated as short-term capital gain or loss and 60% of
such gain or loss will be treated as long-term capital gain or loss without
regard to the length of time the Fund holds the futures contract ("the 40%-60%
rule"). The amount of any capital gain or loss actually realized by a Fund in
a subsequent sale or other disposition of those futures contracts will be
adjusted to reflect any capital gain or loss taken into account by the Fund in
a prior year as a result of the constructive sale of the contracts. With
respect to futures contracts to sell, which will be regarded as parts of a
"mixed straddle" because their values fluctuate inversely to the values of
specific securities held by the Fund, losses from such contracts to sell will
be subject to certain loss deferral rules which limit the amount of loss
currently deductible on either part of the straddle to the amount thereof which
exceeds the unrecognized gain (if any) with respect to the other part of the
straddle, and to certain wash sales regulations. Under short sales rules,
which will also be applicable, the holding period of the securities forming
part of the straddle will (if they have not been held for the long-term holding
period) be deemed not to begin prior to termination of the straddle. With
respect to certain futures contracts, deductions for interest and carrying
charges will not be allowed. Notwithstanding the rules described above, with
respect to futures contracts to sell which are properly identified as such, a
Fund may make an election which will exempt (in whole or in part) those
identified futures contracts from being treated for federal income tax purposes
as sold on the last business day of the Fund's taxable year, but gains and
losses will be subject to such short sales, wash sales, loss deferral rules and
the requirement to capitalize interest and carrying charges. Under temporary
regulations, a Fund would be allowed (in lieu of the foregoing) to elect either
(1) to offset gains or losses from positions which are part of a mixed straddle
by separately identifying each mixed straddle to which such treatment applies,
or (2) to establish a mixed straddle account for which gains and losses would
be recognized and offset on a periodic basis during the taxable year. Under
either election, the 40%-60% rule will apply to the net gain or loss
attributable to the futures contracts, but in the case of a mixed straddle
account election, not more than 50% of net annual gain in an account may be
treated as long-term and no more than 40% of net annual loss in an account may
be treated as short-term. Options on futures contracts generally receive
federal tax treatment similar to that described above.
Certain foreign currency contracts entered into by a Fund may be subject
to the "marking to market" process, but gain or loss will be treated as 100%
ordinary income or loss. To receive such federal income tax treatment, a
foreign currency contract must meet the following conditions: (1) the contract
must require delivery of, or settlement by reference to the value of, a foreign
currency of a type in which regulated futures contracts are traded; (2) the
contract must be entered into at arm's length at a price determined by
reference to the price in the interbank market; and (3) the contract must be
traded in the interbank market. The Treasury Department has broad authority to
issue regulations under the provisions respecting foreign currency contracts.
As of the date of this Additional Statement, the Treasury Department has not
issued any such regulations. Other foreign currency contracts entered into by
a Fund may result in the creation of one or more straddles for federal income
tax purposes, in which case certain loss deferral, short sales, and wash sales
rules and the requirement to capitalize interest and carrying charges may
apply.
Special rules govern the federal income tax treatment of certain
transactions denominated in terms of a currency other than the U.S. dollar or
determined by reference to the value of one or more currencies other than the
U.S. dollar. The types of transactions covered by the special rules include
the following: (i) the acquisition of, or becoming the obligor under, a bond or
other debt instrument (including, to the extent provided in Treasury
regulations, preferred stock); (ii) the accruing of certain trade receivables
and payables; and (iii) the entering into or acquisition of any forward
contract, futures contract, option or similar financial instrument. However,
foreign currency-related regulated futures contracts and nonequity options are
generally not subject to the special currency rules if they are or would be
treated as sold for their fair market value at year-end under the mark-to-
market rules, unless an election is made to have such currency rules apply.
The disposition of a currency other than the U.S. dollar by a U.S. taxpayer is
also treated as a transaction subject to the special currency rules. With
respect to transactions covered by the special rules, foreign currency gain or
loss is calculated separately from any gain or loss on the underlying
transaction and is normally taxable as ordinary gain or loss. The Fund may
elect to treat as capital gain or loss foreign currency gain or loss arising
from certain identified forward contracts, futures contracts and options that
are capital assets in the hands of the Fund and which are not part of a
straddle. In accordance with Treasury regulations, certain transactions
subject to the special currency rules that are part of a "Section 988 hedging
transaction" (as defined in the Code and the Treasury regulations) will be
integrated and treated as a single transaction or otherwise treated
consistently for purposes of the Code. "Section 988 hedging transactions"
are not subject to the mark-to-market or loss deferral rules under the Code.
It is possible that some of the non-U.S. dollar denominated investments a Fund
may make will be subject to the special currency rules described above. Gain
or loss attributable to the foreign currency component of transactions engaged
in by a Fund which are not subject to the special currency rules (such as
foreign equity investment other than certain preferred stocks) will be treated
as capital gain or loss and will not be segregated from the gain or loss on the
underlying transaction.
Qualification as a regulated investment company under the Code requires
that a Fund satisfy certain requirements with respect to the source of its
income during a taxable year. At least 90% of the gross income of each Fund
must be derived from dividends, interest, certain payments with respect to
securities loans, gains from the sale or other disposition of stock, securities
or foreign currencies, and other income (including but not limited to gains
from options, futures or forward contracts) derived with respect to the Fund's
business of investing in such stock, securities or currencies. The Treasury
Department may by regulation exclude from qualifying income foreign currency
gains which are not directly related to a Fund's principal business of
investment in stock or securities, or options and futures with respect to stock
or securities. Any income derived by a Fund from a partnership or trust is
treated for this purpose as derived with respect to the Fund's business of
investment in stock, securities or currencies only to the extent that such
income is attributable to items of income which would have been qualifying
income if realized by the Fund in the same manner as by the partnership or
trust.
Xxxxx
FIRSTAR FUNDS, INC.
Statement of Additional Information
for the Money Market Fund
Institutional Money Market Fund
U.S. Treasury Money Market Fund
U.S. Government Money Market Fund
Tax-Exempt Money Market Fund
February 1, 1998
TABLE OF CONTENTS
Page
Firstar Funds, Inc...................................... 2
Investment Objectives and Policies...................... 2
Additional Information on Portfolio Instruments......... 11
Net Asset Value......................................... 13
Additional Purchase and Redemption Information.......... 14
Additional Information Regarding Shareowner Services
for the U.S. Government Money Market,
U.S. Treasury Money Market, Money Market and
Tax-Exempt Money Market Funds ........................ 17
Description of Shares................................... 18
Additional Information Concerning Taxes................. 20
Management of the Company............................... 22
Custodian, Transfer Agent, Disbursing Agent and
Accounting Services Agent ............................ 30
Expenses................................................ 31
Independent Accountants................................. 31
Counsel................................................. 31
Yield and Other Performance Information................. 32
Miscellaneous........................................... 34
Appendix A.............................................. A-1
This Statement of Additional Information ("SAI") is meant to be read in
conjunction with Firstar Funds, Inc.'s prospectuses ("Prospectuses") dated
February 1, 1998 for the Money Market Fund, Institutional Money Market Fund,
U.S. Treasury Money Market Fund, U.S. Government Money Market Fund and Tax-
Exempt Money Market Fund (collectively referred to as the "Funds"), and is
incorporated by reference in its entirety into the Prospectuses. Because this
SAI is not itself a prospectus, no investment in shares of these Funds should be
made solely upon the information contained herein. Copies of the Prospectuses
for the Funds may be obtained by writing Firstar Funds Center at 615 East
Michigan Street, P.O. Box 3011, Milwaukee, Wisconsin 53201-3011 or by calling 1-
800-982-8909 or 414-287-3710 (Milwaukee area). Capitalized terms used but not
defined herein have the same meanings as in the Prospectuses.
SHARES OF THE FUNDS ARE NOT BANK DEPOSITS, AND ARE NEITHER ENDORSED BY, INSURED
BY, GUARANTEED BY, OBLIGATIONS OF, NOR OTHERWISE SUPPORTED BY THE FDIC, THE
FEDERAL RESERVE BOARD, FIRSTAR INVESTMENT RESEARCH & MANAGEMENT COMPANY, LLC,
FIRSTAR TRUST COMPANY, FIRSTAR CORPORATION, ITS AFFILIATES OR ANY OTHER BANK, OR
OTHER GOVERNMENTAL AGENCY. AN INVESTMENT IN THE FUNDS INVOLVES INVESTMENT
RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
FIRSTAR FUNDS, INC.
Firstar Funds, Inc. (the "Company") is a Wisconsin corporation which was
incorporated on February 15, 1988 as a management investment company. The
Company, formerly known as Portico Funds, Inc., changed its name effective
February 1, 1998. The Company is authorized to issue separate classes of
shares of Common Stock representing interests in separate investment portfolios.
This SAI pertains to five diversified portfolios, the Money Market Fund,
Institutional Money Market Fund, U.S. Treasury Money Market Fund, U.S.
Government Money Market Fund and Tax-Exempt Money Market Fund. The Money Market
Fund, Institutional Money Market Fund, U.S. Treasury Money Market Fund, U.S.
Government Money Market Fund and Tax-Exempt Money Market Fund commenced
operations on March 16, 1988, April 26, 1991, April 29, 1991, August 1, 1988 and
June 27, 1988, respectively. The Company also offers other investment portfolios
which are described in separate prospectuses and statements of additional
information. For information concerning these other portfolios, contact the
Firstar Funds Center at 615 East Michigan Street, P.O. Box 3011, Milwaukee,
Wisconsin 53201-3011 or by calling 1-800-982-8909 or 414-287-3710 (Milwaukee
area).
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of the Money Market Fund, the Institutional Money
Market Fund and the U.S. Government Money Market Fund is to seek a high level of
taxable current income consistent with liquidity, the preservation of capital
and a stable net asset value; the investment objective of the U.S. Treasury
Money Market Fund is to seek to provide a high level of current income exempt
from state income taxes consistent with liquidity, the preservation of capital
and a stable net asset value; and the investment objective of the Tax-Exempt
Money Market Fund is to seek a high level of current income exempt from federal
income taxes consistent with liquidity, the preservation of capital and a stable
net asset value. There is no assurance, however, that the Funds' investment
objectives will be attained. The following policies supplement the Funds'
respective investment objectives and policies as set forth in the Prospectuses.
Portfolio Transactions
Subject to the general supervision of the Board of Directors, the Adviser is
responsible for, makes decisions with respect to, and places orders for all
purchases and sales of portfolio securities for each Fund.
Securities purchased and sold by each Fund are generally traded in the over-the-
counter market on a net basis (i.e., without commission) through dealers, or
otherwise involve transactions directly with the issuer of an instrument. The
cost of securities purchased from underwriters includes an underwriting
commission or concession, and the prices at which securities are purchased from
and sold to dealers include a dealer's mark-up or mark-down. With respect to
over-the-counter transactions, the Adviser will normally deal directly with
dealers who make a market in the instruments involved except in those
circumstances where more favorable prices and execution are available elsewhere.
The Funds may participate, if and when practicable, in bidding for the purchase
of portfolio securities directly from an issuer in order to take advantage of
the lower purchase price available to members of a bidding group. The Funds
will engage in this practice, however, only when the Adviser, in its sole
discretion, believes such practice to be in the Funds' interests.
The Funds do not intend to seek profits from short-term trading. Because the
Funds will invest only in short-term debt instruments, their annual portfolio
turnover rates will be relatively high, but brokerage commissions are normally
not paid on money market instruments, and portfolio turnover is not expected to
have a material effect on the Funds' net investment income. For regulatory
purposes, the Fund's annual portfolio turnover rates are expected to be zero.
The Advisory Agreement between the Company and the Adviser provides that, in
executing portfolio transactions and selecting brokers or dealers, the Adviser
will seek to obtain the best overall terms available. In assessing the best
overall terms available for any transaction, the Adviser shall consider factors
it deems relevant, including the breadth of the market in the security, the
price of the security, the financial condition and execution capability of the
broker or dealer, and the reasonableness of the commission, if any, both for the
specific transaction and on a continuing basis. In addition, the Agreement
authorizes the Adviser to cause the Funds to pay a broker-dealer which furnishes
brokerage and research services a higher commission than that which might be
charged by another broker-dealer for effecting the same transaction, provided
that the Adviser determines in good faith that such commission is reasonable in
relation to the value of the brokerage and research services provided by such
broker-dealer, viewed in terms of either the particular transaction or the
overall responsibilities of the Adviser to the Funds. Such brokerage and
research services might consist of reports and statistics relating to specific
companies or industries, general summaries of groups of stocks or bonds and
their comparative earnings and yields, or broad overviews of the stock, bond and
government securities markets and the economy.
Supplementary research information so received is in addition to, and not in
lieu of, services required to be performed by the Adviser and does not reduce
the advisory fees payable to it by the Funds. The Directors will periodically
review the commissions paid by the Funds to consider whether the commissions
paid over representative periods of time appear to be reasonable in relation to
the benefits inuring to the Funds. It is possible that certain of the
supplementary research or other services received will primarily benefit one or
more other investment companies or other accounts for which investment
discretion is exercised. Conversely, a Fund may be the primary beneficiary of
the research or services received as a result of portfolio transactions effected
for such other account or investment company.
Portfolio securities will not be purchased from or sold to (and savings deposits
will not be made in and repurchase and reverse repurchase agreements will not be
entered into with) the Adviser, the Distributor or an affiliated person of
either of them (as such term is defined in the 1940 Act) acting as principal. In
addition, the Funds will not purchase securities during the existence of any
underwriting or selling group relating thereto of which the Distributor or the
Adviser, or an affiliated person of either of them, is a member, except to the
extent permitted by the Securities and Exchange Commission ("SEC").
Investment decisions for the Funds are made independently from those for other
investment companies and accounts advised or managed by the Adviser. Such other
investment companies and accounts may also invest in the same securities as the
Funds. When a purchase or sale of the same security is made at substantially
the same time on behalf of a Fund and another investment company or account, the
transaction will be averaged as to price and available investments allocated as
to amount, in a manner which the Adviser believes to be equitable to the Fund
and such other investment company or account. In some instances, this
investment procedure may adversely affect the price paid or received by a Fund
or the size of the position obtained or sold by the Fund. To the extent
permitted by law, the Adviser may aggregate the securities to be sold or
purchased for a Fund with those to be sold or purchased for other investment
companies or accounts in executing transactions.
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS
Ratings. Subsequent to its purchase by a Fund, a rated security may cease to be
rated or its rating may be reduced below the minimum rating required for
purchase by a Fund. The Board of Directors or the Adviser, pursuant to
guidelines adopted by the Board, will, in accordance with Rule 2a-7 under the
1940 Act, consider such an event in determining whether the Fund involved should
continue to hold the security. In addition, it is possible that unregistered
securities purchased by a Fund in reliance upon Rule 144A under the Securities
Act of 1933 could have the effect of increasing the level of the Fund's
illiquidity to the extent that qualified institutional buyers become, for a
period, uninterested in purchasing these securities.
Variable and Floating Rate Instruments. With respect to the variable and
floating rate instruments that may be acquired by the Money Market, Tax-Exempt
Money Market and Institutional Money Market Funds as described in the
Prospectuses, the Adviser will consider the earning power, cash flows and other
liquidity ratios of the issuers and guarantors of such instruments and, if the
instrument is subject to a demand feature, will monitor their financial status
to meet payment on demand. In determining average weighted portfolio maturity,
an instrument will usually be deemed to have a maturity equal to the longer of
the period remaining to the next interest rate adjustment or the time the Fund
involved can recover payment of principal as specified in the instrument.
Variable U.S. Government obligations held by a Fund, however, will be deemed to
have maturities equal to the period remaining until the next interest rate
adjustment.
The variable and floating rate demand instruments that the Tax-Exempt Money
Market Fund may purchase include participations in Municipal Obligations
purchased from and owned by financial institutions, primarily banks.
Participation interests provide the Fund with a specified undivided interest (up
to 100%) in the underlying obligation and the right to demand payment of the
unpaid principal balance plus accrued interest on the participation interest
from the institution upon a specified number of days' notice, not to exceed
thirty days. Each participation interest is backed by an irrevocable letter of
credit or guarantee of a bank that the Adviser has determined meets the
prescribed quality standards for the Fund. The bank typically retains fees out
of the interest paid on the obligation for servicing the obligation, providing
the letter of credit and issuing the repurchase commitment.
U.S. Government Obligations. Examples of the types of U.S. government
obligations that may be acquired by the Funds include U.S. Treasury bonds, notes
and bills and the 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, Central Bank for
Cooperatives, Federal Home Loan Mortgage Corporation, Federal Intermediate
Credit Banks, Maritime Administration, and Resolution Trust Corp.
Stripped U.S. Government Obligations and Government-Backed Trusts. The Money
Market Fund, U.S. Government Money Market Fund and Institutional Money Market
Fund may acquire U.S. government obligations and their unmatured interest
coupons which have been separated ("stripped") by their holder, typically a
custodian bank or investment brokerage firm. Having separated the interest
coupons from the underlying principal of the U.S. government obligations, the
holder will resell the stripped securities in custodial receipt programs with a
number of different names, including Treasury Income Growth Receipts ("TIGRs")
and Certificate of Accrual on Treasury Securities ("CATs"). The stripped
coupons are sold separately from the underlying principal, which is sold at a
deep discount because the buyer receives only the right to receive a future
fixed payment on the security and does not receive any rights to periodic
interest (cash) payments. Purchasers of stripped securities acquire, in effect,
discount obligations that are economically identical to the zero coupon
securities that the Treasury Department sells itself. The underlying U.S.
Treasury bonds and notes themselves are held in book-entry form at the Federal
Reserve Bank or, in the case of bearer securities (i.e., unregistered securities
which are owned ostensibly by the bearer or holder), in trust on behalf of the
owners. Counsel to the underwriters of these certificates or other evidences of
ownership of the U.S. Treasury securities have stated that, in their opinion,
purchasers of the stripped securities, such as the Funds, most likely will be
deemed the beneficial holders of the underlying U.S. government obligations for
federal tax and security purposes. The SEC staff believes that participations
in CATs and TIGRs and other similar trusts are not U.S. government securities.
The Treasury Department has also facilitated transfers of ownership of zero
coupon securities by accounting separately for the beneficial ownership of
particular interest coupon and principal payments on Treasury securities through
the Federal Reserve book-entry record-keeping system. The Federal Reserve
program as established by the Treasury Department is known as "STRIPS" or
"Separate Trading of Registered Interest and Principal of Securities." Under
the STRIPS program, a Fund will be able to have its beneficial ownership of zero
coupon securities recorded directly in the book-entry record-keeping system in
lieu of having to hold certificates or other evidences of ownership of the
underlying U.S. Treasury securities.
The Money Market Fund, U.S. Government Money Market Fund and Institutional Money
Market Fund may also invest in certificates issued by government-backed trusts.
Such certificates represent an undivided fractional interest in the respective
government-backed trust's assets. The assets of each government-backed trust
consist of (i) a promissory note issued by a foreign government (the "Note"),
(ii) a guaranty by the U.S. Government, acting through the Defense Security
Assistance Agency of the Department of Defense, of the due and punctual payment
of 90% of all principal and interest due on such Note and (iii) a beneficial
interest in a government securities trust holding U.S. Treasury bills, notes and
other direct obligations of the U.S. Treasury sufficient to provide the Trust
with funds in an amount equal to at least 10% of all principal and interest
payments due on the Note. No more than 35% of the value of a Fund's total
assets will be invested in stripped securities not purchased through the Federal
Reserve's STRIPS program and government-backed trusts.
Investment Companies. Each Fund currently intends to limit its investments in
securities issued by other investment companies so that, as determined
immediately after a purchase of such securities is made: (i) not more than 5%
of the value of the Fund's total assets will be invested in the securities of
any one investment company; (ii) not more than 10% of the value of its total
assets will be invested in the aggregate in securities of investment companies
as a group; and (iii) not more than 3% of the outstanding voting stock of any
one investment company will be owned by the Fund or by the Company as a whole.
Repurchase Agreements. Each Fund (except the Tax-Exempt Money Market Fund) may
agree to purchase securities from financial institutions subject to the seller's
agreement to repurchase them at an agreed upon time and price ("repurchase
agreements"). During the term of the agreement, the Adviser will continue to
monitor the creditworthiness of the seller and will require the seller to
maintain the value of the securities subject to the agreement at not less than
102% of the repurchase price. Default or bankruptcy of the seller would,
however, expose the Fund to possible loss because of adverse market action or
delay in connection with the disposition of the underlying securities. The
securities held subject to a repurchase agreement may have stated maturities
exceeding thirteen months, provided the repurchase agreement itself matures in
less than one year.
The repurchase price under the repurchase agreements described in the
Prospectuses generally equals the price paid by a Fund plus interest negotiated
on the basis of current short-term rates (which may be more or less than the
rate on the securities underlying the repurchase agreement). Securities subject
to repurchase agreements will be held by the Funds' custodian (or sub-custodian)
or in the Federal Reserve/Treasury book-entry system or other authorized
securities depository. Repurchase agreements are considered to be loans under
the 1940 Act.
Reverse Repurchase Agreements. Reverse repurchase agreements are considered to
be borrowings under the 1940 Act. At the time a Fund enters into a reverse
repurchase agreement (an agreement under which a Fund sells portfolio securities
and agrees to repurchase them at an agreed-upon date and price), it will place
in a segregated custodial account U.S. government securities or other liquid
high-grade debt securities having a value equal to or greater than the
repurchase price (including accrued interest), and will subsequently monitor the
account to insure that such value is maintained. 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.
Securities Lending. To increase return on portfolio securities, the Funds may
lend their portfolio securities to broker/dealers and other institutional
investors pursuant to agreements requiring that the loans be secured by
collateral equal in value to at least the market value of the securities loaned.
Collateral for such loans may include cash, securities of the U.S. Government,
its agencies or instrumentalities, or an irrevocable letter of credit issued by
a bank which meets the investment standards of the Fund or any combination
thereof. Such loans will not be made, if, as a result, the aggregate of all
outstanding loans of the Fund exceeds 30% of the value of its total assets.
There may be risks of delay in receiving additional collateral or in recovering
the securities loaned or even a loss of rights in the collateral should the
borrower of the securities fail financially. However, loans will be made only
to borrowers deemed by the Adviser to be of good standing and when, in the
Adviser's judgment, the income to be earned from the loan justifies the
attendant risks. When a Fund lends its securities, it continues to receive
interest or dividends on the securities loaned and may simultaneously earn
interest on the investment of the cash collateral which will be invested in
readily marketable, high-quality, short-term obligations. Although voting
rights, or rights to consent, attendant to securities on loan pass to the
borrower, such loans may be called at any time and will be called so that the
securities may be voted by a Fund if a material event affecting the investment
is to occur.
Securities lending arrangements with broker/dealers require that the loans be
secured by collateral equal in value to at least the market value of the
securities loaned. During the term of such arrangements, a Fund will maintain
such value by the daily marking-to-market of the collateral.
Other Investment Considerations - Tax-Exempt Money Market Fund.
Municipal Obligations which may be acquired by the Tax-Exempt Money Market Fund
include debt obligations issued by governmental entities to obtain funds for
various public purposes, including the construction of a wide range of public
facilities, the refunding of outstanding obligations, the payment of general
operating expenses and the extension of loans to public institutions and
facilities.
The two principal classifications of Municipal Obligations which may be held by
the Tax-Exempt Money Market Fund are General Obligation securities and Revenue
securities. The Fund may also acquire Moral Obligation securities.
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. The ratings of NRSROs
represent their opinions as to the quality of Municipal Obligations. It should
be emphasized, however, that ratings are general and are not absolute standards
of quality, and Municipal Obligations with the same maturity, interest rate and
rating may have different yields while Municipal Obligations of the same
maturity and interest rate with different ratings may have the same yield.
The payment of principal and interest on most securities purchased by the Tax-
Exempt Money Market Fund will depend upon the ability of the issuers to meet
their obligations. An issuer's obligations under its Municipal Obligations are
subject to the provisions of bankruptcy, insolvency, and other laws affecting
the rights and remedies of creditors, such as the Federal Bankruptcy Code, and
laws, if any, which may be enacted by federal or state legislatures extending
the time for payment of principal or interest, or both, or imposing other
constraints upon enforcement of such obligations or upon the ability of
municipalities to levy taxes. The power or ability of an issuer to meet its
obligations for the payment of interest on, and principal of, its Municipal
Obligations may be materially adversely affected by litigation or other
conditions.
Certain of the Municipal Obligations held by the Tax-Exempt Money Market Fund
may be insured at the time of issuance as to the timely payment of principal and
interest. The insurance policies will usually be obtained by the issuer of the
Municipal Obligation at the time of its original issuance. In the event that
the issuer defaults on interest or principal payment, the insurer will be
notified and will be required to make payment to the bondholders. There is,
however, no guarantee that the insurer will meet its obligations. In addition,
such insurance will not protect against market fluctuations caused by changes in
interest rates and other factors. The Tax-Exempt Money Market Fund may, from
time to time, invest more than 25% of its assets in Municipal Obligations
covered by insurance policies.
Municipal Obligations acquired by the Tax-Exempt Money Market Fund may include
short-term General Obligation Notes, Tax Anticipation Notes, Bond Anticipation
Notes, Revenue Anticipation Notes, Tax-Exempt Commercial Paper, Construction
Loan Notes and other forms of short-term tax-exempt loans. Such instruments are
issued with a short-term maturity in anticipation of the receipt of tax funds,
the proceeds of bond placements or other revenues. In addition, the Fund may
invest in bonds and other types of tax-exempt instruments provided they have
remaining maturities of thirteen months or less at the time of purchase.
Certain types of Municipal Obligations (private activity bonds) have been or are
issued to obtain funds to provide privately operated housing facilities,
pollution control facilities, convention or trade show facilities, mass transit,
airport, port or parking facilities and certain local facilities for water
supply, gas, electricity or sewage or solid waste disposal. Private activity
bonds are also issued on behalf of privately held or publicly owned corporations
in the financing of commercial or industrial facilities. State and local
governments are authorized in most states to issue private activity bonds for
such purposes in order to encourage corporations to locate within their
communities. The principal and interest on these obligations may be payable
from the general revenues of the users of such facilities.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Obligations. For example, under the Tax Reform Act of
1986, interest on certain private activity bonds must be included in an
investor's alternative minimum taxable income, and corporate investors must
include all tax-exempt interest in their federal alternative minimum taxable
income. The Company cannot, of course, predict what legislation, if any, may be
proposed in the future as regards the income tax status of interest on Municipal
Obligations, or which proposals, if any, might be enacted. Such proposals,
while pending or if enacted, might materially and adversely affect the
availability of Municipal Obligations for investment by the Tax-Exempt Money
Market Fund and the liquidity and value of the Fund's portfolio. In such an
event, the Company would reevaluate the Fund's investment objective and policies
and consider possible changes in its structure or possible dissolution.
When-Issued Purchases and Forward Commitments. When the Tax-Exempt Money Market
Fund agrees to purchase securities on a when-issued or forward commitment basis,
the custodian will set aside cash or liquid high-grade debt securities equal to
the amount of the commitment in a segregated account. Normally, the custodian
will set aside portfolio securities to satisfy a purchase commitment, and in
such a case the Fund may be required subsequently to place additional assets in
the separate account in order to ensure that the value of the account remains
equal to the amount of the Fund's commitments. It may be expected that the
market value of the Fund's net assets will fluctuate to a greater degree when it
sets aside portfolio securities to cover such purchase commitments than when it
sets aside cash. Because the Fund will set aside cash or liquid assets to
satisfy its purchase commitments in the manner described, the Fund's liquidity
and ability to manage its portfolio might be affected in the event its forward
commitments and commitments to purchase when-issued securities ever exceeded 25%
of the value of its assets.
The Tax-Exempt Money Market Fund will purchase securities on a when-issued or
forward commitment basis only with the intention of completing the transaction
and actually purchasing the securities. If deemed advisable as a matter of
investment strategy, however, the Fund may dispose of or renegotiate a
commitment after it is entered into, and may sell securities it has committed to
purchase before those securities are delivered to the Fund on the settlement
date. In these cases the Fund may realize a taxable capital gain or loss.
When the Tax-Exempt Money Market Fund engages in when-issued and forward
commitment transactions, it relies on the other party to consummate the trade.
Failure of such party to do so may result in the Fund's incurring a loss or
missing an opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a when-issued purchase or a
forward commitment to purchase securities, and any subsequent fluctuations in
their market value, are taken into account when determining the market value of
the Tax-Exempt Money Market Fund starting on the day the Fund agrees to purchase
the securities. The Fund does not earn interest on the securities it has
committed to purchase until they are paid for and delivered on the settlement
date.
Stand-By Commitments. The Tax-Exempt Money Market Fund may acquire "stand-by
commitments" with respect to Municipal Obligations held in its portfolio. Under
a stand-by commitment, a dealer or bank agrees to purchase at the Fund's option
specified Municipal Obligations at a specified price. Stand-by commitments may
be exercisable by the Fund at any time before the maturity of the underlying
Municipal Obligations and may be sold, transferred or assigned only with the
instruments involved.
The amount payable to the Fund upon its exercise of a stand-by commitment is
normally (i) the Fund's acquisition cost of the Municipal Obligations (excluding
any accrued interest which the Fund paid on their acquisition), less any
amortized market premium or plus any amortized market or original issue discount
during the period the Fund owned the securities, plus (ii) all interest accrued
on the securities since the last interest payment date during that period. A
"stand-by commitment" may be sold, transferred or assigned by the Fund only with
the instrument involved.
The Fund expects that stand-by commitments will generally be available without
the payment of any direct or indirect consideration. However, if necessary or
advisable, the Fund may pay for a stand-by commitment either separately in cash
or by paying a higher price for portfolio securities which are acquired subject
to the commitment (thus reducing the yield to maturity otherwise available for
the same securities). Where the Fund has paid any consideration directly or
indirectly for a stand-by commitment, its cost would be reflected as unrealized
loss for the period during which the commitment was held by the Fund and will be
reflected in realized gain or loss when the commitment is exercised or expires.
The total amount paid in either manner for outstanding stand-by commitments held
by the Fund will not exceed 1/2 of 1% of the value of its total assets
calculated immediately after each stand-by commitment is acquired.
The Fund intends to enter into stand-by commitments only with dealers, banks and
broker-dealers which, in the Adviser's opinion, present minimal credit risks.
The Fund's reliances upon the credit of those dealers, banks and broker/dealers
is secured by the value of the underlying Municipal Obligations that are subject
to a commitment.
The Fund would acquire stand-by commitments solely to facilitate portfolio
liquidity and does not intend to exercise its rights thereunder for trading
purposes. The acquisition of a stand-by commitment will not affect the
valuation or assumed maturity of the underlying Municipal Obligations which will
continue to be valued in accordance with the ordinary method of valuation
employed by the Fund. Stand-by commitments acquired by the Fund would be valued
at zero in determining net asset value where the Fund paid any consideration
directly or indirectly for a stand-by commitment; its cost would be reflected as
unrealized depreciation for the period in which the commitment was held by the
Fund.
During the current fiscal year, the Adviser expects that not more than 5% of the
net assets of the Tax-Exempt Money Market Fund will be invested at any time in a
particular class of taxable obligations described in the Prospectuses.
Additional Investment Limitations
Each Fund is subject to the investment limitations enumerated in this subsection
which may be changed with respect to a particular Fund only by a vote of the
holders of a majority of such Fund's outstanding shares (as defined under
"Miscellaneous" below).
No Fund may:
1. Make loans, except that a Fund 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 30% of its
total assets.
2. Purchase securities of companies for the purpose of exercising control.
3. Purchase or sell real estate, except that each Fund may purchase securities
of issuers which deal in real estate and may purchase securities which are
secured by interests in real estate.
4. Acquire any other investment company or investment company security except
in connection with a merger, consolidation, reorganization or acquisition of
assets or where otherwise permitted by the 1940 Act.
5. Act as an underwriter of securities within the meaning of the Securities Act
of 1933 except insofar as a Fund might be deemed to be an underwriter upon the
disposition of portfolio securities acquired within the limitation on purchases
of restricted securities and except to the extent that the purchase of
obligations directly from the issuer thereof in accordance with the Fund's
investment objective, policies and limitations may be deemed to be underwriting.
6. Write or sell put options, call options, straddles, spreads, or any
combination thereof, except for transactions in options on securities, indices
of securities, futures contracts and options on futures contracts.
7. Borrow money or issue senior securities, except that each Fund may borrow
from banks and enter into reverse repurchase agreements for temporary purposes
in amounts up to 10% of the value of its total assets at the time of such
borrowing; or mortgage, pledge or hypothecate any assets, except in connection
with any such borrowing and in amounts not in excess of the lesser of the dollar
amounts borrowed or 10% of the value of a Fund's total assets at the time of
such borrowing. No Fund will purchase securities while its borrowings
(including reverse repurchase agreements) in excess of 5% of its total assets
are outstanding. Securities held in escrow or separate accounts in connection
with a Fund's investment practices described in this SAI or in its Prospectus
are not deemed to be pledged for purposes of this limitation.
8. Purchase securities on margin, make short sales of securities or maintain a
short position, except that (a) this investment limitation shall not apply to a
Fund's transactions in futures contracts and related options, and (b) a Fund may
obtain short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities.
9. Purchase or sell commodity contracts, or invest in oil, gas or mineral
exploration or development programs, except that each Fund may, to the extent
appropriate to its investment objective, purchase publicly traded securities of
companies engaging in whole or in part in such activities and may enter into
futures contracts and related options.
In addition, as summarized in the Prospectuses, no Fund may:
10.Purchase securities of any one issuer (other than securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities ("U.S.
government securities')) if, immediately after such purchase, more than 5% of
the value of the Fund's 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 the Fund or the Company, except that up to 25% of the value of the
Fund's total assets may be invested without regard to these limitations. For
purposes of this limitation, a security is considered to be issued by the entity
(or entities) whose assets and revenues back the security. A guarantee of a
security shall not be deemed to be a security issued by the guarantor when the
value of all securities issued and guaranteed by the guarantor, and owned by the
Fund, does not exceed 10% of the value of the Fund's total assets. In
accordance with current SEC regulations, the Money Market Fund and Institutional
Money Market Fund intend (as a matter of nonfundamental policy) to limit
investments in the securities of any single issuer (other than U.S. government
securities, certain fully collateralized repurchase agreements, securities with
certain guarantees and, under certain circumstances, securities of certain money
market funds) to not more than 5% of the Fund's total assets, provided that the
Fund may invest up to 25% of its total assets in the securities of any one
issuer for a period of up to three business days. Compliance with the
diversification requirements of SEC Rule 2a-7 will be deemed to be compliance
with the fundamental diversification restriction above.
11.Purchase any securities which would cause 25% or more of the value of the
Fund's 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 (i)
instruments issued or guaranteed by the United States, any state, territory or
possession of the United States, the District of Columbia or any of their
authorities, agencies, instrumentalities or political subdivisions; (ii)
instruments issued by domestic branches of U.S. banks; and (iii) repurchase
agreements secured by the instruments described in clauses (i) and (ii); (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; and (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.
Although the foregoing investment limitations would permit the Funds to invest
in options, futures contracts and options on future contracts, the Funds, during
the current fiscal year, do not intend to trade in such instruments. Prior to
making any such investments, the Funds would notify their shareowners and add
appropriate descriptions concerning the instruments to the Prospectuses and this
SAI.
NET ASSET VALUE
The net asset value per share of each Fund described in this SAI is calculated
separately by adding the value of all portfolio securities and other assets
belonging to the particular Fund, subtracting the liabilities charged to the
Fund, and dividing the result by the number of outstanding shares of that Fund.
Assets belonging to a Fund consist of the consideration received upon the
issuance of shares of the particular Fund together with all net investment
income, realized gains/losses and proceeds derived from the investment thereof,
including any proceeds from the sale of such investments, any funds or payments
derived from any reinvestment of such proceeds, and a portion of any general
assets of the Company not belonging to a particular investment portfolio. Assets
belonging to a particular Fund are charged with the direct liabilities of that
Fund and with a share of the general liabilities of the Company which are
normally allocated in proportion to the relative net asset values of all of the
Company's investment portfolios at the time of allocation. Subject to the
provisions of the Articles of Incorporation, determinations by the Board of
Directors as to the direct and allocable liabilities, and the allocable portion
of any general assets, with respect to a particular Fund are conclusive.
The Company uses the amortized cost method of valuation to value each Fund's
portfolio securities, pursuant to which an instrument is valued at its cost
initially and thereafter a constant amortization to maturity of any discount or
premium is assumed, regardless of the impact of fluctuating interest rates on
the market value of the instrument. This method may result in periods during
which value, as determined by amortized cost, is higher or lower than the price
a Fund would receive if it sold the instrument. The market value of portfolio
securities held by a Fund can be expected to vary inversely with changes in
prevailing interest rates.
Each Fund attempts to maintain a dollar-weighted average portfolio maturity
appropriate to its objective of maintaining a stable net asset value per share.
In this regard, except for securities subject to repurchase agreements, each
Fund will neither purchase a security deemed to have a remaining maturity of
more than thirteen months within the meaning of the 1940 Act nor maintain a
dollar-weighted average maturity which exceeds 90 days. The Board of Directors
has also established procedures that are intended to stabilize the net asset
value per share of each Fund for purposes of sales and redemptions at $1.00.
These procedures include the determination, at such intervals as the Directors
deem appropriate, of the extent, if any, to which the net asset value per share
of each Fund calculated by using available market quotations deviates from $1.00
per share. In the event such deviation exceeds one-half of one percent, the
Board will promptly consider what action, if any, should be initiated. If the
Board believes that the extent of any deviation from a $1.00 amortized cost
price per share may result in material dilution or other unfair results to new
or existing investors, it has agreed to take such steps as it considers
appropriate to eliminate or reduce to the extent reasonably practicable any such
dilution or unfair results. These steps may include selling portfolio
instruments prior to maturity; shortening the average portfolio maturity;
withholding or reducing dividends; redeeming shares in kind; reducing the number
of outstanding shares without monetary consideration; or utilizing a net asset
value per share determined by using available market quotations.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of each Fund described in this SAI are sold without a sales charge
imposed by the Company, although Shareowner Organizations or Institutions may be
paid by the Company for advertising, distribution, or shareowner services.
Depending on the terms of the particular account, Shareowner Organizations or
Institutions also may charge their customers fees for automatic investment,
redemption and other services provided. Such fees may include, for example,
account maintenance fees, compensating balance requirements or fees based upon
account transactions, assets or income. Shareowner Organizations or
Institutions are responsible for providing information concerning these services
and any charges to any customer who must authorize the purchase of Fund shares
prior to such purchase.
Investors redeeming shares by check generally will be subject to the same rules
and regulations that the transfer agent applies to checking accounts, although
the election of this privilege creates only a shareowner-transfer agent
relationship with the transfer agent. Because dividends on each Fund accrue
daily, checks may not be used to close an account, as a small balance is likely
to result.
Under the 1940 Act, the Funds may suspend the right of redemption or postpone
the date of payment for shares during any period when (a) trading on the
Exchange is restricted by applicable rules and regulations of the SEC; (b) the
Exchange is closed for other than customary weekend and holiday closings; (c)
the SEC has by order permitted such suspension; or (d) an emergency exists as
determined by the SEC. (The Funds may also suspend or postpone the recording of
the transfer of their shares upon the occurrence of any of the foregoing
conditions.)
The Company's Articles of Incorporation permit a Fund to redeem an account
involuntarily, upon sixty days' notice, if redemptions cause the account's net
asset value to remain at less than $1000.
In addition to the situations described in the Funds' Prospectuses under
"Redemption of Shares" and in the SAI under "Net Asset Value," the Company may
redeem shares involuntarily to reimburse the Funds for any loss sustained by
reason of the failure of a shareowner to make full payment for shares purchased
by the shareowner or to collect any charge relating to a transaction effected
for the benefit of a shareowner which is applicable to Fund shares as provided
in the Prospectuses from time to time.
Exchange Privilege (Not Available for Shares of the Institutional Money Market
Fund)
By use of the exchange privilege, shareowners of the Money Market Fund, U.S.
Treasury Money Market Fund, U.S. Government Money Market Fund and Tax-Exempt
Money Market Fund authorize the transfer agent to act on telephonic or written
exchange instructions from any person representing himself to be the shareowner
or in some cases, the shareowner's registered representative or account
representative of record, and believed by the transfer agent to be genuine. The
transfer agent's records of such instructions are binding. The exchange
privilege may be modified or terminated at any time upon notice to shareowners.
Exchange transactions involving shares of the Money Market Fund, U.S. Treasury
Money Market Fund, U.S. Government Money Market Fund or Tax-Exempt Money Market
Fund and described in paragraphs A, B and C below will be made on the basis of
the relative net asset values per share of the funds involved in the
transactions.
A. Retail Shares of any Equity or Bond Fund purchased with a sales charge may
be exchanged without a sales charge for Retail Shares of any other Equity or
Bond Fund offered by the Company with a sales charge.
B. Shares of any Equity or Bond Fund offered by the Company acquired by a
previous exchange transaction involving Retail Shares on which a sales charge
has directly or indirectly been paid (e.g., shares purchased with a sales
charge or issued in connection with an exchange involving shares that had
been purchased with a sales charge) as well as additional Shares acquired
through reinvestment of dividends or distributions on such Shares may be
exchanged without a sales charge for Retail Shares of any other fund offered
by the Company with a sales charge. To accomplish an exchange under the
provisions of this paragraph, investors must notify the transfer agent of
their prior ownership of Retail Shares and their account number.
C. Shares of any fund offered by the Company (including shares of each money
market fund offered by the Company except the Institutional Money Market
Fund) may be exchanged without a sales charge for shares of any other fund of
the Company that is offered without a sales charge (including shares of each
money market fund offered by the Company except the Institutional Money
Market Fund).
Except as stated above, a sales charge will be imposed when shares of a Fund
that were purchased or otherwise acquired without a sales charge (including
shares of each money market fund offered by the Company except the Institutional
Money Market Fund) are redeemed and the proceeds are used to purchase Retail
Shares of another fund of the Company with a sales charge.
Shares in a fund from which the shareowner is withdrawing an investment will be
redeemed at the net asset value per share next determined on the date of
receipt. Shares of the new fund into which the shareowner is investing will be
purchased at the net asset value per share next determined (plus any applicable
sales charge) after acceptance of the request by the Company in accordance with
the Company's customary policies for accepting investments. Exchanges of shares
will be available only in states where they may legally be made.
For federal income tax purposes, share exchanges are treated as sales on which
the shareowner may realize a gain or loss, depending upon whether the value of
the shares to be given up in exchange is more or less than the basis in such
shares at the time of the exchange. Investors exercising the exchange privilege
should request and review the prospectus for the shares to be acquired in the
exchange prior to making an exchange.
Special Procedures for In-Kind Payments
Payment for shares of a Fund may, in the discretion of the Fund, be made in the
form of securities that are permissible investments for the Fund as described in
the Prospectuses. For further information about this form of payment, contact
the Firstar Funds Center at 414-287-3710. In connection with an in-kind
securities payment, a Fund will require, among other things, that the securities
be valued on the day of purchase in accordance with the pricing methods used by
the Fund; that the Fund receives satisfactory assurances that it will have good
and marketable title to the securities received by it; that the securities be in
proper form for transfer to the Fund; that adequate information be provided to
the Fund concerning the basis and other tax matters relating to the securities;
and that the amount of the purchase be at least $1,000,000.
ADDITIONAL INFORMATION REGARDING SHAREOWNER SERVICES FOR THE U.S. GOVERNMENT
MONEY MARKET, U.S. TREASURY MONEY MARKET, MONEY MARKET AND TAX-EXEMPT MONEY
MARKET FUNDS
Periodic Investment Plan
The Funds offer a Periodic Investment Plan whereby a shareowner may
automatically make purchases of shares of a Fund on a regular, monthly basis
($50 minimum per transaction). Under the Periodic Investment Plan, a
shareowner's designated bank or other financial institution debits a
preauthorized amount on the shareowner's account each month and applies the
amount to the purchase of Fund shares. The Periodic Investment Plan must be
implemented with a financial institution that is a member of the Automated
Clearing House. No service fee is currently charged by a Fund for participation
in the Periodic Investment Plan. A $20 fee will be imposed by the transfer
agent if sufficient funds are not available in the shareowner's account or the
shareowner's account has been closed at the time of the automatic transaction.
ConvertiFundR Transactions
The Funds permit shareowners to effect ConvertiFundR transactions, an automated
method by which a shareowner may invest proceeds from one account to another
account of the Firstar family of funds. Such proceeds include dividend
distributions, capital gain distributions and systematic withdrawals.
ConvertiFundR transactions may be used to invest funds from a regular account
to another regular account, from a qualified plan account to another qualified
plan account, or from a qualified plan account to a regular account.
Investments in the non-money market funds will be subject to the applicable
sales charges.
Systematic Withdrawal Plan
The Funds offer shareowners a Systematic Withdrawal Plan, which allows a
shareowner who owns shares of a Fund worth at least $5,000 at current net asset
value at the time the shareowner initiates the Systematic Withdrawal Plan to
designate that a fixed sum ($50 minimum per transaction) be distributed to the
shareowner or as otherwise directed at regular intervals.
DESCRIPTION OF SHARES
The Company's Articles of Incorporation authorize the Board of Directors to
issue up to 150 billion full and fractional shares of common stock, $.0001 par
value per share that shall be divided into thirty classes (each a designated
"class" or ""fund"). Each class is further divided into two series,
Institutional Series and Series A/Retail Series (each, a "Series") and, with
respect to the Funds, consists of shares set forth next to its name in the table
below:
Number of Authorized
Class-Series of Fund in Which Stock Shares in Each
Common Stock Represents Interest Initial Series
1-Institutional Money Market 5 billion
1-A 5 billion
2-Institutional Tax-Exempt Money Market 5 billion
2-A 5 billion
3-Institutional U.S. Government Money 5 billion
Market
3-A 5 billion
4-Institutional Institutional Money 5 billion
Market
4-A 5 billion
5-Institutional U.S. Treasury Money 5 billion
Market
5-A 5 billion
Currently, only Series A Shares of the Money Market Funds have been offered by
the Company. The Board of Directors has also authorized the issuance of classes
6 through 18 common stock representing interests in thirteen other separate
investment portfolios which are described in separate prospectuses and
statements of additional information. The remaining authorized shares have been
classified by the Board into twelve additional classes representing interests in
other potential future investment portfolios of the Company. The Directors may
similarly classify or reclassify any particular class of shares into one or more
additional series.
In the event of a liquidation or dissolution of the Company or an individual
Fund, shareowners of a particular Fund would be entitled to receive the assets
available for distribution belonging to such Fund, and a proportionate
distribution, based upon the relative assets of the Company's respective
investment portfolios, of any general assets not belonging to any particular
portfolio which are available for distribution. Subject to the allocation of
certain costs, expenses, charges and reserves attributable to the operation of a
particular series, shareowners of a Fund are entitled to participate equally in
the net distributable assets of the particular Fund involved on liquidation,
based on the number of shares of the Fund that are held by each shareowner.
Shareowners of the Funds, as well as those of any other investment portfolio
offered by the Company, will vote together in the aggregate and not separately
on a portfolio-by-portfolio basis, except as otherwise required by law or when
the Board of Directors determines that the matter to be voted upon affects only
the interests of the shareowners of a particular class or a particular series
within a class. Rule 18f-2 under the 1940 Act provides that any matter required
to be submitted to the holders of the outstanding voting securities of an
investment company such as the Company shall not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each portfolio affected by the matter. A portfolio is
affected by a matter unless it is clear that the interests of each portfolio in
the matter are substantially identical or that the matter does not affect any
interest of the portfolio. Under the Rule, the approval of an investment
advisory agreement or any change in a fundamental investment policy would be
effectively acted upon with respect to a portfolio only if approved by a
majority of the outstanding shares of such portfolio. However, the Rule also
provides that the ratification of the appointment of independent accountants,
the approval of principal underwriting contracts and the election of Directors
may be effectively acted upon by shareowners of the Company voting together in
the aggregate without regard to particular portfolios.
When issued for payment as described in the Funds' Prospectuses and this SAI,
shares of the Funds will be fully paid and non-assessable by the Company, except
as provided in Section 180.0622(2)(b) of the Wisconsin Business Corporation Law,
as amended, which in general provides for personal liability on the part of a
corporation's shareowners for unpaid wages of employees. The Company does not
intend to have any employees and, to that extent, the foregoing statute will be
inapplicable to holders of Fund shares and will not have a material effect on
the Company.
The Articles of Incorporation authorize the Board of Directors, without
shareowner approval (unless otherwise required by applicable law), to: (a) sell
and convey the assets belonging to a series of shares to another management
investment company for consideration which may include securities issued by the
purchaser and, in connection therewith, to cause all outstanding shares of such
series to be redeemed at a price which is equal to their net asset value and
which may be paid in cash or by distribution of the securities or other
consideration received from the sale and conveyance; (b) sell and convert the
assets belonging to a series of shares into money and, in connection therewith,
to cause all outstanding shares of such series to be redeemed at their net asset
value; or (c) combine the assets belonging to a series of shares with the assets
belonging to one or more other series of shares if the Board of Directors
reasonably determines that such combination will not have a material adverse
effect on the shareowners of any series participating in such combination and,
in connection therewith, to cause all outstanding shares of any such series to
be redeemed or converted into shares of another series of shares at their net
asset value.
ADDITIONAL INFORMATION CONCERNING TAXES
The following is only a summary of certain additional tax considerations
generally affecting the Funds and their shareowners that are not described in
the Funds' Prospectus. No attempt is made to present a detailed explanation of
the tax treatment of the Funds or their shareowners, and the discussion here and
in the Prospectus is not intended as a substitute for careful tax planning.
Investors are advised to consult their tax advisers with specific reference to
their own tax situations.
Tax-Exempt Money Market Fund
As described above and in the Prospectuses, the Tax-Exempt Money Market Fund is
designed to provide investors with current tax-exempt interest income. This
Fund is not intended to constitute a balanced investment program and is not
designed for investors seeking capital appreciation or maximum tax-exempt income
irrespective of fluctuations in principal. Shares of the Fund may not be
suitable for tax-exempt institutions, or for retirement plans qualified under
Section 401 of the Internal Revenue Code of 1986 (the "Code"), H.R. 10 plans and
individual retirement accounts since such plans and accounts are generally tax-
exempt and, therefore, not only would not gain any additional benefit from the
Fund's dividends being tax-exempt, but such dividends would be ultimately
taxable to the beneficiaries when distributed to them. In addition, the Fund
may not be an appropriate investment for entities which are "substantial users"
of facilities financed by private activity bonds or "related persons" thereof.
"Substantial user" is defined under U.S. Treasury Regulations to include a non-
exempt person who regularly uses a part of such facilities in his trade or
business and whose gross revenues derived with respect to the facilities
financed by the issuance of bonds are more than 5% of the total revenues derived
by all users of such facilities, who occupies more than 5% of the usable area of
such facilities or for whom such facilities or a part thereof were specifically
constructed, reconstructed or acquired. "Related persons" include certain
related natural persons, affiliated corporations, a partnership and its partners
and an S Corporation and its shareowners.
The percentage of total dividends paid by the Tax-Exempt Money Market Fund with
respect to any taxable year which qualifies as federal exempt-interest dividends
will be the same for all shareowners receiving dividends for such year. In
order for this Fund to pay exempt-interest dividends during any taxable year, at
the close of each taxable quarter at least 50% of the aggregate value of the
Fund's portfolio must consist of tax-exempt obligations. Within 60 days of the
close of its taxable year, the Fund will notify shareowners of the portion of
the dividends paid by the Fund which constitutes an exempt-interest dividend
with respect to such taxable year. However, the aggregate amount of dividends so
designated cannot exceed the excess of the amount of interest exempt from tax
under Section 103 of the Code received by the Fund during the taxable year over
any amounts disallowed as deductions under Sections 265 and 171(a)(2) of the
Code.
Interest on indebtedness incurred by a shareowner to purchase or carry shares of
the Tax-Exempt Money Market Fund generally is not deductible for federal income
tax purposes if the Fund distributes exempt-interest dividends during the
shareowner's taxable year. If a shareowner holds shares of the Tax-Exempt Money
Market Fund for six months or less, any loss on the sale or exchange of those
shares will be disallowed to the extent of the amount of exempt-interest
dividends received with respect to the shares. The Treasury Department,
however, is authorized to issue regulations reducing the six-month holding
requirement to a period of not less than the greater of 31 days or the period
between regular distributions for investment companies that regularly distribute
at least 90% of their net tax-exempt interest. No such regulations had been
issued as of the date of this SAI.
All Funds
Each Fund is treated as a separate tax entity under the Code. Although each
Fund expects to qualify as a "regulated investment company" (by satisfying
certain distribution and income requirements in accordance with the code) and
to be relieved of all or substantially all federal income taxes, depending
upon the extent of the Company's activities in states and localities, the
Funds may be subject to the tax laws of such states or localities. In
addition, in those states and localities which have income tax laws, the
treatment of the Funds and their shareowners under such laws may differ
from their treatment under federal income tax laws.
Investment company taxable income earned by the Money Market Fund, the
Institutional Money Market Fund, the U.S. Treasury Money Market Fund, the U.S.
Government Money Market Fund or the Tax-Exempt Money Market Fund will be
distributed by the Funds to their shareowners, and will be taxable to
shareowners as ordinary income whether paid in cash or additional shares. In
general, investment company taxable income will be a Fund's taxable income,
subject to certain adjustments and excluding the excess of any net long-term
capital gain for the taxable year over the net short-term capital loss, if any,
for such year.
Similarly, while the Funds do not expect to realize long-term capital gains, any
net realized long-term capital gains will be distributed at least annually. The
Funds will generally have no tax liability with respect to such gains and the
distributions (whether paid in cash or additional shares) will be taxable to
shareowners as mid-term or other long-term capital gains, regardless of how long
a shareowner has held Fund shares. Such long-term capital gain will be 20% or
28% rate gain, depending upon the funds holding period for the assets the sale
of which generated the capital gain. The tax status of such distributions will
be designated as a capital gain dividend in a written notice mailed by the
Company to shareowners after the close of the Company's taxable year.
A 4% non-deductible excise tax is imposed on regulated investment companies that
fail to distribute specified percentages of their ordinary taxable income and
capital gain net income (excess of capital gains over capital losses) with
respect to each calendar year. The Funds intend to make sufficient
distributions or deemed distributions out of their ordinary taxable income and
any capital gain net income with respect to each calendar year to avoid
liability for this excise tax.
If for any taxable year a Fund does not qualify for the special federal income
tax treatment afforded regulated investment companies, all of its taxable income
will be subject to federal income tax at regular corporate rates (without any
deduction for distributions to its shareowners). In such event, dividend
distributions (including amounts derived from interest on Municipal Obligations)
would be taxable as ordinary income to shareowners to the extent of the Fund's
current and accumulated earnings and profits, and would be eligible for the
dividends received deduction in the case of corporate shareowners.
The foregoing discussion is based on federal tax laws and regulations which are
in effect on the date of this SAI; such laws and regulations may be changed by
legislative or administrative action.
MANAGEMENT OF THE COMPANY
Directors and Officers
The Directors and Officers of the Company, their addresses, principal
occupations during the past five years and other affiliations are as follows:
Position Principal Occupations During
Name, Address & with the Past 5 Years and Other
Age Company Affiliations
Steven R. Parish* Director, Executive Vice President of
W290 N3967 Dry President Trust and Investments, Firstar
Creek Ct. and Corporation since 1996; Vice
Pewaukee, WI Treasurer President and Portfolio
53072 Manager, FIRMCO 1991-1994;
Age: 40 Director, Firstar Funds, Inc.
since September 1997;
Director, Firstar Trust
Company since April 1996;
Director, Firstar Information
Services Corp. since April 1996;
Director, Firstar Insurance
Services since April 1996;
Director, Firstar Investment
Services since April 1996;
Director, United Way since
June 1997.
James M. Wade Chairman of Vice President and Chief
2802 Wind Bluff the Board Financial Officer, Johnson
Circle Controls, Inc. (a controls
Wilmington, NC manufacturing company)
28409 January 1987- May 1991.
Age: 54
Glen R. Bomberger Director Executive Vice President,
One Park Plaza Chief Financial Officer and
11270 West Park Director, A.O. Smith
Place Corporation (a diversified
Milwaukee, WI manufacturing company) since
53224-3690 January 1987. Director of
Age: 60 companies affiliated with A.O.
Smith Corporation; Chief
Financial Officer, Director
and Vice President, Smith
Investment Company; Officer
and Director of companies
affiliated with Smith
Investment Company.
Jerry G. Remmel Director Vice President, Treasurer and
16650A Lake Circle Chief Financial Officer of
Brookfield, WI Wisconsin Energy Corporation
53005 1994-1996; Treasurer of
Age: 66 Wisconsin Electric Power
Company 1973-1996; Director of
Wisconsin Electric Power
Company 1989-1996; Senior Vice
President, Wisconsin Electric
Power Company 1988 - 1994;
Chief Financial Officer,
Wisconsin Electric Power
Company 1983-1996; Vice
President and Treasurer,
Wisconsin Electric Power
Company, 1983 - 1989.
Richard K. Director President and Chief Executive
Riederer Officer since 1995, Director of
400 Three Springs Weirton Steel since 1993;
Drive Executive Vice President and
Weirton, WV Chief Financial Officer,
26062-4989 Weirton Steel January 1994 -
Age: 53 1995; Vice President of
Finance and Chief Financial
Officer, Weirton Steel January
1989-1994; Member - Board of
Directors of American Iron and
Steel Institute since 1995;
Member - Board of Directors,
National Association of
Manufacturers since 1995.
Member, Board of Directors,
WESBANCO since September 1997.
Charles R. Roy* Director Vice President - Finance,
14245 Heatherwood Chief Financial Officer and
Court Secretary, Rexnord Corporation
Elm Grove, WI (an equipment manufacturing
53122 company), 1988 - 1992; Vice
Age: 67 President - Finance and
Administration, Rexnord Inc.,
1982 - 1988; Officer and
Director of several Rexnord
subsidiaries until 1992.
Mary Ellen Stanek Vice President and Chief Operating
777 E. Wisconsin President Officer, FIRMCO since 1994;
Avenue, Director of FIRMCO since 1992
Suite 800 and Director Fixed Income
Milwaukee, WI Securities of FIRMCO since
53202 1990.
Age: 41
W. Bruce McConnel, Secretary Partner of the law firm of
III Drinker Biddle & Reath LLP.
Philadelphia
National Bank
Building
1345 Chestnut
Street
Philadelphia, PA
19107
Age: 54
* Messrs. Parish and Roy are considered by the Company to be "interested
persons" of the Company as defined in the 1940 Act.
The following chart provides certain information about the Director fees
for the year ended October 31, 1997 of the Company's Directors.
TOTAL
PENSION OR COMPENSATION
RETIREMENT ESTIMATED FROM
AGGREGATE BENEFITS ANNUAL COMPANY
NAME OF COMPENSATION ACCRUED AS BENEFITS AND FUND
PERSON/ FROM THE PART OF FUND UPON COMPLEX* PAID
POSITION COMPANY EXPENSES RETIREMENT TO DIRECTORS
James M.
Wade
Chairman of
the Board $16,875 $0 $0 $16,985
Glen R.
Bomberger
Director $13,750+ $0 $0 $13,750
Jerry G.
Remmel
Director $13,750 $0 $0 $13,750
Richard K.
Riederer
Director $13,750 $0 $0 $13,750
Charles R.
Roy
Director $13,750 $0 $0 $13,750
*The "Fund Complex" includes only the Company.
+Includes $13,750 which Mr. Bomberger elected to defer under the Company's
deferred compensation plan.
Each Director receives an annual fee of $10,000, a $1,000 per meeting
attendance fee and reimbursement of expenses incurred as a Director. The
Chairman of the Board is entitled to receive an additional $3,500 per annum for
services in such capacity. For the fiscal year ended October 31, 1997, the
Directors and Officers received aggregate fees and reimbursed expenses of
$74,320. Mr. Parish and Ms. Stanek receive no fees from the Company for their
services as President and Vice President, respectively, although FIRMCO, of
which Ms. Stanek is President, receives fees from the Company for advisory
services. FIRMCO is a wholly owned subsidiary of Firstar Corporation, of which
Mr. Parish is Executive Vice President. Drinker Biddle & Reath LLP, of which
Mr. McConnel is a partner, receives legal fees as counsel to the Company. As of
the date of this SAI, the Directors and Officers of the Company, as a group,
owned less than 1% of the outstanding shares of each Fund.
Advisory Services
FIRMCO became the investment adviser to the Funds as of February 3, 1992. Prior
thereto, investment advisory services were provided by Firstar Trust Company
("Firstar Trust"), an affiliate of the Adviser. Firstar Trust has guaranteed
all obligations incurred by FIRMCO in connection with its Investment Advisory
Agreement with the Funds. In its Investment Advisory Agreement, the Adviser has
agreed to pay all expenses incurred by it in connection with its advisory
activities, other than the cost of securities and other investments, including
brokerage commissions and other transaction charges, if any, purchased or sold
for the Funds.
In addition to the compensation stated in the Prospectuses, the Adviser is
entitled to 4/10ths of the gross income earned by each Fund on each loan of its
securities, excluding capital gains or losses, if any. Pursuant to current
policy of the SEC, the Adviser does not intend to receive compensation for such
securities lending activity. The Adviser may voluntarily waive additional
advisory fees otherwise payable by the Funds.
For the services provided and expenses assumed by the Adviser under its
Investment Advisory Agreement for the fiscal years ended October 31, 1997, 1996,
and 1995, the Adviser earned and waived advisory fees as follows:
Advisory Fees Earned (Advisory Fees Waived)
1997 1996 1995
Money Market Fund $770,065 (401,147) $702,547 (266,408) $422,104 (365,955)
U.S. Treasury Money
Market Fund 264,236 (69,017) 228,672 (84,582) 199,277 (97,487)
U.S. Government
Money Market Fund 933,618 (50,816) 886,823 (74,691) 730,168 (136,091)
Tax-Exempt Money
Market Fund 384,622 (72,448) 307,395 (88,415) 232,548 (118,037)
Institutional 2,758,246(2,045,957) 2,207,362(1,670,748) 1,670,220(1,882,153)
Money Market Fund
Under its Investment Advisory Agreement, the Adviser is not liable for any error
of judgment or mistake of law or for any loss suffered by the Company in
connection with the performance of such Agreement, except a loss resulting from
a breach of fiduciary duty with respect to the receipt of compensation for
services or a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of the Adviser in the performance of its duties or from
its reckless disregard of its duties and obligations under the Agreement.
Banking Laws and Regulations
Banking laws and regulations, including the Glass-Steagall Act as presently
interpreted by the Board of Governors of the Federal Reserve System, presently
(a) prohibit a bank holding company registered under the Federal Bank Holding
Company Act of 1956 or any bank or non-bank 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 (b) do not prohibit
such a bank holding company or affiliate or banks generally from acting as
investment adviser, transfer agent or custodian to such an investment company or
from purchasing shares of such a company as agent and upon order of a customer.
In 1971, the United States Supreme Court held in Investment Company Institute
vs. Camp that the Glass-Steagall Act prohibits a national bank from operating a
fund for the collective investment of managing agency accounts. Subsequently,
the Board of Governors of the Federal Reserve System (the "Board") issued a
regulation and interpretation to the effect that the Glass-Steagall Act and such
decision forbid a bank holding company registered under the Federal Bank Holding
Company Act of 1956 (the "Holding Company Act"), or any non-bank affiliate
thereof from sponsoring, organizing or controlling a registered, open-end
investment company continuously engaged in the issuance of its shares, but did
not prohibit such a holding company or affiliate from acting as investment
adviser, transfer agent and custodian to such an investment. company. In 1981,
the United States Supreme Court held in Board of Governors of the Federal
Reserve System vs. Investment Company Institute that the Board did not exceed
its authority under the Holding Company Act when it adopted its regulation and
interpretation authorizing bank holding companies and their non-bank affiliates
to act as investment advisers to registered closed-end investment companies.
FIRMCO and Firstar Trust are subject to such banking laws and regulations.
The Adviser and Firstar Trust believe that they may perform the services for the
Funds contemplated by their respective agreements with the Company without
violation of the Glass-Steagall Act or other applicable banking laws or
regulations. These companies further believe that, if the question were properly
presented, a court should hold that these companies may each perform such
activities without violation of the Glass-Steagall Act or other applicable
banking laws or regulations. It should be noted, however, there have been no
cases deciding whether banks and their affiliates may perform services
comparable to those performed by these companies, and future changes in either
federal or state statutes and regulations relating to permissible activities of
banks or trust companies and their subsidiaries or affiliates, as well as
further judicial or administrative decisions or interpretations of present and
future statutes and regulations, could prevent such companies from continuing to
perform such services for the Funds. If the companies were prohibited from
continuing to perform advisory, accounting, shareowner servicing and custody
services for the Funds, it is expected that the Board of Directors would
recommend that the Funds enter into new agreements or would consider the
possible termination of the Funds.
Shares of the Funds are not bank deposits, are not insured by the FDIC or any
other governmental agency, are not endorsed, insured or guaranteed by Firstar
Trust or FIRMCO and are not obligations of or otherwise supported by Firstar
Trust or FIRMCO.
Administration and Distribution Services
Firstar Trust became a Co-Administrator to the Funds on September 1, 1994, and
B. C. Ziegler and Company ("Ziegler") became a Co-Administrator to the Funds
on January 1, 1995. Under the Co-Administration Agreement, the following
administrative services are provided jointly by the Co-Administrators: assist in
maintaining office facilities, furnish clerical services, stationery and office
supplies; monitor the Company's arrangements with respect to services provided
by Shareowner Organizations; and generally assist in the Funds' operations. The
following administrative services are provided by Ziegler: review and comment
upon the registration statement and amendments thereto prepared by Firstar
Trust or counsel to the Company, as requested by Firstar Trust; review and
comment upon sales literature and advertising relating to the Company, as
requested by Firstar Trust; assist in the administration of the marketing
budget; periodically review blue sky registration and sales reports for the
Funds; attend meetings of the Board of Directors, as requested by the Board of
Directors of the company; and such other services as may be requested in writing
and expressly agreed to by Ziegler. The following administrative services are
provided by Firstar Trust: compile data for and prepare with respect to the
Funds timely Notices to the SEC required pursuant to rule 24f-2 under the 1940
Act and Semi-Annual Reports on Form N-SAR; coordinate execution and filing by
the Company of all federal and state tax returns and required tax filings other
than those required to be made by the Company's custodian and transfer agent;
prepare compliance filings and Blue Sky registrations pursuant to state
securities laws with the advice of the Company's counsel; assist to the extent
requested by the Company with the Company's preparation of Annual and Semi-
Annual Reports to Fund shareowners and Registration Statements for the Funds;
monitor each Fund's expense accruals and cause all appropriate expenses to be
paid on proper authorization from each Fund; monitor each Fund's status as a
regulated investment company under Subchapter M of the Code; maintain each
Fund's fidelity bond as required by the 1940 Act; and monitor compliance with
the policies and limitations of each Fund as set forth in the Prospectus, SAI,
By-laws and Articles of Incorporation.
Each of the Co-Administrators has agreed to pay all expenses incurred by it in
connection with its administrative activities. Under the Co-Administration
Agreement, the Co-Administrators are not liable for any error of judgment or
mistake of law or for any loss suffered by the Funds in connection with the
performance of the Co-Administration Agreement, except a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of the Co-
Administrators in the performance of their respective duties or from their
reckless disregard of their duties and obligations under the Agreement.
The Distributor also provides distribution services for each Fund as described
in the Funds' Prospectuses pursuant to a Distribution Agreement with the Funds
under which the Distributor, as agent, sells shares of each Fund on a continuous
basis. The Distributor has agreed to use its best efforts to solicit orders for
the sale of shares, although it is not obliged to sell any particular amount of
shares. The Distributor causes expenses to be paid for the cost of printing and
distributing prospectuses to persons who are not shareowners of the Funds
(excluding preparation and printing expenses necessary for the continued
registration of the Funds' shares) and of printing and distributing all sales
literature. For the fiscal years ended October 31, 1997, 1996 and 1995, Ziegler
received no fees for its distribution services. For the fiscal years ended
October 31, 1997, 1996 and 1995, the following administrative fees were earned
and waived:
Administration Fees Earned (Administration Fees Waived)
1997 1996 1995
Money Market Fund $102,516 (158,431) $73,082 (148,206) $72,183 (119,354)
U.S. Treasury Money
Market Fund 25,971 (48,185) 29,446 (42,094) 27,263 (44,793)
U. S. Government
Money Market Fund 77,457 (141,599) 84,282 (135,306) 77,856 (130,337)
Tax-Exempt Money
Market Fund 35,787 (65,920) 37,207 (53,187) 31,469 (51,566)
Institutional Money
Market Fund 199,081 (869,952) 205,168 (680,504) 215,820 (647,783)
Shareowner Organizations (Money Market, U.S. Government Money Market, U.S.
Treasury Money Market and Tax-Exempt Money Market Funds)
As stated in the Funds' Prospectus, the Funds intend to enter into agreements
from time to time with Shareowner Organizations providing for support and/or
distribution services to customers of the Shareowner Organizations who are the
beneficial owners of Fund shares. Under the agreements, the Funds may pay
Shareowner Organizations up to 0.25% (on an annualized basis) of the average
daily net asset value of the shares beneficially owned by their customers.
Support services provided by Shareowner Organizations under their Service
Agreements or Distribution and Service Agreements may include: (i) processing
dividend and distribution payments from a Fund; (ii) providing information
periodically to customers showing their share positions; (iii) arranging for
bank wires; (iv) responding to customer inquiries; (v) providing sub-accounting
with respect to shares beneficially owned by customers or the information
necessary for sub-accounting; (vi) forwarding shareowner communications; (vii)
assisting in processing share purchase, exchange and redemption requests from
customers; (viii) assisting customers in changing dividend options, account
designations and addresses; and (ix) other similar services requested by the
Funds. In addition, under the Distribution and Service Plan, Shareowner
Organizations may provide assistance (such as the forwarding of sales literature
and advertising to their customers) in connection with the distribution of Fund
shares.
The Funds' arrangements with Shareowner Organizations under the agreements are
governed by two Plans (a Service Plan and a Distribution and Service Plan),
which have been adopted by the Board of Directors. Because the Distribution and
Service Plan contemplates the provision of services related to the distribution
of Fund shares (in addition to support services), that Plan has been adopted in
accordance with Rule 12b-1 under the 1940 Act. In accordance with the Plans,
the Board of Directors reviews, at least quarterly, a written report of the
amounts expended in connection with the Funds' arrangements with Shareowner
Organizations and the purposes for which the expenditures were made. In
addition, the Funds' arrangements with Shareowner Organizations must be approved
annually by a majority of the Directors, including a majority of the Directors
who are not "interested persons" of the Funds as defined in the 1940 Act and
have no direct or indirect financial interest in such arrangements (the
"Disinterested Directors").
The Funds believe that there is a reasonable likelihood that their arrangements
with Shareowner Organizations have benefited each Fund and its shareowners as a
way of allowing Shareowners Organizations to participate with the Funds in the
provision of support and distribution services to customers of the Shareowner
Organizations who own Fund shares. Any material amendment to the arrangements
with Shareowner Organizations under the agreements must be approved by a
majority of the Board of Directors (including a majority of the Disinterested
Directors), and any amendment to increase materially the costs under the
Distribution and Service Plan with respect to a Fund must be approved by the
holders of a majority of the outstanding shares of the Fund involved. So long
as the Distribution and Service Plan is in effect, the selection and nomination
of the members of the Board of Directors who are not "interested persons" (as
defined in the 1940 Act) of the Funds will be committed to the discretion of
such Disinterested Directors.
The Funds paid fees to Shareowner Organizations, none of which were affiliated
with the Adviser, pursuant to the Distribution and Service Plan for the fiscal
years ended October 31, 1997, 1996 and 1995 as follows:
Fees Earned by Non-Affiliated Shareowner Organizations
1997 1996 1995
Money Market Fund $61,140 $45,429 $35,574
U.S. Government Money Market Fund 218 501 365
Tax-Exempt Money Market Fund 366 140 260
Institutional Money Market Fund 0 0 0
U.S. Treasury Money Market Fund 0 0 46
The Funds paid fees to Shareowner Organizations, all of which were affiliated
with the
Adviser, pursuant to the Service Plan for the fiscal years ended October 31,
1997, 1996 and 1995 as follows:
Fees Earned by Affiliated
Shareowner Organizations
1997 1996 1995
Money Market Fund $0 $0 $9,663
U.S. Government Money Market Fund 0 0 48,913
Tax-Exempt Money Market Fund 0 0 16,271
Institutional Money Market Fund 0 0 293,262
U. S. Treasury Money Market Fund 0 0 12,934
As of January 1, 1995, the Institutional Money Market Fund no longer pays
Shareowner Organization fees under the Service Plan.
CUSTODIAN, TRANSFER AGENT, DISBURSING AGENT AND ACCOUNTING SERVICES AGENT
Firstar Trust serves as custodian of the Funds' assets. Under the Custody
Agreement, Firstar Trust has agreed to (i) maintain a separate account in the
name of each Fund, (ii) make receipts and disbursements of money on behalf of
each Fund, (iii) collect and receive all income and other payments and
distributions on account of each Fund's portfolio investments, (iv) respond to
correspondence from shareowners, security brokers and others relating to its
duties and (v) make periodic reports to the Company concerning each Fund's
operations. Firstar Trust may, at its own expense, open and maintain a custody
account or accounts on behalf of each Fund with other banks or trust companies,
provided that Firstar Trust shall remain liable for the performance of all of
its duties under the Custody Agreement notwithstanding any delegation. For its
services as custodian, Firstar Trust is entitled to receive a fee, payable
monthly, based on the annual rate of 0.02% of the Company's first $2 billion of
total assets, plus 0.015% of the Company's next $2 billion of total assets, and
0.01% of the Company's total assets in excess of $4 billion. In addition,
Firstar Trust, as custodian, is entitled to certain charges for securities
transactions and reimbursement for expenses.
Firstar Trust also serves as transfer agent and dividend disbursing agent for
each Fund under a Shareowner Servicing Agent Agreement. As transfer agent and
dividend disbursing agent, Firstar Trust has agreed to (i) issue and redeem
shares of the Funds, (ii) make dividend and other distributions to shareowners
of the Funds, (iii) respond to correspondence by Fund shareowners and others
relating to its duties, (iv) maintain shareowner accounts, and (v) make periodic
reports to the Funds. For its transfer agency and dividend disbursing services,
Firstar Trust is entitled to receive a fee at the following rates: $20 per
shareowner account with an annual minimum of $12,000 per Fund, plus certain
other transaction charges and reimbursement for expenses.
In addition, the Funds have entered into a Fund Accounting Servicing Agreement
with Firstar Trust pursuant to which Firstar Trust has agreed to maintain the
financial accounts and records of the Funds in compliance with the 1940 Act and
to provide other accounting services to the Funds. For its accounting services,
Firstar Trust is entitled to receive fees, payable monthly, at the annual rate
of $25,000 on the first $40 million of each Fund's assets, 0.01% on the next
$200 million of such assets, and 0.005% on the assets in excess of $240 million,
plus out-of-pocket expenses, including pricing expenses. The annual fee for the
Institutional Money Market Fund is capped at $55,000.
EXPENSES
Operating expenses of the Funds include taxes, interest, fees and expenses of
Directors and officers, SEC fees, state securities qualification fees, advisory
fees, administrative fees, Shareowner Organization fees, charges of the
custodian and transfer agent, dividend disbursing agent and accounting services
agent, certain insurance premiums, auditing and legal expenses, costs of
preparing and printing prospectuses for regulatory purposes and for distribution
to shareowners, membership fees in the Investment Company Institute, costs of
shareowner reports and meetings and any extraordinary expenses. The Funds also
pay any brokerage fees, commissions and other transaction charges (if any)
incurred in connection with the purchase and sale of portfolio securities.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, independent accountants, 100 E. Wisconsin Avenue, Suite
1500, Milwaukee, Wisconsin 53202, serve as auditors for the Company. The
financial statements and related report of Price Waterhouse LLP contained in
each Fund's Annual Report for the fiscal year ended October 31, 1997 are
incorporated herein by reference. No other part of a Fund's Annual Report is
incorporated herein by reference. Such financial statements have been
incorporated herein in reliance on the report of Price Waterhouse LLP,
independent accountants, given as authority of said firm as experts in auditing
and accounting.
COUNSEL
Drinker Biddle & Reath LLP (of which Mr. McConnel, Secretary of the Company, is
a partner), Philadelphia National Bank Building, 1345 Chestnut Street,
Philadelphia, Pennsylvania 19107, serve as counsel to the Company and will pass
upon the legality of the shares offered by the Funds' Prospectuses.
YIELD AND OTHER PERFORMANCE INFORMATION
From time to time each Fund may quote its "yield" and "effective yield," and the
Tax-Exempt Money Market Fund may also quote its "tax-equivalent yield," in
advertisements or in communications to shareowners. Each yield figure is based
on historical earnings and is not intended to indicate future performance. The
"yield" of a Fund refers to the income generated by an investment in the Fund
over a seven-day period identified in the advertisement. This income is then
"annualized." That is, the amount of income generated by the investment during
that week is assumed to be generated each week over a 52-week period and is
shown as a percentage of the investment. The "effective yield" is calculated
similarly but, when annualized, the income earned by an investment in the Fund
is assumed to be reinvested. The "effective yield" will be slightly higher than
the "yield" because of the compounding effect of this assumed reinvestment. The
"yield" and "effective yield" of each Fund are calculated according to formulas
prescribed by the SEC. The standardized seven-day yield for each Fund is
computed separately by determining the net change, exclusive of capital changes
and income other than investment income, in the value of a hypothetical pre-
existing account in the particular Fund involved having a balance of one share
at the beginning of the period, dividing the net change in account value by the
value of the account at the beginning of the base period to obtain the base
period return, and multiplying the base period return by (365/7). The net
change in the value of an account in a Fund includes the value of additional
shares purchased with dividends from the original share, and dividends declared
on both the original share and any such additional shares and all fees, other
than nonrecurring account sales charges, that are charged to all shareowner
accounts in proportion to the length of the base period and the Fund's average
account size. The capital changes to be excluded from the calculation of the
net change in account value are realized gains and losses from the sale of
securities and unrealized appreciation and depreciation. The effective
annualized yield for each Fund is computed by compounding a particular Fund's
unannualized base period return (calculated as above) by adding 1 to the base
period return, raising the sum to a power equal to 365 divided by 7, and
subtracting one from the result. The fees which may be imposed by financial
intermediaries directly on their customers for cash management services are not
reflected in the Company's calculations of yields for the Funds.
The "tax-equivalent yield" of the Tax-Exempt Money Market Fund shows the level
of taxable yield needed to produce an after-tax equivalent to the Fund's tax-
free yield. This is done by increasing the Fund's yield (calculated as above)
by the amount necessary to reflect the payment of federal income tax at a stated
tax rate. The Fund's standardized "tax-equivalent yield" is computed by: (a)
dividing the portion of the Fund's yield (as calculated above) that is exempt
from federal income tax by one minus a stated federal income tax rate; and (b)
adding the figure resulting from (a) above to that portion, if any, of the
Fund's yield that is not exempt from federal income tax. The "tax-equivalent
yield" will always be higher than the "yield" of the Tax-Exempt Money Market
Fund.
Each Fund may compute "average annual total return." Average annual total
return reflects the average annual percentage change in value of an investment
in shares of a series over the measuring period. Each Fund may compute
aggregate total return, which reflects the total percentage change in value over
the measuring period.
Additionally, the total return and yields of the Funds may be compared in such
advertisements or reports to shareowners to those of other mutual funds with
similar investment objectives and to 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 yields of the
Money Market Fund and the Institutional Money Market Fund may be compared to the
Donoghue's Money Fund Average, the yields of the U.S. Treasury Money Market Fund
and the U.S. Government Money Market Fund may be compared to the Donoghue's
Government Money Fund Average, and the yields of the Tax-Exempt Money Market
Fund may be compared to the Donoghue's Tax-Free Money Fund Average, which are
averages compiled by IBC/Donoghue's Money Fund Report, a widely recognized
independent publication that monitors the performance of money market funds. In
addition, the yields of the Money Market, Institutional Money Market, U.S.
Treasury Money Market and the U.S. Government Money Market Funds may be compared
to the average yields reported by the Bank Rate Monitor for money market deposit
accounts offered by the 50 leading banks and thrift institutions in the top five
standard metropolitan statistical areas.
Yield data and total return as reported in national financial publications
including Money Magazine, Forbes, Barron's, Morningstar Mutual Funds, The Wall
Street Journal, Mutual Funds Magazine, Kiplingers Personal Finance and The New
York Times, or in publications of a local or regional nature, may also be used
in comparing the yields of the Funds.
Since performance fluctuates, performance data cannot necessarily be used to
compare an investment in a Fund's shares with bank deposits, savings accounts
and similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Investors should remember that
performance and yield are generally functions of the kind and quality of the
instruments held in a portfolio, portfolio maturity, operating expenses, and
market conditions. Any fees charged by Shareowner Organizations directly to
their customer accounts in connection with investments in shares of the Funds
will not be included in the Funds' calculations of yield and total return.
The current yield for each of the Funds may be obtained by calling Firstar Trust
at 1-800-228-1024. For the seven-day period ended October 31, 1997, the
annualized yields of the Money Market Fund, Institutional Money Market Fund,
U.S. Treasury Money Market Fund, U.S. Government Money Market Fund and Tax-
Exempt Money Market Fund were 5.07%, 5.31%, 4.68% , 4.94% and 3.07%,
respectively. Without fees waived by the Adviser and Co-Administrators during
such period, the annualized yields of such Funds would have been 4.70%, 4.98%,
4.54%, 4.85% and 2.92%, respectively. For the seven-day period ended October
31, 1997, the effective yields of the Money Market Fund, Institutional Money
Market Fund, U.S. Treasury Money Market Fund, U.S. Government Money Market Fund
and Tax-Exempt Money Market Fund were 5.19%, 5.45%,4.79%, 5.07% and 3.12 %,
respectively. Without fees waived by the Adviser and Co-Administrators during
such period, the effective yields of such Funds would have been 4.82%, 5.12%,
4.65%, 4.98% and 2.97%, respectively. For the seven-day period ended October
31, 1997, the tax-equivalent yield of the Tax-Exempt Money Market Fund was 4.45%
(assuming a federal income tax rate of 31%). Without fees waived by the Adviser
and Co-Administrators during such period, the tax-equivalent yield of such Fund
would have been 4.30%.
MISCELLANEOUS
As used in this SAI and in the Funds' Prospectuses, a "majority of the
outstanding shares" of a Fund or portfolio means, with respect to the approval
of an investment advisory agreement or change in a fundamental investment
policy, the lesser of (1) 67% of the shares of the particular Fund or portfolio
represented at a meeting at which the holders of more than 50% of the
outstanding shares of such Fund or portfolio are present in person or by proxy,
or (2) more than 50% of the outstanding shares of such Fund or portfolio.
As of December 31, 1997, the Adviser and its affiliates held of record
substantially all of the outstanding shares of each of the Company's investment
portfolios as agent, custodian, trustee or investment adviser on behalf of their
customers. At such date, Firstar Trust Company, P.O. Box 2054, Milwaukee,
Wisconsin 53202, and its affiliated banks held as beneficial owner five percent
or more of the outstanding shares of the following investment portfolios of the
Company because they possessed sole voting or investment power with respect to
such shares: Money Market Fund (10%); Institutional Money Market Fund (91%);
U.S. Government Money Market Fund (66%); Tax-Exempt Money Market Fund (61%);
U.S. Treasury Money Market Fund (44%); Growth and Income Fund (67%); Short-Term
Bond Market Fund (56%); Special Growth Fund (73%); Bond IMMDEXTM Fund (79%);
Equity Index Fund (76%); Balanced Growth Fund (76%); Growth Fund (83%);
Intermediate Bond Market Fund (81%); Tax-Exempt Intermediate Bond Fund (63%);
International Equity Fund (88%); MicroCap Fund (81%); and Emerging Growth Fund
(87%). At such date, no other person was known by the Company to hold of record
or beneficially 5% or more of the outstanding shares of any investment portfolio
of the Company.
APPENDIX A
Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. The following summarizes the rating categories used by Standard and
Poor's for commercial paper.
"A-1" - Issue's degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are
denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory. However,
the relative degree of safety is not as high as for issues designated "A-1."
"A-3" - Issue has an adequate capacity for timely payment. It is
however, somewhat more vulnerable to the adverse effects of changes and
circumstances than an obligation carrying a higher designation.
"B"- Issue has only a speculative capacity for timely payment.
"C" - Issue has a doubtful capacity for payment.
"D" - 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 following summarizes the rating categories used by
Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are considered to
have a superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
"Prime-2" - Issuer or related supporting institutions are considered to
have a strong capacity for repayment of short-term promissory obligations.
This will normally be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound, will be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternative
liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an acceptable
capacity for repayment of short-term promissory obligations. The effects of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D- 1," "D- 2" and "D- 3." Duff
& Phelps employs three designations, "D- 1+," " D- 1" and "D- 1-," within
the highest rating category. The following summarizes the rating categories
used by Duff & Phelps for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental protection factors.
Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty for timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity, and other protection
factors qualify issue as investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer failed to meet scheduled principal and/or interest
payments.
Fitch IBCA short-term ratings apply to debt obligations that are payable
on demand or have original maturities of generally up to three years. The
following summarizes the rating categories used by Fitch IBCA for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit quality. Issues
assigned this rating are regarded as having the strongest degree of assurance
for timely payment.
"F-1" - Securities possess highest credit quality. Issues assigned this
rating reflect an assurance of timely payment only slightly less in degree than
issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues assigned this
rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues assigned this
rating have characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
"B" - Securities are speculative. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for timely payment and
are vulnerable to near-term adverse changes in financial and economic
conditions.
"C" - Default is a real possibility for these securities. Capacity for
meeting financial commitments is solely reliant upon a sustained, favorable
business and economic environment.
"D" - Securities are in actual or imminent payment default.
Fitch IBCA may also use the symbol "LOC" with its short-term ratings to
indicate that the rating is based upon a letter of credit issued by a
commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of an untimely
payment of principal or interest of unsubordinated instruments having a
maturity of one year or less which is issued by United States commercial banks,
thrifts and non-bank banks; non-United States banks; and broker-dealers. The
following summarizes the ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest rating
category and indicates a very high likelihood that principal and interest will
be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of safety
regarding timely repayment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
the capacity to service principal and interest in a timely fashion is
considered adequate.
"TBW-4" - This designation indicates that the debt is regarded as non-
investment grade and therefore speculative.
Corporate and Municipal Long-Term Debt Ratings
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - This designation represents the highest rating assigned by
Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay interest
and repay principal and differs from AAA issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay interest and
repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt
in higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay interest
and repay principal. Whereas such issues normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC," and "C" - Debt is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation.
While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"CI" - This rating is reserved for income bonds on which no interest is
being paid.
"D" - Debt is in payment default. This rating is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes such payments will
be made during such grace period. Rating is also used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid, and
certain other obligations that S & P believes may experience high volatility or
high variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged.' Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as high-
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing;
"Ca" represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds
may be in default.
Con. ( ) - Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting
condition attaches. Parenthetical rating denotes the probable credit stature
upon completion of construction or elimination of basis of condition.
(P) - When applied to forward delivery bonds, indicates that the rating is
provisional pending delivery of the bonds. The ratings may be revised prior to
delivery if changes occur in the legal documents or the underlying credit
quality of the bonds.
Moody's applies numerical modifiers 1, 2 and 3 in each generic
classification from "Aa" to "B" in its bond rating system. The modifier 1
indicates that the issuer 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 issuer ranks at the lower end of its generic rating
category.
The following summarizes the long-term debt ratings used by Duff & Phelps
for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high quality. Protection factors are
strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but adequate.
However, risk factors are more variable and greater in periods of economic
stress.
"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when
due. Debt rated "B" possesses the risk that obligations will not be met when
due. Debt rated "CCC" is well below investment grade and has considerable
uncertainty as to timely payment of principal, interest or preferred dividends.
Debt rated "DD" is a defaulted debt obligation, and the rating "DP"
represents preferred stock with dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+)
or minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by Fitch IBCA for
corporate and municipal bonds:
"AAA" - bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds
rated in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated "F-1+."
"A" - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of good credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
To provide more detailed indications of credit quality, the Fitch IBCA
ratings from and including "AA" to "BBB" may be modified by the addition of
a plus (+) or minus (-) sign to show relative standing within these major
rating categories.
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long-term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes
the rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is very high.
"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis with limited incremental risk versus
issues rated in the highest category.
"A" - This designation indicates that the ability to repay principal and
interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC" - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree
of speculation and "CC" the highest degree of speculation.
"D" - this designation indicates that the long-term debt is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may include
a plus or minus sign designation which indicates where within the respective
category the issue is placed.
Municipal Note Ratings
A Standard and Poor's rating reflects the liquidity concerns and market
access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Rating Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term loans
are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1" / "VMIG-1" - Loans bearing this designation are of the best
quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2" / ""VMIG-2" - Loans bearing this designation are of high
quality, with margins of protection ample although not so large as in the
preceding group.
"MIG-3" / "VMIG-3" - Loans bearing this designation are of favorable
quality, with all security elements accounted for but lacking the undeniable
strength of the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well established.
"MIG-4" / "VMIG-4" - Loans bearing this designation are of adequate
quality, carrying specific risk but having protection commonly regarded as
required of an investment security and not distinctly or predominantly
speculative.
"SG" - Loans bearing this designation are of speculative quality and
lack margins of protection.
Duff & Phelps and Fitch IBCA use the short-term ratings described under
commercial Paper Ratings for Municipal notes.
xxxxx
FIRSTAR FUNDS, INC.
Statement of Additional Information
for the
Balanced Income Fund
February 1, 1998
TABLE OF CONTENTS
Page
Firstar Funds, Inc. .......................................... 2
Investment Objective and Policies ............................ 2
Additional Information on Portfolio Instruments............... 4
Net Asset Value ..............................................16
Additional Purchase and Redemption Information ...............16
Description of Shares ........................................20
Additional Information Concerning Taxes ......................22
Management of the Company ....................................23
Custodian, Transfer Agent and Accounting Services Agent ......29
Independent Accountants ......................................30
Counsel ......................................................30
Performance Calculations .....................................31
Miscellaneous ................................................33
Appendix A ...................................................A-1
Appendix B ...................................................B-1
This Statement of Additional Information ("SAI") is meant to be
read in conjunction with Firstar Funds, Inc.'s prospectus ("Prospectus")
dated February 1, 1998, for the Retail and Institutional Shares of the
Balanced Income Fund (the "Fund") and is incorporated by reference in its
entirety into the Prospectus. Because this SAI is not itself a prospectus,
no investment in shares of the Fund should be made solely upon the
information contained herein. Copies of the Prospectus for the Fund may be
obtained by writing Firstar Funds Center at 615 East Michigan Street, P.O.
Box 3011, Milwaukee, Wisconsin 53202-3011, or by calling 1-800-982-8909 or
414-287-3710 (Milwaukee area). Capitalized terms used but not defined
herein have the same meanings as in the Prospectus.
SHARES OF THE FUND ARE NOT BANK DEPOSITS, AND ARE NEITHER ENDORSED BY,
INSURED BY, GUARANTEED BY, OBLIGATIONS OF, NOR OTHERWISE SUPPORTED BY THE
FDIC, THE FEDERAL RESERVE BOARD, FIRSTAR INVESTMENT RESEARCH & MANAGEMENT
COMPANY, LLC, FIRSTAR TRUST COMPANY, FIRSTAR CORPORATION, ITS AFFILIATES OR
ANY OTHER BANK, OR OTHER GOVERNMENTAL AGENCY. AN INVESTMENT IN THE FUND
INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
FIRSTAR FUNDS, INC.
Firstar Funds, Inc. (the "Company") is a Wisconsin corporation which
was incorporated on February 15, 1988 as a management investment company. The
Company, formerly known as Portico Funds, Inc., changed its name effective
February 1, 1998. The Company is authorized to issue separate classes of shares
of Common Stock representing interests in separate investment portfolios. Each
class for the funds is currently divided into two series, a retail and
institutional series. This SAI pertains to Retail Series and Institutional
Series Shares of the Balanced Income Fund. The Company also offers other
investment portfolios which are described in separate prospectuses and
statements of additional information. For information concerning these other
portfolios, contact the Firstar Funds Center at 1-800-982-8909 or write to 615
East Michigan Street, P.O. Box 3011, Milwaukee, Wisconsin 53202-3011.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Balanced Income Fund is to seek
current income and the preservation of capital through investment in a balanced
portfolio of dividend paying equity and fixed income securities. There is no
assurance, however, that the Fund's investment objective will in fact be
attained. The following policies supplement the Fund's investment objective and
policies as set forth in the Prospectus.
Portfolio Transactions
Subject to the general supervision of the Board of Directors, the
Adviser is responsible for, makes decisions with respect to, and places orders
for all purchases and sales of portfolio securities for the Fund.
The portfolio turnover rate for the Fund is calculated by dividing the
lesser of purchases or sales of portfolio securities for the reporting period by
the monthly average value of the portfolio securities owned during the reporting
period. The calculation excludes all securities, including options, whose
maturities or expiration dates at the time of acquisition are one year or less.
Portfolio turnover may vary greatly from year to year as well as within a
particular year, and may be affected by cash requirements for redemption of
shares and by requirements which enable the Fund to receive favorable tax
treatment. Portfolio turnover will not be a limiting factor in making portfolio
decisions, and the Fund may engage in short-term trading to achieve its
investment objective.
Transactions on U.S. stock exchanges involve the payment of negotiated
brokerage commissions. On exchanges on which commissions are negotiated, the
cost of transactions may vary among different brokers. Unlike transactions on
U.S. stock exchanges which involve the payment of negotiated brokerage
commissions, transactions in foreign securities generally involve the payment of
fixed brokerage commissions which are generally higher than those in the United
States.
Transactions in the over-the-counter market are generally principal
transactions with dealers and the costs of such transactions involve dealer
spreads rather than brokerage commissions. With respect to over-the-counter
transactions, the Adviser will normally deal directly with dealers who make a
market in the securities involved except in those circumstances where better
prices and execution are available elsewhere or as described below.
Fixed income securities purchased and sold by the Fund are generally
traded in the over-the-counter market on a net basis (i.e., without commission)
through dealers, or otherwise involve transactions directly with the issuer of
an instrument. The cost of securities purchased from underwriters includes an
underwriting commission or concession, and the prices at which securities are
purchased from and sold to dealers include a dealer's mark-up or mark-down.
The Fund may participate, if and when practicable, in bidding for the
purchase of portfolio securities directly from an issuer in order to take
advantage of the lower purchase price available to members of a bidding group.
The Fund will engage in this practice, however, only when the Adviser in its
sole discretion, believes such practice to be in the Fund's interests.
The Advisory Agreement between the Company and the Adviser provides
that, in executing portfolio transactions and selecting brokers or dealers, the
Adviser will seek to obtain the best overall terms available. In assessing the
best overall terms available for any transaction, the Adviser shall consider
factors it deems relevant, including the breadth of the market in the security,
the price of the security, the financial condition and execution capability of
the broker or dealer, and the reasonableness of the commissions, if any, both
for the specific transaction and on a continuing basis. In addition, the
Agreement authorizes the Adviser to cause the Fund to pay a broker-dealer which
furnishes brokerage and research services a higher commission than that which
might be charged by another broker-dealer for effecting the same transaction,
provided that the Adviser determines in good faith that such commission is
reasonable in relation to the value of the brokerage and research services
provided by such broker-dealer, viewed in terms of either the particular
transaction or the overall responsibilities of the Adviser to the Fund. Such
brokerage and research services might consist of reports and statistics relating
to specific companies or industries, general summaries of groups of stocks or
bonds and their comparative earnings and yields, or broad overviews of the
stock, bond and government securities markets and the economy.
Supplementary research information so received is in addition to, and
not in lieu of, services required to be performed by the Adviser and does not
reduce the advisory fees payable to it by the Fund. The Directors will
periodically review the commissions paid by the Fund to consider whether the
commissions paid over representative periods of time appear to be reasonable in
relation to the benefits inuring to the Fund. It is possible that certain of
the supplementary research or other services received will primarily benefit one
or more other investment companies or other accounts for which investment
discretion is exercised. Conversely, the Fund may be the primary beneficiary of
the research or services received as a result of portfolio transactions effected
for such other account or investment company.
Portfolio securities will not be purchased from or sold to (and
savings deposits will not be made in and repurchase and reverse repurchase
agreements will not be entered into with) the Adviser and the Distributor or an
affiliated person of any of them (as such term is defined in the 1940 Act)
acting as principal. In addition, the Fund will not purchase securities during
the existence of any underwriting or selling group relating thereto of which the
Distributor or its Adviser, or an affiliated person of any of them, is a member,
except to the extent permitted by the Securities and Exchange Commission
("SEC").
Investment decisions for the Fund are made independently from those
for other investment companies and accounts advised or managed by its Adviser.
Such other investment companies and accounts may also invest in the same
securities as the Fund. When a purchase or sale of the same security is made at
substantially the same time on behalf of a Fund and another investment company
or account, the transaction will be averaged as to price and available
investments allocated as to amount, in a manner which the Adviser believes to be
equitable to the Fund and such other investment company or account. In some
instances, this investment procedure may adversely affect the price paid or
received by a Fund or the size of the position obtained or sold by the Fund. To
the extent permitted by law, the Adviser may aggregate the securities to be sold
or purchased for a Fund with those to be sold or purchased for other investment
companies or accounts in executing transactions.
From time to time the Fund may hold securities of its regular brokers
or dealers (as defined under the 1940 Act) or their parents.
Additional Information On Portfolio Instruments
Ratings. The ratings of Standard & Poor's, Moody's and other
nationally recognized rating agencies represent their opinions as to the quality
of debt securities. It should be emphasized, however, that ratings are general
and are not absolute standards of quality, and debt securities with the same
maturity, interest rate and rating may have different yields while debt
securities of the same maturity and interest rate with different ratings may
have the same yield.
The payment of principal and interest on most debt securities
purchased by the Fund will depend upon the ability of the issuers to meet their
obligations. An issuer's obligations under its debt securities are subject to
the provisions of bankruptcy, insolvency, and other laws affecting the rights
and remedies of creditors, such as the Federal Bankruptcy Code, and laws, if
any, which may be enacted by federal or state legislatures extending the time
for payment of principal or interest, or both, or imposing other constraints
upon enforcement of such obligations. The power or ability of an issuer to meet
its obligations for the payment of interest on, and principal of, its debt
securities may be materially adversely affected by litigation or other
conditions.
Subsequent to its purchase by the Fund, a rated security may cease to
be rated or its rating may be reduced below the minimum rating required for
purchase by the Fund. The Adviser will consider such an event in determining
whether the Fund should continue to hold the security. For a more detailed
description of ratings, see Appendix A to the SAI.
Securities Lending. Although the Fund does not intend to during the
current fiscal year, it may lend its portfolio securities to unaffiliated
domestic broker/dealers and other institutional investors pursuant to agreements
requiring that the loans be secured by collateral equal in value to at least the
market value of the securities loaned in order to increase return on portfolio
securities. Collateral for such loans may include cash, securities of the U.S.
Government, its agencies or instrumentalities, or an irrevocable letter of
credit issued by a bank which meets the investment standards stated below under
"Money Market Instruments," or any combination thereof. There may be risks of
delay in receiving additional collateral or in recovering the securities loaned
or even a loss of rights in the collateral should the borrower of the securities
fail financially. However, loans will be made only to borrowers deemed by the
Adviser to be of good standing and when, in the Adviser's judgment, the income
to be earned from the loan justifies the attendant risks. When a Fund lends its
securities, it continues to receive interest or dividends on the securities
loaned and may simultaneously earn interest on the investment of the cash
collateral which will be invested in readily marketable, high-quality, short-
term obligations. Although voting rights, or rights to consent, attendant to
securities on loan pass to the borrower, such loans may be called at any time
and will be called so that the securities may be voted by the Fund if a material
event affecting the investment is to occur.
Securities lending arrangements with broker/dealers require that the
loans be secured by collateral equal in value to at least the market value of
the securities loaned. During the term of such arrangements, the Fund will
maintain such value by the daily marking-to-market of the collateral.
Money Market Instruments. As described in the Prospectus, the Fund
may invest from time to time in "money market instruments," a term that
includes, among other things, bank obligations, commercial paper, variable
amount master demand notes and corporate bonds with remaining maturities of
thirteen months or less.
Bank obligations include bankers' acceptances, negotiable certificates
of deposit and non-negotiable time deposits, including U.S. dollar-denominated
instruments issued or supported by the credit of U.S. or foreign banks or
savings institutions. Although the Fund will invest in money market obligations
of foreign banks or foreign branches of U.S. banks only where the Adviser
determines the instrument to present minimal credit risks, such investments may
nevertheless entail risks that are different from those of investments in
domestic obligations of U.S. banks due to differences in political, regulatory
and economic systems and conditions. All investments in bank obligations are
limited to the obligations of financial institutions having more than $1 billion
in total assets at the time of purchase, and investments by the Fund in the
obligations of foreign banks and foreign branches of U.S. banks will not exceed
25% of the Fund's total assets at the time of purchase. The Fund may also make
interest-bearing savings deposits in commercial and savings banks in amounts not
in excess of 5% of its net assets.
Investments by the Fund in commercial paper will consist of issues
rated at the time A-1 and/or P-1 by Standard & Poor's, Moody's or similar rating
by another nationally recognized rating agency. In addition, the Fund may
acquire unrated commercial paper and corporate bonds that are determined by the
Adviser at the time of purchase to be of comparable quality to rated instruments
that may be acquired by the Fund as previously described.
The Fund may also purchase variable amount master demand notes which
are unsecured instruments that permit the indebtedness thereunder to vary and
provide for periodic adjustments in the interest rate. Although the notes are
not normally traded and there may be no secondary market in the notes, the Fund
may demand payment of the principal of the instrument at any time. The notes
are not typically rated by credit rating agencies, but issuers of variable
amount master demand notes must satisfy the same criteria as set forth above for
issuers of commercial paper. If an issuer of a variable amount master demand
note defaulted on its payment obligation, the Fund might be unable to dispose of
the note because of the absence of a secondary market and might, for this or
other reasons, suffer a loss to the extent of the default. The Fund will invest
in variable amount master notes only when the Adviser deems the investment to
involve minimal credit risk.
Repurchase Agreements. The Fund may agree to purchase securities from
financial institutions subject to the seller's agreement to repurchase them at
an agreed upon time and price ("repurchase agreements"). During the term of the
agreement, the Adviser will continue to monitor the creditworthiness of the
seller and will require the seller to maintain the value of the securities
subject to the agreement at not less than 102% of the repurchase price. Default
or bankruptcy of the seller would, however, expose the Fund to possible loss
because of adverse market action or delay in connection with the disposition of
the underlying securities. The securities held subject to a repurchase
agreement may have stated maturities exceeding one year, provided the repurchase
agreement itself matures in less than one year.
The repurchase price under the repurchase agreements described in the
Prospectus generally equals the price paid by the Fund plus interest negotiated
on the basis of current short-term rates (which may be more or less than the
rate on the securities underlying the repurchase agreement). Securities subject
to repurchase agreements will be held by the Fund's custodian or in the Federal
Reserve/Treasury book-entry system or other authorized securities depository.
Repurchase agreements are considered to be loans under the 1940 Act.
Reverse Repurchase Agreements. Reverse repurchase agreements are
considered to be borrowings under the 1940 Act. At the time the Fund enters
into a reverse repurchase agreement (an agreement under which the Fund sells
portfolio securities and agrees to repurchase them at an agreed-upon date and
price), it will place in a segregated custodial account U.S. Government
securities or other liquid high-grade debt securities having a value equal to or
greater than the repurchase price (including accrued interest), and will
subsequently monitor the account to insure that such value is maintained.
Reverse repurchase agreements involve the risk that the market value of the
securities sold by the Fund may decline below the price of the securities it is
obligated to repurchase.
Investment Companies. The Fund currently intends to limit its
investments in securities issued by other investment companies so that, as
determined immediately after a purchase of such securities is made: (i) not
more than 5% of the value of the Fund's total assets will be invested in the
securities of any one investment company; (ii) not more than 10% of the value of
its total assets will be invested in the aggregate in securities of investment
companies as a group; and (iii) not more than 3% of the outstanding voting stock
of any one investment company will be owned by the Fund or by the Company as a
whole.
The Fund may invest from time to time in securities issued by other
investment companies which invest in high-quality, short-term debt securities.
Securities of other investment companies will be acquired by the Fund within the
limits prescribed by the 1940 Act. As a shareowner of another investment
company, the Fund would bear, along with other shareowners, its pro rata portion
of the other investment company's expenses, including advisory fees, and such
fees and other expenses will be borne indirectly by the Fund's shareowners.
These expenses would be in addition to the advisory and other expenses that the
Fund bears directly in connection with its own operations.
U.S. Government Obligations. Examples of the types of U.S. Government
obligations that may be acquired by the Fund include U.S. Treasury bonds, notes
and bills and the 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, Central Bank for
Cooperatives, Federal Home Loan Mortgage Corporation, Federal Intermediate
Credit Banks, Maritime Administration, and Resolution Trust Corp.
Bank Obligations. For purposes of the Fund's investment policies with
respect to bank obligations, the assets of a bank or savings institution will be
deemed to include the assets of its domestic and foreign branches. The Fund's
investments in the obligations of foreign branches of U.S. banks and of foreign
banks may subject the Fund to investment risks (similar to those discussed below
under "Foreign Securities and American Depository Receipts") that are different
in some respects from those of investments in obligations of U.S. domestic
issuers. Such risks include future political and economic developments, the
possible imposition of withholding taxes on interest income, possible seizure or
nationalization of foreign deposits, the possible establishment of exchange
controls or the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal and interest of such obligations. In
addition, foreign branches of U.S. banks and foreign banks may be subject to
less stringent reserve requirements and to different accounting, auditing,
reporting and record keeping standards than those applicable to domestic
branches of U.S. banks.
Other Investment Considerations
The Balanced Income Fund maintains a long-term investment horizon with
respect to investments in equity securities. However, when a company's growth
in earnings and valuation results in price appreciation that reaches a level
which meets the Fund's established return objective, the stock is normally sold.
Holdings are also sold if there has been significant deterioration in the
underlying fundamentals of the securities involved since their acquisition.
Sale proceeds are either re-invested in money market instruments or in other
securities which meet the Fund's investment criteria.
The increase or decrease of cash equivalents in the Fund is primarily
the residual effect of the research process. The portion of the Fund invested
in cash equivalents tends to rise when the pool of acceptable securities is
limited and tends to fall when the Fund's valuation screening process identifies
a large number of attractive securities. Short-term forecasts for the economy
and financial markets are not an important determinant of the level of cash
equivalents in the Fund. As stated in the Prospectus, however, under normal
market conditions the Fund may hold money market instruments or cash, pending
investment to meet anticipated redemptions or if in the opinion of the Adviser
other suitable securities are unavailable. The Fund does not attempt to "time"
the securities market.
When-Issued Purchases, Delayed Delivery and Forward Commitments. When
the Fund agrees to purchase securities on a when-issued or delayed delivery
basis or enter into a forward commitment to purchase securities, its custodian
will set aside cash or liquid high grade debt securities equal to the amount of
the commitment in a segregated account. Normally, the custodian will set aside
portfolio securities to satisfy a purchase commitment, and in such a case the
Fund may be required subsequently to place additional assets in the segregated
account in order to ensure that the value of the account remains equal to the
amount of the Fund's commitments. It may be expected that the market value of
the Fund's net assets will fluctuate to a greater degree when it sets aside
portfolio securities to cover such purchase commitments than when it sets aside
cash. Because the Fund will set aside cash or liquid assets to satisfy its
purchase commitments in the manner described, the Fund's liquidity and ability
to manage its portfolio might be affected in the event its commitments ever
exceeded 25% of the value of its assets. In the case of a forward commitment to
sell portfolio securities, the Fund's custodian will hold the portfolio
securities themselves in a segregated account while the commitment is
outstanding. When-issued and forward commitment transactions involve the risk
that the price or yield obtained in a transaction (and therefore the value of a
security) may be less favorable then the price or yield (and therefore the value
of a security) available in the market when the securities delivery takes place.
The Fund will make commitments to purchase securities on a when-issued
basis or to purchase or sell securities on a forward commitment basis only with
the intention of completing the transaction and actually purchasing or selling
the securities. If deemed advisable as a matter of investment strategy, however,
the Fund may dispose of or renegotiate a commitment after it is entered into,
and may sell securities it has committed to purchase before those securities are
delivered to the Fund on the settlement date. In these cases the Fund may
realize a capital gain or loss.
When the Fund engages in when-issued, delayed delivery and forward
commitment transactions, it relies on the other party to consummate the trade.
Failure of such party to do so may result in the Fund incurring a loss or
missing an opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a when-issued purchase
or a forward commitment to purchase securities, and any subsequent fluctuations
in their market value, are taken into account when determining the net asset
value of the Fund starting on the day the Fund agrees to purchase the
securities. The Fund does not earn interest on the securities it has committed
to purchase until they are paid for and delivered on the settlement date. When
the Fund makes a forward commitment to sell securities it owns, the proceeds to
be received upon settlement are included in the Fund's assets. Fluctuations in
the market value of the underlying securities are not reflected in the Fund's
net asset value as long as the commitment remains in effect.
Mortgage-Backed and Asset-Backed Securities. The Balanced Income Fund
may purchase residential and commercial mortgage-backed as well as other asset-
backed securities (collectively called "asset-backed securities") that are
secured or backed by automobile loans, installment sale contracts, credit card
receivables or other assets and are issued by entities such as Government
National Mortgage Association ("GNMA"), Federal National Mortgage Association
("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"), commercial banks,
trusts, financial companies, finance subsidiaries of industrial companies,
savings and loan associations, mortgage banks and investment banks. These
securities represent interests in pools of assets in which periodic payments of
interest and/or principal on the securities are made, thus, in effect passing
through periodic payments made by the individual borrowers on the assets that
underlie the securities, net of any fees paid to the issuer or guarantor of the
securities. The average life of these securities varies with the maturities and
the prepayment experience of the underlying instruments.
There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage-backed securities
and among the securities that they issue. Mortgage-backed securities guaranteed
by GNMA include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie
Maes") which are guaranteed as to the timely payment of principal and interest
by GNMA and such guarantee is backed by the full faith and credit of the United
States. GNMA is a wholly owned U.S. Government corporation within the
Department of Housing and Urban Development. GNMA certificates also are
supported by the authority of GNMA to borrow funds from the U.S. Treasury to
make payments under its guarantee. Mortgage-backed securities issued by FNMA
include FNMA Guaranteed Mortgage Pass-Through Certificates (also known as
"Fannie Maes") which are solely the obligations of FNMA and are not backed by or
entitled to the full faith and credit of the United States, but are supported by
the right of the issuer to borrow from the Treasury. FNMA is a government-
sponsored organization owned entirely by private stockholders. Fannie Maes are
guaranteed as to timely payment of the principal and interest by FNMA.
Mortgage-backed securities issued by the FHLMC include FHLMC Mortgage
Participation Certificates (also known as "Freddie Macs" or "PCs"). FHLMC is a
corporate instrumentality of the United States, created pursuant to an Act of
Congress. Freddie Macs are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute a debt or obligation of the United
States or of any Federal Home Loan Bank. Freddie Macs entitle the holder to
timely payment of interest, which is guaranteed by the FHLMC. FHLMC guarantees
either ultimate collection or timely payment of all principal payments on the
underlying mortgage loans. When FHLMC does not guarantee timely payment of
principal, FHLMC may remit the amount due on account of its guarantee of
ultimate payment of principal at any time after default on an underlying
mortgage, but in no event later than one year after it becomes payable.
As stated in the Prospectus for the Balanced Income Fund, mortgage-
backed securities such as CMOs may be purchased. CMOs are issued in multiple
classes and their relative payment rights may be structured in many ways. In
many cases, however, payments of principal are applied to the CMO classes in
order of their respective maturities, so that no principal payments will be made
on a CMO class until all other classes having an earlier maturity date are paid
in full. The classes may include accrual certificates (also known as "Z-
Bonds"), which do not accrue interest at a specified rate until other specified
classes have been retired and are converted thereafter to interest-paying
securities. They may also include planned amortization classes ("PACs") which
generally require, within certain limits, that specified amounts of principal be
applied to each payment date, and generally exhibit less yield and market
volatility than other classes. Investments in CMO certificates can expose the
Fund to greater volatility and interest rate risk than other types of mortgage-
backed obligations. Prepayments on mortgage-backed securities generally
increase with falling interest rates and decrease with rising interest rates;
furthermore, prepayment rates are influenced by a variety of economic and social
factors.
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 may reduce yield to maturity, while a prepayment rate that is slower
than expected may have the opposite effect of increasing yield to maturity.
Conversely, if an asset-backed security is purchased at a discount, faster than
expected prepayments may increase, while slower than expected prepayments may
decrease, yield to maturity.
In general, the collateral supporting non-mortgage asset-backed
securities is of shorter maturity than mortgage loans. Like other fixed-income
securities, when interest rates rise the value of an asset-backed security
generally will decline; however, when interest rates decline, the value of an
asset-backed security with prepayment features may not increase as much as that
of other fixed-income securities.
Variable Rate Medium Term Notes. The Fund may purchase variable rate
medium term notes which provide for periodic adjustments in the interest rates.
The adjustments in interest rates reflect changes in an index (i.e., the Lehman
Brothers Intermediate Government/Corporate Bond Index).
Other Portfolio Information
Options Trading. As stated in the Fund's Prospectus, the Fund may
purchase put and call options. Option purchases by the Fund will not exceed 5%
of its net assets. Such options may relate to particular securities or to
various indices. This is a highly specialized activity which entails greater
than ordinary investment risks. Regardless of how much the market price of the
underlying security or index increases or decreases, the option buyer's risk is
limited to the amount of the original investment for the purchase of the option.
However, options may be more volatile than the underlying securities or indices,
and therefore, on a percentage basis, an investment in options may be subject to
greater fluctuation than an investment in the underlying securities. In
contrast to an option on a particular security, an option on an index provides
the holder with the right to make or receive a cash settlement upon exercise of
the option. The amount of this settlement will be equal to the difference
between the closing price of the index at the time of exercise and the exercise
price of the option expressed in dollars, times a specified multiple.
A call option gives the purchaser of the option the right to buy, and
a writer the obligation to sell, the underlying security or index at the stated
exercise price at any time prior to the expiration of the option, regardless of
the market price of the security. The premium paid to the writer is in
consideration for undertaking the obligations under the option contract. A put
option gives the purchaser the right to sell the underlying security or index at
the stated exercise price at any time prior to the expiration date of the
option, regardless of the market price of the security or index. Put and call
options purchased by the Fund will be valued at the last sale price or, in the
absence of such a price, at the mean between bid and asked prices.
The Fund may also sell covered call options listed on a national
securities exchange. Such options may relate to particular securities or to
various indices. A call option on a security is covered if the Fund owns the
security underlying the call or has an absolute and immediate right to acquire
that security without additional cash consideration (or, if additional cash
consideration is required, cash or cash equivalents in such amount as required
are held in a segregated account by its custodian) upon conversion or exchange
of other securities held by it. A call option on an index is covered if the
Fund maintains with its custodian cash or cash equivalents equal to the contract
value. A call option is also covered if the Fund holds a call on the same
security or index as the call written where the exercise price of the call held
is (i) equal to or less than the exercise price of the call written, or (ii)
greater than the exercise price of the call written provided the difference is
maintained by the Fund in cash or cash equivalents in a segregated account with
its custodian.
The Fund's obligation under a covered call option written by it may be
terminated prior to the expiration date of the option by the Fund's executing a
closing purchase transaction, which is effected by purchasing on an exchange an
option of the same series (i.e., same underlying security or index, exercise
price and expiration date) as the option previously written. Such a purchase
does not result in the ownership of an option. A closing purchase transaction
will ordinarily be effected to realize a profit on an outstanding option, to
prevent an underlying security from being called, to permit the sale of the
underlying security or to permit the writing of a new option containing
different terms. The cost of such a liquidation purchase plus transactions
costs may be greater than the premium received upon the original option, in
which event the Fund will have incurred a loss in the transaction. An option
position may be closed out only on an exchange which provides a secondary market
for an option of the same series. There is no assurance that a liquid secondary
market on an exchange will exist for any particular option. A covered call
option writer, unable to effect a closing purchase transaction, will not be able
to sell an underlying security until the option expires or the underlying
security is delivered upon exercise with the result that the writer in such
circumstances will be subject to the risk of market decline during such period.
The Fund will write an option on a particular security only if the Adviser
believes that a liquid secondary market will exist on an exchange for options of
the same series which will permit the Fund to make a closing purchase
transaction in order to close out its position.
When the Fund writes a covered call option, an amount equal to the net
premium (the premium less the commission) received by the Fund is included in
the liability section of the Fund's statement of assets and liabilities. The
amount of the liability will be subsequently marked-to-market to reflect the
current value of the option written. The current value of the traded option is
the last sale price or, in the absence of a sale, the average of the closing bid
and asked prices. If an option expires on the stipulated expiration date or if
the Fund enters into a closing purchase transaction, it will realize a gain (or
loss if the cost of a closing purchase transaction exceeds the net premium
received when the option is sold) and the liability related to such option will
be eliminated. Any gain on a covered call option on a security may be offset by
a decline in the market price of the underlying security during the option
period. If a covered call option on a security is exercised, the Fund may
deliver the underlying security held by it or purchase the underlying security
in the open market. In either event, the proceeds of the sale will be increased
by the net premium originally received, and the Fund will realize a gain or
loss. Premiums from expired options written by the Fund and net gains from
closing purchase transactions are treated as short-term capital gains for
federal income tax purposes, and losses on closing purchase transactions are
short-term capital losses.
As noted previously, there are several risks associated with
transactions in options on securities and indices. For example, there are
significant differences between the securities and options markets that could
result in an imperfect correlation between these markets, causing a given
transaction not to achieve its objectives. A decision as to whether, when and
how to use options involves the exercise of skill and judgment, and a
transaction may be unsuccessful to some degree because of market behavior or
unexpected events.
Futures Contracts and Related Options. The Adviser may determine that
it would be in the interest of the Fund to purchase or sell futures contracts,
or options thereon, as a hedge against changes resulting from market conditions
in the value of the securities held by the Fund, or of securities which it
intends to purchase. For example, the Fund may enter into transactions involving
an index futures contract, which is a bilateral agreement pursuant to which the
parties agree to take or make delivery of an amount of cash equal to a specified
dollar amount times the difference between the index value (which assigns
relative values to the securities included in the index) at the close of the
last trading day of the contract and the price at which the futures contract is
originally struck. No physical delivery of the underlying securities in the
index is made.
In connection with a futures transaction, unless the transaction is
covered in accordance with SEC positions, the Fund will maintain a segregated
account with its custodian or sub-custodian consisting of cash or liquid high
grade debt securities equal to the entire amount at risk (less margin deposits)
on a continuous basis. For a more detailed description of futures contracts and
related options, including a discussion of the limitations imposed by federal
tax law, see Appendix B to the SAI.
Foreign Securities and American Depository Receipts ("ADRs"). In
addition to investing directly in foreign securities the Fund may also invest in
sponsored ADRs, which are receipts issued by an American bank or trust company
evidencing ownership of underlying securities issued by a foreign issuer. ADRs
may be listed on a national securities exchange or may trade in the over-the-
counter market. ADR prices are denominated in U.S. dollars; the underlying
security may be denominated in a foreign currency. The underlying security may
be subject to foreign government taxes which would reduce the yield on such
securities. Investments in foreign securities and ADRs also involve certain
inherent risks, such as political or economic instability of the country of
issue, the difficulty of predicting international trade patterns and the
possibility of imposition of exchange controls. Such securities may also be
subject to greater fluctuations in price than securities of domestic
corporations. In addition, there may be less publicly available information
about a foreign company than about a domestic company. Foreign companies
generally are not subject to uniform accounting, auditing and financial
reporting standards comparable to those applicable to domestic companies. With
respect to certain foreign countries, there is a possibility of expropriation or
confiscatory taxation, or diplomatic developments which could affect investment
in those countries.
Zero Coupon Bonds. Zero coupon obligations have greater price
volatility than coupon obligations and will not result in the payment of
interest until maturity, provided that the Fund will purchase such zero coupon
obligations only if the likely relative greater price volatility of such zero
coupon obligations is not inconsistent with the Fund's investment objective.
Although zero coupon securities pay no interest to holders prior to maturity,
interest on these securities is reported as income to the Fund and distributed
to its shareowners. These distributions must be made from the Fund's cash
assets or, if necessary, from the proceeds of sales of portfolio securities.
Additional income producing securities may not be able to be purchased with cash
used to make such distributions and its current income ultimately may be reduced
as a result.
Convertible Securities. The Fund may hold convertible securities.
Convertible securities entitle the holder to receive interest paid or accrued on
debt or the dividend paid on preferred stock until the securities mature or are
redeemed, converted or exchanged. Prior to conversion, convertible securities
have characteristics similar to ordinary debt securities in that they normally
provide a stable stream of income with generally higher yields than those of
common stock of the same or similar issuers. Convertible securities rank senior
to common stock in a corporation's capital structure and therefore generally
entail less risk than the corporation's common stock, although the extent to
which such risk is reduced depends in large measure upon the degree to which the
convertible security sells above its value as a fixed income security.
As described in its Prospectus, the Fund may invest a portion of its assets
in convertible securities that are rated below investment grade.
Warrants. Warrants basically are options to purchase equity securities at
a specific price valid for a specific period of time. They do not represent
ownership of the securities, but only the right to buy them. They have no
voting rights, pay no dividends and have no rights with respect to the assets of
the company issuing them. Warrants differ from call options in that warrants
are issued by the issuer of the security which may be purchased on their
exercise, whereas call options may be written or issued by anyone. The prices
of warrants do not necessarily move parallel to the prices of the underlying
securities.
Investment Limitations
The Fund is subject to the investment limitations enumerated in this
subsection which may be changed only by a vote of the holders of a majority of
the Fund's outstanding shares (as defined under "Miscellaneous" below).
The Fund may not:
1. Make loans, except that the Fund 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 30% of its total assets.
2. Purchase securities of companies for the purpose of exercising
control.
3. Purchase or sell real estate except that the Fund may purchase
securities of issuers which deal in real estate and may purchase securities
which are secured by interests in real estate.
4. Acquire any other investment company or investment company security
except in connection with a merger, consolidation, reorganization or acquisition
of assets or where otherwise permitted by the 1940 Act.
5. Act as an underwriter of securities within the meaning of the
Securities Act of 1933 except insofar as the Fund might be deemed to be an
underwriter upon the disposition of portfolio securities acquired within the
limitation on purchases of restricted securities and except to the extent that
the purchase of securities directly from the issuer thereof in accordance with
the Fund's investment objective, policies and limitations may be deemed to be
underwriting.
6. Write or sell put options, call options, straddles, spreads, or any
combination thereof, except for transactions in options on securities, indices
of securities, futures contracts and options on futures contracts.
7. Purchase securities on margin, make short sales of securities or
maintain a short position except that (a) this investment limitation shall not
apply to the Fund's transactions in futures contracts and related options, and
(b) the Fund may obtain short-term credit as may be necessary for the clearance
of purchases and sales of portfolio securities.
8. Purchase or sell commodity contracts, or invest in oil, gas or mineral
exploration or development programs, except that the Fund may, to the extent
appropriate to its investment objective, purchase publicly traded securities of
companies engaging in whole or in part in such activities and may enter into
futures contracts and related options.
In addition, as summarized in the Prospectus, the Fund may not:
9. 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 the Fund's 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 the Fund or the
Company, except that up to 25% of the value of the Fund's total assets may be
invested without regard to these limitations. For purposes of this limitation,
a security is considered to be issued by the entity (or entities) whose assets
and revenues back the security. A guarantee of a security shall not be deemed
to be a security issued by the guarantor when the value of all securities issued
and guaranteed by the guarantor, and owned by the Fund, does not exceed 10% of
the value of the Fund's total assets.
10. Purchase any securities which would cause 25% or more of the value of
the Fund's 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
instruments issued or guaranteed by the United States, its agencies or
instrumentalities 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; and (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.
11. Borrow money or issue senior securities, except that the Fund may
borrow from banks and enter into reverse repurchase agreements for temporary
purposes in amounts up to 10% of the value of the total assets at the time of
such borrowing; or mortgage, pledge or hypothecate any assets, except in
connection with any such borrowing and in amounts not in excess of the lesser of
the dollar amounts borrowed or 10% of the value of the Fund's total assets at
the time of such borrowing. Securities held in escrow or separate accounts in
connection with the Fund's investment practices described in this SAI or in the
Prospectus are not deemed to be pledged for purposes of this limitation.
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 the Fund's portfolio securities will not constitute a violation of such
limitation. If due to market fluctuations or other reasons the amount of
borrowings and reverse repurchase agreements exceed the 10% limit stated above,
the Fund will promptly reduce such amount. As a matter of fundamental policy,
the Fund will not purchase securities while its borrowings (including reverse
repurchase agreements) in excess of 5% of its total assets are outstanding.
NET ASSET VALUE
The net asset value per share of the Fund is calculated separately for
the Institutional Series and Retail Series by adding the value of all portfolio
securities and other assets belonging to the Fund that are allocable to a
particular series, subtracting the liabilities charged to that series, and
dividing the result by the number of outstanding shares of that series. Assets
belonging to the Fund consist of the consideration received upon the issuance of
shares of the Fund together with all net investment income, realized
gains/losses and proceeds derived from the investment thereof, including any
proceeds from the sale of such investments, any funds or payments derived from
any reinvestment of such proceeds, and a portion of any general assets of the
Company not belonging to a particular investment portfolio. The liabilities that
are charged to the Fund are borne by each share of the Fund, except for certain
payments under the Fund's Distribution and Service Plan and Shareowner Servicing
Plan applicable only to Retail Shares. Subject to the provisions of the Articles
of Incorporation, determinations by the Board of Directors as to the direct and
allocable liabilities, and the allocable portion of any general assets, with
respect to the Fund are conclusive.
The value of the Fund's portfolio securities that are traded on stock
exchanges outside the United States are based upon the price on the exchange as
of the close of business of the exchange immediately preceding the time of
valuation, except when an occurrence subsequent to the time a value was so
established is likely to have changed such value. Securities trading in over-
the-counter markets in European and Pacific Basin countries is normally
completed well before 3:00 P.M. Central Time. In addition, European and Pacific
Basin securities trading may not take place on all business days. Furthermore,
trading takes place in Japanese markets on certain Saturdays and in various
foreign markets on days which are not business days in New York and on which the
net asset value of the Fund is not calculated. The calculation of the net asset
value of the Fund may not take place contemporaneously with the determination of
the prices of portfolio securities used in such calculation. Events affecting
the values of portfolio securities that occur between the time their prices are
determined and 3:00 P.M. Central Time, and at other times, may not be reflected
in the calculation of net asset value of the Fund.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Computation of Offering Price of the Funds. An illustration of the
computation of the initial offering price per share of the Retail Shares of the
Balanced Income Fund follows:
Net Assets $ 9.60
Numbers of Shares 1
Outstanding
Net Asset Value $ 9.60
Per Share
Sales Charge, 4.00% of Offering Price $ .40
(4.16% of net asset value per share) ------
Public Offering Price $10.00
Retail Shares are sold with a front-end sales charge. A front-end
sales charge will not be imposed on reinvested dividends or distributions.
Likewise, there is no front-end sales charge (provided the status of the
investment is explained at the time of investment) on purchases of Retail Shares
if (a) you were a Firstar shareowner as of January 1, 1995 and have continuously
maintained a shareowner account with the Company; (b) you open an account within
60 days of a redemption of Firstar Institutional Shares, (c) you are an
employee, director or retiree of Firstar Corporation or its affiliates or of
Firstar; (d) you maintain a personal trust account with an affiliate of Firstar
Corporation at the time of purchase; (e) you open an account within 60 days of
a termination of a personal trust account or corporate sponsored qualified
retirement plan for which Firstar Trust Company serves as administrator; (f) you
make any purchase for your medical savings account for which an affiliate of
Firstar Corporation serves in a custodial capacity; (g) you make any purchase
within 60 days of a redemption of a mutual fund on which you paid an initial
sales charge or a contingent deferred sales charge; (h) you are a registered
investment adviser that has entered into an agreement with the Distributor to
purchase shares for your own account or for discretionary client accounts; (i)
you are a spouse, parent or child of an individual who falls within the
preceding categories (a) or (d) above; (j) you are a spouse, parent, sibling or
child of an individual who falls within the preceding category (c) above;or (k)
you make any purchase for your Individual Retirement Account that was opened
between February 28, 1997 and January 31, 1998. These exemptions to the
imposition of a front-end sales charge are due to the nature of the investors
and/or the reduced sales efforts that will be needed in obtaining such
investments.
Shareowner Organizations or Institutions may be paid by the Fund for
advertising, distribution or shareowner services. Depending on the terms of the
particular account, Shareowner Organizations or Institutions also may charge
their customers fees for automatic investment, redemption and other services
provided. Such fees may include, for example, account maintenance fees,
compensating balance requirements or fees based upon account transactions,
assets or income. Shareowner Organizations or Institutions are responsible for
providing information concerning these services and any charges to any customer
who must authorize the purchase of Fund shares prior to such purchase.
Shares of the Fund for which a redemption order is received in proper
form by the transfer agent or Firstar Investment Services, Inc. ("FIS"),
before the close of the Exchange (normally 3:00 p.m. Central Time) on a business
day will be redeemed as of the determination of net asset value on that day.
Orders for a redemption received on a business day after the close of the
Exchange or on a non-business day will be priced as of the determination of net
asset value on the next day on which shares of the particular Fund are priced.
If a shareowner requests that redemption proceeds be paid by federal funds wire,
the proceeds will be wired to a correspondent member bank if the investor's
designated bank is not a member of the Federal Reserve System.
Under the 1940 Act, the Fund may suspend the right of redemption or
postpone the date of payment for shares during any period when (a) trading on
the Exchange is restricted by applicable rules and regulations of the SEC; (b)
the Exchange is closed for other than customary weekend and holiday closings;
(c) the SEC has by order permitted such suspension; or (d) an emergency exists
as determined by the SEC. (The Fund may also suspend or postpone the recording
of the transfer of its shares upon the occurrence of any of the foregoing
conditions.)
The Company's Articles of Incorporation permit the Fund to redeem an
account involuntarily, upon sixty days' notice, if redemptions cause the
account's net asset value to remain at less than $1,000.
In addition to the situations described in the Fund's Prospectus under
"Redemption of Shares," the Fund may redeem shares involuntarily to reimburse
the Fund for any loss sustained by reason of the failure of a shareowner to make
full payment for shares purchased by the shareowner or to collect any charge
relating to a transaction effected for the benefit of a shareowner which is
applicable to Fund shares as provided in the Prospectus from time to time.
Exchange Privilege. By use of the exchange privilege, shareowners
authorize the transfer agent to act on telephonic or written exchange
instructions from any person representing himself to be the shareowner or in
some cases, the shareowner's registered representative of record, and believed
by the transfer agent to be genuine. The transfer agent's records of such
instructions are binding. The exchange privilege may be modified or terminated
at any time upon notice to shareowners.
Exchange transactions as described in paragraphs A, B, and C below will be made
on the basis of the relative net asset values per share of the funds involved in
the transaction.
A. Retail Shares of any fund purchased with a sales charge may be exchanged
without a sales charge for Retail Shares of any other fund offered by the
Company with a sales charge.
B. Shares of any fund offered by the Company acquired by a previous
exchange transaction involving Retail Shares on which a sales charge has
directly or indirectly been paid (e.g. shares purchased with a sales charge or
issued in connection with an exchange involving shares that had been purchased
with a sales charge) as well as additional Shares acquired through reinvestment
of dividends or distributions on such Shares may be exchanged without a sales
charge for Retail Shares of any other fund offered by the Company with a sales
charge. To accomplish an exchange under the provisions of this paragraph,
investors must notify the transfer agent of their prior ownership of Retail
Shares and their account number.
C. Shares of any fund offered by the Company may be exchanged without a
sales charge for shares of any other fund of the Company that is offered without
a sales charge.
Except as stated above, a sales charge will be imposed when shares of a
fund that were purchased or otherwise acquired without a sales charge are
redeemed and the proceeds are used to purchase Retail Shares of another fund of
the Company with a sales charge.
Shares in a fund from which the shareowner is withdrawing an investment
will be redeemed at the net asset value per share next determined on the date of
receipt. Shares of the new fund into which the shareowner is investing will be
purchased at the net asset value per share next determined (plus any applicable
sales charge) after acceptance of the request by the Company in accordance with
the policies for accepting investments. Exchanges of shares will be available
only in states where they may legally be made.
For federal income tax purposes, share exchanges are treated as sales
on which the shareowner may realize a gain or loss, depending upon whether the
value of the shares to be given up in exchange is more or less than the basis in
such shares at the time of the exchange. Investors exercising the exchange
privilege should request and review the prospectus for the shares to be acquired
in the exchange prior to making an exchange.
Additional Information Regarding Shareowner Services for Retail Shares
The Retail Shares of the Fund offer a Periodic Investment Plan whereby
a shareowner may automatically make purchases of shares of the Fund on a
regular, monthly basis ($50 minimum per transaction). Under the Periodic
Investment Plan, a shareowner's designated bank or other financial institution
debits a preauthorized amount on the shareowner's account each month and applies
the amount to the purchase of Retail Shares. The Periodic Investment Plan must
be implemented with a financial institution that is a member of the Automated
Clearing House. No service fee is currently charged by the Fund for
participation in the Periodic Investment Plan. A $20 fee will be imposed by the
transfer agent if sufficient funds are not available in the shareowner's account
or the shareowner's account has been closed at the time of the automatic
transaction.
The Periodic Investment Plan permits an investor to use "Dollar Cost
Averaging' in making investments. Instead of trying to time market
performance, a fixed dollar amount is invested in Retail Shares at predetermined
intervals. This may help investors to reduce their average cost per share
because the agreed upon fixed investment amount allows more Retail Shares to be
purchased during periods of lower Retail Share prices and fewer Retail Shares to
be purchased during periods of higher Retail Share prices. In order to be
effective, Dollar Cost Averaging should usually be followed on a sustained,
consistent basis. Investors should be aware, however, that Retail Shares bought
using Dollar Cost Averaging are purchased without regard to their price on the
day of investment or to market trends. Dollar Cost Averaging does not assure a
profit and does not protect against losses in a declining market. In addition,
while investors may find Dollar Cost Averaging to be beneficial, it will not
prevent a loss if an investor ultimately redeems his Retail Shares at a price
which is lower than their purchase price. An investor may want to consider his
financial ability to continue purchases through periods of low price levels.
The Retail Shares of the Fund permit shareowners to effect
ConvertiFundR transactions, an automated method by which a Retail shareowner may
invest proceeds from one account to another account of the Retail Shares of the
Firstar family of funds. Such proceeds include dividend distributions, capital
gain distributions and systematic withdrawals. ConvertiFundR transactions may be
used to invest funds from a regular account to another regular account, from a
qualified plan account to another qualified plan account, or from a qualified
plan account to a regular account.
The Retail Shares of the Fund offer shareowners a Systematic
Withdrawal Plan, which allows a shareowner who owns shares of a Fund worth at
least $5,000 at current net asset value at the time the shareowner initiates the
Systematic Withdrawal Plan to designate that a fixed sum ($50 minimum per
transaction) be distributed to the shareowner or as otherwise directed at
regular intervals. Purchase of additional shares concurrently with withdrawals
will be disadvantageous because of the sales charge involved in the additional
purchases.
Special Procedures for In-Kind Payments
Payment for shares of the Fund may, in the discretion of the Fund, be
made in the form of securities that are permissible investments for the Fund as
described in its Prospectus. For further information about this form of
payment, contact Investor Services at 414-287-3710. In connection with an
in-kind securities payment, the Fund will require, among other things, that the
securities be valued on the day of purchase in accordance with the pricing
methods used by the Fund; that the Fund receive satisfactory assurances that it
will have good and marketable title to the securities received by it; that the
securities be in proper form for transfer to the Fund; that adequate information
be provided to the Fund concerning the basis and other tax matters relating to
the securities; and that the amount of the purchase be at least $1,000,000.
DESCRIPTION OF SHARES
The Company's Articles of Incorporation authorize the Board of
Directors to issue up to 150,000,000,000 full and fractional shares of common
stock, $.0001 par value per share, divided into thirty classes (each, a
"class" or "fund"). Each class is divided into two series designated as
Institutional Series and Series A/Retail Series (each, a "Series") and, in the
case of the Fund, consists of the number of shares set forth in the table below:
Class-Series of Fund in which Stock Number of Authorized
Common Stock Represents Interest Shares in Each Series
17-Institutional Balanced Income 100 Million
17-A/Retail 100 Million
The Board of Directors has also authorized the issuance of classes 1
through 16 and class 18 common stock representing interests in seventeen other
separate investment portfolios which are described in separate prospectuses and
statements of additional information. The remaining authorized shares are
classified into twelve additional classes representing interests in other
potential future investment portfolios of the Company. The Directors may
similarly classify or reclassify any particular class of shares into one or more
additional series.
In the event of a liquidation or dissolution of the Company or the
Fund, shareowners of the Fund would be entitled to receive the assets available
for distribution belonging to the Fund, and a proportionate distribution, based
upon the relative assets of the Company's respective investment portfolios, of
any general assets not belonging to any particular portfolio which are available
for distribution. Subject to the allocation of certain costs, expenses, charges
and reserves attributed to the operation of a particular series as described in
the Fund's Prospectus, shareowners of the Fund are entitled to participate
equally in the net distributable assets of the Fund on liquidation, based on the
number of shares of the Fund that are held by each shareowner.
Shareowners of the Fund, as well as those of any other investment
portfolio offered by the Company, will vote together in the aggregate and not
separately on a portfolio-by-portfolio basis, except as otherwise required by
law or when the Board of Directors determines that the matter to be voted upon
affects only the interests of the shareowners of a particular class or a
particular series within a class. Rule 18f-2 under the 1940 Act provides that
any matter required to be submitted to the holders of the outstanding voting
securities of an investment company such as the Company shall not be deemed to
have been effectively acted upon unless approved by the shareowners of each
portfolio affected by the matter. A portfolio is affected by a matter unless it
is clear that the interests of each portfolio in the matter are substantially
identical or that the matter does not affect any interest of the portfolio.
Under the Rule, the approval of an investment advisory agreement or any change
in a fundamental investment policy would be effectively acted upon with respect
to a portfolio only if approved by a majority of the outstanding shares of such
portfolio. However, the Rule also provides that the ratification of the
appointment of independent accountants, the approval of principal underwriting
contracts and the election of Directors may be effectively acted upon by
shareowners of the Company voting together in the aggregate without regard to
particular portfolios. Similarly, on any matter submitted to the vote of
shareowners which only pertains to agreements, liabilities or expenses
applicable to one series of the Fund (such as the Distribution and Service Plan
applicable to Retail Shares) but not the other series of the Fund, only the
affected series will be entitled to vote.
When issued for payment as described in the Fund's Prospectus and this
SAI, shares of the Fund will be fully paid and non-assessable by the Company,
except as provided in Section 180.0622(2)(b) of the Wisconsin Business
Corporation Law, as amended, which in general provides for personal liability on
the part of a corporation's shareowners for unpaid wages of employees. The
Company does not intend to have any employees and, to that extent, the foregoing
statute will be inapplicable to holders of Fund shares and will not have a
material effect on the Company.
The Articles of Incorporation authorize the Board of Directors,
without shareowner approval (unless otherwise required by applicable law), to:
(a) sell and convey the assets belonging to a series of shares to another
management investment company for consideration which may include securities
issued by the purchaser and, in connection therewith, to cause all outstanding
shares of such series to be redeemed at a price which is equal to their net
asset value and which may be paid in cash or by distribution of the securities
or other consideration received from the sale and conveyance; (b) sell and
convert the assets belonging to a series of shares into money and, in connection
therewith, to cause all outstanding shares of such series to be redeemed at
their net asset value; or (c) combine the assets belonging to a series of shares
with the assets belonging to one or more other series of shares if the Board of
Directors reasonably determines that such combination will not have a material
adverse effect on the shareowners of any series participating in such
combination and, in connection therewith, to cause all outstanding shares of any
such series to be redeemed or converted into shares of another series of shares
at their net asset value.
ADDITIONAL INFORMATION CONCERNING TAXES
The following is only a summary of certain additional tax
considerations generally affecting the Fund and its shareowners that are not
described in the Fund's Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Fund or its shareowners, and the
discussion here and in the Prospectus is not intended as a substitute for
careful tax planning. Investors are advised to consult their tax advisers with
specific reference to their own tax situations.
The Fund is treated as a separate tax entity under the Code. Although
the Fund expects to qualify as a "regulated investment company" (by satisfying
certain income and distribution requirements in accordance with the code) and to
be relieved of all or substantially all federal income taxes, depending upon the
extent of the Company's activities in states and localities, the Fund may be
subject to the tax laws of such states or localities. In addition, in those
states and localities which have income tax laws, the treatment of the Fund and
its shareowners under such laws may differ from their treatment under federal
income tax laws.
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to distribute specified percentages of their ordinary
taxable income and capital gain net income (excess of capital gains over capital
losses) with respect to each calendar year. The Fund intends to make sufficient
distributions or deemed distributions out of its ordinary taxable income and any
capital gain net income with respect to each calendar year to avoid liability
for this excise tax.
If the Fund qualifies as a regulated investment company under the
Code, shareowners, unless otherwise exempt, will pay income or capital gains
taxes on amounts distributed (except distributions that are treated as a return
of capital) regardless of whether such distributions are paid in cash or
reinvested in additional shares.
Distributions out of the net capital gain, (the excess of net long-
term capital gain over net short-term capital loss), if any, of the Fund will be
taxed to shareowners as long-term capital gain, regardless of the length of time
a shareowner has held his or her shares or whether such gain was reflected in
the price paid for the shares. Such long-term capital gain will be 20% or 28%
rate gain, depending upon the funds holding period for the assets the sale of
which generated the capital gain. The Fund will designate the tax status of
capital gain distributions in a written notice mailed to shareowners within
60 days after the close of the Fund's taxable year.
If for any taxable year the Fund does not qualify for the special
federal income tax treatment afforded regulated investment companies, all of its
taxable income will be subject to federal income tax at regular corporate rates
(without any deduction for distributions to its shareowners). In such event,
dividend distributions would be taxable as ordinary income to shareowners to the
extent of the Fund's current and accumulated earnings and profits, and would be
eligible for the dividends received deduction in the case of corporate
shareowners.
Income received by the Fund from sources within foreign countries may
be subject to withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes.
The foregoing discussion is based on federal tax laws and regulations
which are in effect on the date of this SAI; such laws and regulations may be
changed by legislative or administrative action.
MANAGEMENT OF THE COMPANY
Directors and Officers
The Directors and Officers of the Company, their addresses, principal
occupations during the past five years and other affiliations are as follows:
Position Principal Occupations During
Name, Address & with the Past 5 Years and Other
Age Company Affiliations
Steven R. Parish* Director, Executive Vice President of
W290 N3967 Dry President Trust and Investments, Firstar
Creek Ct. and Corporation since 1996, Vice
Pewaukee, WI Treasurer President and Portfolio
53072 Manager, FIRMCO 1991-1994;
Age: 40 Director, Firstar Funds, Inc.
since September 1997; Director,
Firstar Trust Company since
April, 1996; Director, Firstar
Information Services, Corp. since
April, 1996; Director, Firstar
Investment Services since
April, 1996; Director, Firstar
Insurance Services since
April, 1996; Director,
United Way since June, 1997.
James M. Wade Chairman of Vice President and Chief
2802 Wind Bluff the Board Financial Officer, Johnson
Circle Controls, Inc. (a controls
Wilmington, NC manufacturing company)
28409 January 1987- May 1991.
Age: 54
Glen R. Bomberger Director Executive Vice President,
One Park Plaza Chief Financial Officer and
11270 West Park Director, A.O. Smith
Place Corporation (a diversified
Milwaukee, WI manufacturing company) since
53224-3690 January 1987; Director of
Age: 60 companies affiliated with A.O.
Smith Corporation; Chief
Financial Officer, Director
and Vice President, Smith
Investment Company; Officer
and Director of companies
affiliated with Smith
Investment Company.
Jerry G. Remmel Director Vice President, Treasurer and
16650A Lake Circle Chief Financial Officer of
Brookfield, WI Wisconsin Energy Corporation
53005 1994-1996; Treasurer of
Age: 66 Wisconsin Electric Power
Company 1973-1996; Director of
Wisconsin Electric Power
Company 1989-1996; Senior Vice
President, Wisconsin Electric
Power Company 1988 - 1994;
Chief Financial Officer,
Wisconsin Electric Power
Company 1983-1996; Vice
President and Treasurer,
Wisconsin Electric Power
Company, 1983 - 1989.
Richard K. Director President and Chief Executive
Riederer Officer since 1995, Director of
400 Three Springs Weirton Steel since 1993;
Drive Executive Vice President and
Weirton, WV Chief Financial Officer,
26062-4989 Weirton Steel January 1994 -
Age: 53 1995; Vice President of
Finance and Chief Financial
Officer, Weirton Steel January
1989-1994; Member, Board of
Directors of American Iron and
Steel Institute since 1995;
Member, Board of Directors,
National Association of
Manufacturers since 1995;
Member, Board of Directors,
WESBANCO since September 1997.
Charles R. Roy* Director Vice President - Finance,
14245 Heatherwood Chief Financial Officer and
Court Secretary, Rexnord Corporation
Elm Grove, WI (an equipment manufacturing
53122 company), 1988 - 1992; Vice
Age: 67 President - Finance and
Administration, Rexnord Inc.,
1982 - 1988; Officer and
Director of several Rexnord
subsidiaries until 1992.
Mary Ellen Stanek Vice President and Chief Operating
777 E. Wisconsin President Officer, FIRMCO since 1994;
Avenue, Director of FIRMCO since 1992
Suite 800 and Director Fixed Income
Milwaukee, WI Securities of FIRMCO since
53202 1990.
Age: 41
W. Bruce McConnel, Secretary Partner of the law firm of
III Drinker Biddle & Reath LLP.
Philadelphia
National Bank
Building
1345 Chestnut
Street
Philadelphia, PA
19107
Age: 54
* Messrs. Parish and Roy are considered by the Company to be "interested
persons" of the Company as defined in the 1940 Act.
The following chart provides certain information about the Director fees
for the year ended October 31, 1997 of the Company's Directors.
TOTAL
COMPENSATION
RETIREMENT ESTIMATED FROM
AGGREGATE PENSIONTOR ANNUAL COMPANY
NAME OF COMPENSATION ACCRUED AS BENEFITS AND FUND
PERSON/ FROM THE PART OF FUND UPON COMPLEX* PAID
POSITION COMPANY EXPENSES RETIREMENT TO DIRECTORS
James M.
Wade
Chairman of
the Board $16,875 $0 $0 $16,875
Glen R.
Bomberger
Director $13,750+ $0 $0 $13,750
Jerry G.
Remmel
Director $13,750 $0 $0 $13,750
Richard K.
Riederer
Director $13,750 $0 $0 $13,750
Charles R.
Roy
Director $13,750 $0 $0 $13,750
*The "Fund Complex" includes only the Company.
+Includes $13,750 which Mr. Bomberger elected to defer under the Company's
deferred compensation plan.
Each Director receives an annual fee of $10,000, a $1,000 per meeting
attendance fee and reimbursement of expenses incurred as a Director. The
Chairman of the Board is entitled to receive an additional $3,500 per annum for
services in such capacity. For the fiscal year ended October 31, 1997, the
Directors and Officers received aggregate fees and reimbursed expenses of
$74,320. Mr. Parish and Ms. Stanek receive no fees from the Company for their
services as President and Vice President, respectively, although FIRMCO, of
which Ms. Stanek is President, receives fees from the Company for advisory
services. FIRMCO is a wholly owned subsidiary of Firstar Corporation, of which
Mr. Parish is Executive Vice President. Drinker Biddle & Reath LLP, of which
Mr. McConnel is a partner, receives legal fees as counsel to the Company. As of
the date of this SAI, the Directors and Officers of the Company, as a group,
owned less than 1% of the outstanding shares of the Fund.
Advisory Services
FIRMCO is the Investment Adviser to the Fund. In its Investment
Advisory Agreement, the Adviser has agreed to pay all expenses incurred by it in
connection with its advisory activities, other than the cost of securities and
other investments, including brokerage commissions and other transaction
charges, if any, purchased or sold for the Fund. The Adviser may voluntarily
waive advisory fees otherwise payable by the Fund.
In addition to the compensation stated in the Prospectus, the Adviser
is entitled to 4/10ths of the gross income earned by the Fund on each loan of
its securities, excluding capital gains or losses, if any. Pursuant to current
policy of the Securities and Exchange Commission, the Adviser does not intend to
receive compensation for such securities lending activity. The Adviser may
voluntarily waive advisory fees otherwise payable by the Fund.
Under its Investment Advisory Agreement, the Adviser is not liable for
any error of judgment or mistake of law or for any loss suffered by the Fund in
connection with the performance of such Agreement, except a loss resulting from
a breach of fiduciary duty with respect to the receipt of compensation for
services or a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of the Adviser in the performance of its duties or from
its reckless disregard of its duties and obligations under the Agreement.
Banking Laws and Regulations. Banking laws and regulations, including the
Glass-Steagall Act as presently interpreted by the Board of Governors of the
Federal Reserve System, presently (a) prohibit a bank holding company registered
under the Federal Bank Holding Company Act of 1956 or any bank or non-bank
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 (b) do not prohibit such a bank holding company or affiliate or
banks generally from acting as investment adviser, transfer agent or custodian
to such an investment company or from purchasing shares of such a company as
agent and upon order of a customer. In 1971, the United States Supreme Court
held in Investment Company Institute vs. Camp that the Glass-Steagall Act
prohibits a national bank from operating a fund for the collective investment of
managing agency accounts. Subsequently, the Board of Governors of the Federal
Reserve System (the "Board") issued a regulation and interpretation to the
effect that the Glass-Steagall Act and such decision forbid a bank holding
company registered under the Federal Bank Holding Company Act of 1956 (the
"Holding Company Act"), or any non-bank affiliate thereof from sponsoring,
organizing or controlling a registered, open-end investment company continuously
engaged in the issuance of its shares, but did not prohibit such a holding
company or affiliate from acting as investment adviser, transfer agent and
custodian to such an investment company. In 1981, the United States Supreme
Court held in Board of Governors of the Federal Reserve System v. Investment
Company Institute that the Board did not exceed its authority under the Holding
Company Act when it adopted its regulation and interpretation authorizing bank
holding companies and their non-bank affiliates to act as investment advisers to
registered closed-end investment companies. FIRMCO and Firstar Trust Company
("Firstar Trust") are subject to such banking laws and regulations.
FIRMCO and Firstar Trust believe that they may perform the services
for the Fund contemplated by their respective agreements with the Company
without violation of the Glass-Steagall Act or other applicable banking laws or
regulations. These companies further believe that, if the question were
properly presented, a court should hold that these companies may each perform
such activities without violation of the Glass-Steagall Act or other applicable
banking laws and or regulations. It should be noted, however, there have been
no cases deciding whether banks and their affiliates may perform services
comparable to those performed by these companies, and future changes in either
federal or state statutes and regulations relating to permissible activities of
banks or trust companies and their subsidiaries or affiliates, as well as
further judicial or administrative decisions or interpretations of present and
future statutes and regulations, could prevent such companies from continuing to
perform such services for the Fund. If the companies were prohibited from
continuing to perform advisory, accounting, shareowner servicing and custody
services for the Fund, it is expected that the Board of Directors would
recommend that the Fund enter into new agreements or would consider the possible
termination of the Fund. Any new advisory agreement would be subject to
shareowner approval.
Shares of the Fund are not bank deposits, are neither endorsed by,
insured by, or guaranteed by, obligations of, nor otherwise supported by the
FDIC, the Federal Reserve Board, Firstar Trust or FIRMCO, their affiliates or
any other bank, or any other governmental agency. An investment in the Fund
involves risks including possible loss of principal.
Administration and Distribution Services
Firstar Trust and B. C. Ziegler and Company ("Ziegler") serve as
the Co-Administrators. Under the Co-Administration Agreement, the following
administrative services are provided jointly by the Co-Administrators: assist in
maintaining office facilities; furnish clerical services and stationery and
office supplies; monitor the Company's arrangements with respect to services
provided by Shareowner Organizations and Institutions; and generally assist in
the Funds' operations. The following administrative services are provided by
Ziegler: review and comment upon the registration statement and amendments
thereto prepared by Firstar Trust or counsel to the Company, as requested by
Firstar Trust; review and comment upon sales literature and advertising relating
to the Company, as requested by Firstar Trust; assist in the administration of
the marketing budget; periodically review Blue Sky registration and sales
reports for the Fund; attend meetings of the Board of Directors, as requested by
the Board of Directors of the Company; and such other services as may be
requested in writing and expressly agreed to by Ziegler. The following
administrative services are provided by Firstar Trust: compile data for and
prepare with respect to the Fund timely Notices to the Securities and Exchange
Commission required pursuant to Rule 24f-2 under the 1940 Act and Semi-Annual
Reports on Form N-SAR; coordinate execution and filing by the Company of all
federal and state tax returns and required tax filings other than those required
to be made by the Company's custodian and transfer agent; prepare compliance
filings and Blue Sky registrations pursuant to state securities laws with the
advice of the Company's counsel; assist to the extent requested by the Company
with the Company's preparation of Annual and Semi-Annual Reports to Fund
shareowners and Registration Statements for the Fund; monitor the Fund's expense
accruals and cause all appropriate expenses to be paid on proper authorization
from the Fund; monitor the Fund's status as a regulated investment company under
Subchapter M of the Code; maintain the Fund's fidelity bond as required by the
1940 Act; and monitor compliance with the policies and limitations of the Fund
as set forth in the Prospectus, SAI, By-laws and Articles of Incorporation.
Each of the Co-Administrators has agreed to pay all expenses incurred
by it in connection with its administrative activities. Under the Co-
Administration Agreement, the Co-Administrators are not liable for any error of
judgment or mistake of law or for any loss suffered by the Fund in connection
with the performance of the Co-Administration Agreement, except a loss resulting
from willful misfeasance, bad faith or gross negligence on the part of the Co-
Administrators in the performance of their respective duties or from their
reckless disregard of their duties and obligations under the Agreement.
The Distributor provides distribution services for the Fund as
described in the Fund's Prospectus pursuant to a Distribution Agreement with the
Fund under which the Distributor, as agent, sells shares of the Fund on a
continuous basis. The Distributor has agreed to use its best efforts to solicit
orders for the sale of shares, although it is not obliged to sell any particular
amount of shares. The Distributor causes expenses to be paid for the cost of
printing and distributing prospectuses to persons who are not shareowners of the
Fund (excluding preparation and printing expenses necessary for the continued
registration of the Fund's shares) and of printing and distributing all sales
literature. The Distributor is not entitled to receive fees from the Fund for
its distribution services.
Shareowner Organizations
As stated in the Fund's Prospectus, the Fund intends to enter into
agreements from time to time with Shareowner Organizations providing for support
and/or distribution services to customers of the Shareowner Organizations who
are the beneficial owners of Retail Shares of the Fund. Under the agreements,
the Fund may pay Shareowner Organizations up to 0.25% (on an annualized basis)
of the average daily net asset value of Retail Shares beneficially owned by
their customers. Support services provided by Shareowner Organizations under
their Service Agreements or Distribution and Service Agreements may include:
(i) processing dividend and distribution payments from the Fund; (ii) providing
information periodically to customers showing their share positions; (iii)
arranging for bank wires; (iv) responding to customer inquiries; (v) providing
sub-accounting with respect to shares beneficially owned by customers or the
information necessary for sub-accounting; (vi) forwarding shareowner
communications; (vii) assisting in processing share purchase, exchange and
redemption requests from customers; (viii) assisting customers in changing
dividend options, account designations and addresses; and (ix) other similar
services requested by the Fund. In addition, Shareowner Organizations, under
the Distribution and Service Plan, may provide assistance (such as the
forwarding of sales literature and advertising to their customers) in connection
with the distribution of Retail Shares. All fees paid under these agreements
are borne exclusively by the Fund's Retail Shares.
The Fund's arrangements with Shareowner Organizations under the
agreements are governed by two Plans (a Service Plan and a Distribution and
Service Plan), which have been adopted by the Board of Directors. Because the
Distribution and Service Plan contemplates the provision of services related to
the distribution of Retail Shares (in addition to support services), that Plan
has been adopted in accordance with Rule 12b-1 under the 1940 Act. In
accordance with the Plans, the Board of Directors reviews, at least quarterly, a
written report of the amounts expended in connection with the Fund's
arrangements with Shareowner Organizations and the purposes for which the
expenditures were made. In addition, the Fund's arrangements with Shareowner
Organizations must be approved annually by a majority of the Directors,
including a majority of the Directors who are not "interested persons" of the
Funds, as defined in the 1940 Act, and have no direct or indirect financial
interest in such arrangements (the "Disinterested Directors").
The Fund believes that there is a reasonable likelihood that its
arrangements with Shareowner Organizations will benefit the holders of Retail
Shares as a way of allowing Shareowner Organizations to participate with the
Fund in the provision of support and distribution services to customers of the
Shareowner Organization who own Retail Shares. Any material amendment to the
arrangements with Shareowner Organizations under the agreements must be approved
by a majority of the Board of Directors (including a majority of the
Disinterested Directors), and any amendment to increase materially the costs
under the Distribution and Service Plan with respect to the Fund must be
approved by the holders of a majority of the outstanding Retail Shares of the
Fund. So long as the Plans are in effect, the selection and nomination of the
members of the Board of Directors who are not "interested persons" (as defined
in the 1940 Act) of the Fund will be committed to the discretion of such
Disinterested Directors.
CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES AGENT
Firstar Trust serves as custodian of all the Fund's assets. Under the
Custody Agreement, Firstar Trust has agreed to (i) maintain a separate account
in the name of the Fund, (ii) make receipts and disbursements of money on behalf
of the Fund, (iii) collect and receive all income and other payments and
distributions on account of the Fund's portfolio investments, (iv) respond to
correspondence from shareowners, security brokers and others relating to its
duties and (v) make periodic reports to the Company concerning the Fund's
operations. Firstar Trust may, at its own expense, open and maintain a custody
account or accounts on behalf of the Fund with other banks or trust companies,
provided that Firstar Trust shall remain liable for the performance of all of
its duties under the Custody Agreement notwithstanding any delegation. For its
services as custodian, Firstar Trust is entitled to receive a fee, payable
monthly, based on the annual rate of $0.20 per $1,000 of the market value of the
Fund's first $2 billion of assets, $0.15 per $1,000 of the market value of the
Fund's next $2 billion of assets, and $0.10 per $1,000 of the balance of such
assets. In addition, Firstar Trust, as custodian, is entitled to certain
charges for securities transactions and reimbursement for expenses.
Firstar Trust also serves as transfer agent and dividend disbursing
agent for the Fund under a Shareowner Servicing Agent Agreement. As transfer
agent and dividend disbursing agent, Firstar Trust has agreed to (i) issue and
redeem shares of the Fund, (ii) make dividend and other distributions to
shareowners of the Fund, (iii) respond to correspondence by Fund shareowners and
others relating to its duties, (iv) maintain shareowner accounts, and (v) make
periodic reports to the Fund. For its transfer agency and dividend disbursing
services for the Fund, Firstar Trust is entitled to receive fees at the rate of
$15.00 per shareowner account with an annual minimum of $24,000 per portfolio,
plus certain other transaction charges and reimbursement for expenses.
In addition, the Fund has entered into a Fund Accounting Servicing
Agreement with Firstar Trust pursuant to which Firstar Trust has agreed to
maintain the financial accounts and records of the Fund in compliance with the
1940 Act and to provide other accounting services to the Fund. For its
accounting services, Firstar Trust is entitled to receive fees, payable monthly,
at the following annual rates of the market value of the Fund's assets: --
$27,500 on the first $40 million, 1.25/100th of 1% on the next $200 million, and
6.25/1000ths of 1% on the balance, plus out-of-pocket expenses, including
pricing expenses.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, independent accountants, 100 East Wisconsin
Avenue, Suite 1500, Milwaukee, Wisconsin, 53202, serve as auditors for the
Company.
COUNSEL
Drinker Biddle & Reath LLP (of which Mr. McConnel,
Secretary of the Company, is a partner), Philadelphia National Bank Building,
1345 Chestnut Street, Philadelphia, Pennsylvania 19107, serve as counsel to the
Company and will pass upon the legality of the shares offered by the Fund's
Prospectus.
PERFORMANCE CALCULATIONS
From time to time, total return data for Retail or
Institutional Shares of the Fund may be quoted in advertisements or in
communications to shareowners. The total return of the Fund's Retail or
Institutional Shares will be calculated on an average annual (compound) total
return basis, and may also be calculated on an aggregate total return basis, for
various periods. Average annual total return reflects the average annual
percentage change in value of an investment in Retail or Institutional Shares of
the Fund over the measuring period. Aggregate total return reflects the total
percentage change in value over the measuring period.
Total Return Calculations.
The Fund computes "average annual total return" separately for its
Retail and Institutional Shares by determining the average annual compounded
rates of return during specified periods that equate the initial amount invested
in a particular series to the ending redeemable value of such investment in the
series. This is done by dividing the ending redeemable value of a hypothetical
$1,000 initial payment by $1,000 and raising the quotient to a power equal to
one divided by the number of years (or fractional portion thereof) covered by
the computation and subtracting one from the result. This calculation can be
expressed as follows:
ERV 1/n
T = [(-----) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value at the end of the period
covered by the computation of a hypothetical $1,000
payment made at the beginning of the period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in terms
of years.
The Fund computes its aggregate total returns separately for Retail
and Institutional Shares, by determining the aggregate rates of return during
specified periods that likewise equate the initial amount invested in a
particular series to the ending redeemable value of such investment in the
series. The formula for calculating aggregate total return is as follows:
ERV
T = [(-----) - 1]
P
The calculations of average annual total return and aggregate total
return assume the reinvestment of all dividends and capital gain distributions
on the reinvestment dates during the period. The ending redeemable value
(variable "ERV" in each formula) is determined by assuming complete redemption
of the hypothetical investment and the deduction of all nonrecurring charges at
the end of the period covered by the computations. In addition, the Fund's
average annual total return and aggregate total return reflect the deduction of
the maximum front-end sales charge of 4% in connection with the purchase of
Retail Shares. The Fund may also advertise total return data without reflecting
sales charges in accordance with the rules of the Securities and Exchange
Commission. Quotations that do not reflect the sales charge will, of course, be
higher than quotations that do reflect the sales charge.
The Fund may also from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on the Fund's
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciation of the Fund would increase the value, not only of
the original Fund investment, but also of the additional Fund shares received
through reinvestment. As a result, the value of the Fund investment would
increase more quickly than if dividends or other distribution had been paid in
cash. The Fund may also include discussions or illustrations of the potential
investment goals of a prospective investor, investment management techniques,
policies or investment suitability of the Fund, economic conditions, the effects
of inflation and historical performance of various asset classes, including but
not limited to, stocks, bonds and Treasury bills. From time to time
advertisements or communications to shareowners may summarize the substance of
information contained in shareowner reports (including the investment
composition of the Fund), as well as the views of the Adviser as to market,
economic, trade and interest rate trends, legislative, regulatory and monetary
developments, investment strategies and related matters believed to be of
relevance to the Fund. The Fund may also include in advertisements, charts,
graphs or drawings which illustrate the potential risks and rewards of
investment in various investment vehicles, including but not limited to stocks,
bonds, treasury bills and shares of the Fund. In addition, advertisement or
shareowner communications may include a discussion of certain attributes or
benefits to be derived by an investment in the Fund. Such advertisements or
communications may include symbols, headlines or other materials which highlight
or summarize the information discussed in more detail therein.
The total return of the Fund's Retail and Institutional Shares may be
compared to those of other mutual funds with similar investment objectives and
to stock, bond 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 total return of the Fund's Retail
and Institutional Shares may be compared to data prepared by Lipper Analytical
Services, Inc. In addition, the total return of the Fund's Retail and
Institutional Shares may be compared to the S&P 500 Index; the S&P MidCap 400
Index; the S&P SmallCap 600 Index; the NASDAQ Composite Index, an index of
unmanaged groups of common stocks of domestic companies that are quoted on the
National Association of Securities Quotation System; the Dow Jones Industrial
Average, a recognized unmanaged index of common stocks of 30 industrial
companies listed on the New York Stock Exchange; the Wilshire Top 750 Index, an
index of all domestic equity issues which are traded over the national exchanges
(consists of approximately 5,000 issues); the Value Line Composite Index, an
unmanaged index of nearly 1,700 stocks reviewed in Ratings & Reports; Lehman
Brothers Intermediate Government/Corporate Bond Index; and the Consumer Price
Index. Total return data as reported in national financial publications, such
as Money Magazine, Forbes, Barron's, Morningstar Mutual Funds, The Wall Street
Journal, Mutual Funds Magazine, Kilpinger's Personal Finance and The New York
Times, or in publications of a local or regional nature, may also be used in
comparing the performance of the Fund.
Performance quotations represent past performance, and should not be
considered as representative of future results. The investment return and
principal value of an investment in the Fund's Retail and Institutional Shares
will fluctuate so that an investor's shares, when redeemed, may be worth more or
less than their original cost. Since performance will fluctuate, performance
data for the Fund cannot necessarily be used to compare an investment in the
Fund's Retail and Institutional Shares with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Investors should remember that
performance is generally a function of the kind and quality of the investments
held in a portfolio, portfolio maturity, operating expenses and market
conditions. Any fees charged by Shareowner Organizations directly to their
customer accounts in connection with investments in the Fund will not be
included in the Fund's calculations of total return and will reduce the total
return received by the accounts.
MISCELLANEOUS
As used in this SAI and in the Fund's Prospectus, a majority of the
outstanding shares of the Fund or portfolio means, with respect to the approval
of an investment advisory agreement or a charge in a fundamental investment
policy, the lesser of (1) 67% of the shares of the Fund or portfolio represented
at a meeting at which the holders of more than 50% of the outstanding shares of
the Fund or portfolio are present in person or by proxy, or (2) more than 50% of
the outstanding shares of the Fund or portfolio.
As of December 31, 1997, the Adviser and its affiliates held of record
substantially all of the outstanding shares of each of the Company's investment
portfolios as agent, custodian, trustee or investment adviser on behalf of their
customers. At such date, Firstar Trust Company, P.O. Box 2054, Milwaukee,
Wisconsin 53201, and its affiliated banks held as beneficial owner five percent
or more of the outstanding shares of the following investment portfolios of the
Company because they possessed sole voting or investment power with respect to
such shares: Money Market Fund (10%), Institutional Money Market Fund (91%);
Tax-Exempt Money Market Fund (61%); U.S. Treasury Money Market Fund (44%); U.S.
Government Money Market Fund (66%); Growth and Income Fund (67%); Short-Term
Bond Market Fund (56%); Special Growth Fund (73%); Emerging Growth Fund (87%),
Bond IMMDEXTM Fund (79%); Equity Index Fund (76%); Balanced Growth Fund (76%);
Intermediate Bond Market Fund (81%); Growth Fund (83%); Tax-Exempt Intermediate
Bond Fund (63%); International Equity Fund (88%); and MicroCap Fund (81%). At
such date, no other person was known by the Company to hold of record or
beneficially 5% or more of the outstanding shares of any investment portfolio of
the Company.
APPENDIX A
Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. The following summarizes the rating categories used by Standard and
Poor's for commercial paper.
"A-1" - Issue's degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are
denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory. However,
the relative degree of safety is not as high as for issues designated "A-1."
"A-3" - Issue has an adequate capacity for timely payment. It is
however, somewhat more vulnerable to the adverse effects of changes and
circumstances than an obligation carrying a higher designation.
"B"- Issue has only a speculative capacity for timely payment.
"C" - Issue has a doubtful capacity for payment.
"D" - 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 following summarizes the rating categories used by
Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are considered to
have a superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
"Prime-2" - Issuer or related supporting institutions are considered to
have a strong capacity for repayment of short-term promissory obligations.
This will normally be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound, will be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternative
liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an acceptable
capacity for repayment of short-term promissory obligations. The effects of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D- 1," "D- 2" and "D- 3." Duff
& Phelps employs three designations, "D- 1+," " D- 1" and "D- 1-," within
the highest rating category. The following summarizes the rating categories
used by Duff & Phelps for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental protection factors.
Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty for timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity, and other protection
factors qualify issue as investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer failed to meet scheduled principal and/or interest
payments.
Fitch IBCA short-term ratings apply to debt obligations that are payable
on demand or have original maturities of generally up to three years. The
following summarizes the rating categories used by Fitch IBCA for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit quality. Issues
assigned this rating are regarded as having the strongest degree of assurance
for timely payment.
"F-1" - Securities possess highest credit quality. Issues assigned this
rating reflect an assurance of timely payment only slightly less in degree than
issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues assigned this
rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues assigned this
rating have characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
"B" - Securities are speculative. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for timely payment and
are vulnerable to near-term adverse changes in financial and economic
conditions.
"C" - Default is a real possibility for these securities. Capacity for
meeting financial commitments is solely reliant upon a sustained, favorable
business and economic environment.
"D" - Securities are in actual or imminent payment default.
Fitch IBCA may also use the symbol "LOC" with its short-term ratings to
indicate that the rating is based upon a letter of credit issued by a
commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of an untimely
payment of principal or interest of unsubordinated instruments having a
maturity of one year or less which is issued by United States commercial banks,
thrifts and non-bank banks; non-United States banks; and broker-dealers. The
following summarizes the ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest rating
category and indicates a very high likelihood that principal and interest will
be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of safety
regarding timely repayment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
the capacity to service principal and interest in a timely fashion is
considered adequate.
"TBW-4" - This designation indicates that the debt is regarded as non-
investment grade and therefore speculative.
Corporate and Municipal Long-Term Debt Ratings
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - This designation represents the highest rating assigned by
Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay interest
and repay principal and differs from AAA issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay interest and
repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt
in higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay interest
and repay principal. Whereas such issues normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC," and "C" - Debt is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation.
While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"CI" - This rating is reserved for income bonds on which no interest is
being paid.
"D" - Debt is in payment default. This rating is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes such payments will
be made during such grace period. Rating is also used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid, and
certain other obligations that S & P believes may experience high volatility or
high variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged.' Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as high-
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing;
"Ca" represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds
may be in default.
Con. ( ) - Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting
condition attaches. Parenthetical rating denotes the probable credit stature
upon completion of construction or elimination of basis of condition.
(P) - When applied to forward delivery bonds, indicates that the rating is
provisional pending delivery of the bonds. The ratings may be revised prior to
delivery if changes occur in the legal documents or the underlying credit
quality of the bonds.
Moody's applies numerical modifiers 1, 2 and 3 in each generic
classification from "Aa" to "B" in its bond rating system. The modifier 1
indicates that the issuer 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 issuer ranks at the lower end of its generic rating
category.
The following summarizes the long-term debt ratings used by Duff & Phelps
for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high quality. Protection factors are
strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but adequate.
However, risk factors are more variable and greater in periods of economic
stress.
"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when
due. Debt rated "B" possesses the risk that obligations will not be met when
due. Debt rated "CCC" is well below investment grade and has considerable
uncertainty as to timely payment of principal, interest or preferred dividends.
Debt rated "DD" is a defaulted debt obligation, and the rating "DP"
represents preferred stock with dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+)
or minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by Fitch IBCA for
corporate and municipal bonds:
"AAA" - bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds
rated in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated "F-1+."
"A" - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of good credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
To provide more detailed indications of credit quality, the Fitch IBCA
ratings from and including "AA" to "BBB" may be modified by the addition of
a plus (+) or minus (-) sign to show relative standing within these major
rating categories.
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long-term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes
the rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is very high.
"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis with limited incremental risk versus
issues rated in the highest category.
"A" - This designation indicates that the ability to repay principal and
interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC" - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree
of speculation and "CC" the highest degree of speculation.
"D" - this designation indicates that the long-term debt is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may include
a plus or minus sign designation which indicates where within the respective
category the issue is placed.
Municipal Note Ratings
A Standard and Poor's rating reflects the liquidity concerns and market
access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Rating Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term loans
are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1" / "VMIG-1" - Loans bearing this designation are of the best
quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2" / ""VMIG-2" - Loans bearing this designation are of high
quality, with margins of protection ample although not so large as in the
preceding group.
"MIG-3" / "VMIG-3" - Loans bearing this designation are of favorable
quality, with all security elements accounted for but lacking the undeniable
strength of the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well established.
"MIG-4" / "VMIG-4" - Loans bearing this designation are of adequate
quality, carrying specific risk but having protection commonly regarded as
required of an investment security and not distinctly or predominantly
speculative.
"SG" - Loans bearing this designation are of speculative quality and
lack margins of protection.
Duff & Phelps and Fitch IBCA use the short-term ratings described under
commercial Paper Ratings for Municipal notes.
APPENDIX B
ADDITIONAL INFORMATION CONCERNING FUTURES AND RELATED
OPTIONS
As stated in the Prospectus, the Fund may enter into futures contracts and
options for hedging or other purposes. Such transactions are described in this
Appendix.
I. Interest Rate Futures Contracts.
Use of Interest Rate Futures Contracts. Bond prices are established in
both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the future
for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, the Fund may use interest rate futures
as a defense, or hedge, against anticipated interest rate changes and not for
speculation. As described below, this would include the use of futures contract
sales to protect against expected increases in interest rates and futures
contract purchases to offset the impact of interest rate declines.
The Fund presently could accomplish a similar result to that which it hopes
to achieve through the use of futures contracts by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase, or conversely, selling short-term bonds and investing in
long-term bonds when interest rates are expected to decline. However, because
of the liquidity that is often available in the futures market the protection is
more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by the Fund, through using futures contracts.
Description of Interest Rate Futures Contracts. An interest rate futures
contract sale would create an obligation by the Fund, as seller, to deliver the
specific type of financial instrument called for in the contract at a specific
future time for a specified price. A futures contract purchase would create an
obligation by the Fund, as purchaser, to take delivery of the specific type of
financial instrument at a specific future time at a specific price. The
specific securities delivered or taken, respectively, at settlement date, would
not be determined until at or near that date. The determination would be in
accordance with the rules of the exchange on which the futures contract sale or
purchase was made.
Although interest rate futures contracts by their terms call for actual
delivery or acceptance of securities, in most cases the contracts are closed out
before the settlement date without the making or taking of delivery of
securities. Closing out a futures contract sale is effected by the Fund's
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
in the sale exceeds the price in the offsetting purchase, the Fund is paid the
difference and thus realizes a gain. If the offsetting purchase price exceeds
the sale price, the Fund pays the difference and realizes a loss. Similarly,
the closing out of a futures contract purchase is effected by the Fund's
entering into a futures contract sale. If the offsetting sale price exceeds the
purchase price, the Fund realizes a gain, and if the purchase price exceeds the
offsetting sale price, the Fund realizes a loss.
Interest rate futures contracts are traded in an auction environment on the
floors of several exchanges -- principally, the Chicago Board of Trade, the
Chicago Mercantile Exchange and the New York Futures Exchange. The Fund would
deal only in standardized contracts on recognized exchanges. Each exchange
guarantees performance under contract provisions through a clearing corporation,
a nonprofit organization managed by the exchange membership.
A public market now exists in futures contracts covering various financial
instruments including long-term U.S. Treasury Bonds and Notes; Government
National Mortgage Association (GNMA) modified pass-through mortgage-backed
securities; three-month U.S. Treasury Bills; and ninety-day commercial paper.
The Fund may trade in any futures contract for which there exists a public
market, including, without limitation, the foregoing instruments.
Examples of Futures Contract Sale. The Fund would engage in an interest
rate futures contract sale to maintain the income advantage from continued
holding of a long-term bond while endeavoring to avoid part or all of the loss
in market value that would otherwise accompany a decline in long-term securities
prices. Assume that the market value of a certain security in the Fund's
portfolio tends to move in concert with the futures market prices of long-term
U.S. Treasury bonds ("Treasury bonds"). The Adviser wishes to fix the current
market value of this portfolio security until some point in the future. Assume
the portfolio security has a market value of 100, and the Adviser believes that,
because of an anticipated rise in interest rates, the value will decline to 95.
The Fund might enter into futures contract sales of Treasury bonds for an
equivalent of 98. If the market value of the portfolio security does indeed
decline from 100 to 95, the equivalent futures market price for the Treasury
bonds might also decline from 98 to 93.
In that case, the five-point loss in the market value of the portfolio
security would be offset by the five-point gain realized by closing out the
futures contract sale. Of course, the futures market price of Treasury bonds
might well decline to more than 93 or to less than 93 because of the imperfect
correlation between cash and futures prices mentioned below.
The Adviser could be wrong in its forecast of interest rates and the
equivalent futures market price could rise above 98. In this case, the market
value of the portfolio securities, including the portfolio security being
protected, would increase. The benefit of this increase would be reduced by the
loss realized on closing out the futures contract sale.
If interest rate levels did not change, the Fund in the above example might
incur a loss of 2 points (which might be reduced by an offsetting transaction
prior to the settlement date). In each transaction, transaction expenses would
also be incurred.
Examples of Futures Contract Purchase. The Fund would engage in an
interest rate futures contract purchase when it is not fully invested in long-
term bonds but wishes to defer for a time the purchase of long-term bonds in
light of the availability of advantageous interim investments, e.g., shorter-
term securities whose yields are greater than those available on long-term
bonds. The Fund's basic motivation would be to maintain for a time the income
advantage from investment in the short-term securities; the Fund would be
endeavoring at the same time to eliminate the effect of all or part of an
expected increase in market price of the long-term bonds that the fund may
purchase.
For example, assume that the market price of a long-term bond that the Fund
may purchase, currently yielding 10%, tends to move in concert with futures
market prices of Treasury bonds. The Adviser wishes to fix the current market
price (and thus 10% yield) of the long-term bond until the time (four months
away in this example) when it may purchase the bond. Assume the long-term bond
has a market price of 100, and the Adviser believes that, because of an
anticipated fall in interest rates, the price will have risen to 105 (and the
yield will have dropped to about 9 1/2%) in four months. The Fund might enter
into futures contracts purchases of Treasury bonds for an equivalent price of
98. At the same time, the Fund could, for example, assign a pool of investments
in short-term securities that are either maturing in four months or earmarked
for sale in four months, for purchase of the long-term bond at an assumed market
price of 100. Assume these short-term securities are yielding 15%. If the
market price of the long-term bond does indeed rise from 100 to 105, the
equivalent futures market price for Treasury bonds might also rise from 98 to
103. In that case, the 5-point increase in the price that the Fund pays for the
long-term bond would be offset by the 5-point gain realized by closing out the
futures contract purchase.
The Adviser could be wrong in its forecast of interest rates; long-term
interest rates might rise to above 10%; and the equivalent futures market price
could fall below 98. If short-term rates at the same time fall to 10% or below,
it is possible that the Fund would continue with its purchase program for long-
term bonds. The market price of available long-term bonds would have decreased.
The benefit of this price decrease, and thus yield increase, will be reduced by
the loss realized on closing out the futures contract purchase.
If, however, short-term rates remained above available long-term rates, it
is possible that the Fund would discontinue its purchase program for long-term
bonds. The yield on short-term securities in the portfolio, including those
originally in the pool assigned to the particular long-term bond, would remain
higher than yields on long-term bonds. The benefit of this continued
incremental income will be reduced by the loss realized on closing out the
futures contract purchase.
In each transaction, expenses would also be incurred.
II. Index Futures Contracts.
A stock or bond index assigns relative values to the stocks or bonds
included in the index and the index fluctuates with changes in the market values
of the stocks or bonds included. Some stock index futures contracts are based
on broad market indexes, such as the Standard & Poor's 500 or the New York Stock
Exchange Composite Index. In contrast, certain exchanges offer futures
contracts on narrower market indexes, such as the Standard & Poor's 100 or
indexes based on an industry or market segment, such as oil and gas stocks.
Futures contracts are traded on organized exchanges regulated by the commodity
Futures Trading Commission. Transactions on such exchanges are cleared through
a clearing corporation, which guarantees the performance of the parties to each
contract.
The Fund may sell index futures contracts as set forth in the Prospectus.
The Fund may do so either to hedge the value of its equity portfolio as a whole,
or to protect against declines, occurring prior to sales of securities, in the
value of the securities to be sold. Conversely, the Fund may purchase index
futures contracts as set forth in the Prospectus.
In addition, the Fund may utilize index futures contracts in anticipation
of changes in the composition of its portfolio holdings. For example, in the
event that the Fund expects to narrow the range of industry groups represented
in its holdings it may, prior to making purchases of the actual securities,
establish a long futures position based on a more restricted index, such as an
index comprised of securities of a particular industry group. The Fund may also
sell futures contracts in connection with this strategy, in order to protect
against the possibility that the value of the securities to be sold as part of
the restructuring of the portfolio will decline prior to the time of sale.
The following are examples of transactions in stock index futures (net of
commissions and premiums, if any).
ANTICIPATORY PURCHASE HEDGE: Buy the Future Hedge
Objective: Protect Against Increasing Price
Portfolio Futures
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures at 125
Equity Portfolio Value of Futures=$62,500/Contract
-Day Hedge is Lifted-
Buy Equity Portfolio with Sell 1 Index Futures at 130
Actual Cost = $65,000 Value of Futures = $65,000/Contract
Increase in Purchase Price = $2,500 Gain on Futures = $2,500
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Portfolio
Factors:
Value of Stock Portfolio = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Portfolio Beta Relative to the Index = 1.0
Portfolio Futures
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Equity Portfolio Value of Futures = $1,000,000
-Day Hedge is Lifted-
Equity Portfolio - Own Buy 16 Index Futures at 120
Stock with Value = $960,000 Value of Futures = $960,000
Loss in Portfolio Value = $40,000 Gain on Futures = $40,000
If, however, the market moved in the opposite direction, that is, market value
decreased and the Fund had entered into an anticipatory purchase hedge, or
market value increased and the Fund had hedged its stock portfolio, the results
of the Fund's transactions in stock index futures would be as set forth below.
Portfolio Futures
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures at 125
Equity Portfolio Value of Futures = $62,500/Contract
Portfolio Futures
-Day Hedge is Lifted-
Buy Equity Portfolio with Sell 1 Index Futures at 120
Actual Cost - $60,000 Value of Futures = $60,000/Contract
Decrease in Purchase Price = $2,500 Loss on Futures = $2,500
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Portfolio
Factors:
Value of Stock Portfolio = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Portfolio Beta Relative to the Index = 1.0
Portfolio Futures
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Equity Portfolio Value of Futures = $1,000,000
-Day Hedge is Lifted-
Equity Portfolio - Own Buy 16 Index Futures at 130
Stock with Value = $1,040,000 Value of Futures = $1,040,000
Gain in Portfolio Value = $40,000 Loss on Futures = $40,000
III. Margin Payments.
Unlike when the Fund purchases or sells a security, no price is paid or
received by the Fund upon the purchase or sale of a futures contract.
Initially, in accordance with the terms of the exchange on which such futures
contract is traded, the Fund may be required to deposit with the broker or in a
segregated account with the Fund's custodian an amount of cash or cash
equivalents, the value of which may vary but is generally equal to 10% or less
of the value of the contract. This amount is known as initial margin. The
nature of initial margin in futures transactions is different from that of
margin in security transactions in that futures contract margin does not involve
the borrowing of funds by the customer to finance the transactions. Rather, the
initial margin is in the nature of a performance bond or good faith deposit on
the contract which is returned to the Fund upon termination of the futures
contract assuming all contractual obligations have been satisfied. Subsequent
payments, called variation margin, to and from the broker, will be made on a
daily basis as the price of the underlying security or index fluctuates making
the long and short positions in the futures contract more or less valuable, a
process known as marking to the market. For example, when the Fund has
purchased a futures contract and the price of the contract has risen in response
to a rise in the underlying instruments, that position will have increased in
value and the Fund will be entitled to receive from the broker a variation
margin payment equal to that increase in value. Conversely, where the Fund has
purchased a futures contract and the price of the futures contract has declined
in response to a decrease in the underlying instruments, the position would be
less valuable and the Fund would be required to make a variation margin payment
to the broker. At any time prior to expiration of the futures contract, the
Adviser may elect to close the position by taking an opposite position, subject
to the availability of a secondary market, which will operate to terminate the
Fund's position in the futures contract. A final determination of variation
margin is then made, additional cash is required to be paid by or released to
the Fund, and the Fund realizes a loss or gain.
IV. Risks of Transactions in Futures Contracts.
There are several risks in connection with the use of futures by the Fund
as a hedging device. One risk arises because of the imperfect correlation
between movements in the price of the future and movements in the price of the
securities which are the subject of the hedge. The price of the future may move
more than or less than the price of the securities being hedged. If the price
of the future moves less than the price of the securities which are the subject
of the hedge, the hedge will not be fully effective but, if the price of the
securities being hedged has moved in an unfavorable direction, the Fund would be
in a better position than if it had not hedged at all. If the price of the
securities being hedged has moved in a favorable direction, this advantage will
be partially offset by the loss on the future. If the price of the future moves
more than the price of the hedged securities, the Fund involved will experience
either a loss or gain on the future which will not be completely offset by
movements in the price of the securities which are the subject of the hedge. To
compensate for the imperfect correlation of movements in the price of securities
being hedged and movements in the price of futures contracts, the Fund may buy
or sell futures contracts in a greater dollar amount than the dollar amount of
securities being hedged if the volatility over a particular time period of the
prices of such securities has been greater than the volatility over such time
period of the future, or if otherwise deemed to be appropriate by the Adviser.
Conversely, the Fund may buy or sell fewer futures contracts if the volatility
over a particular time period of the prices of the securities being hedged is
less than the volatility over such time period of the futures contract being
used, or if otherwise deemed to be appropriate by the Adviser. It is also
possible that, where the Fund has sold futures to hedge its portfolio against a
decline in the market, the market may advance and the value of securities held
by the Fund may decline. If this occurred, the Fund would lose money on the
future and also experience a decline in value in its portfolio securities.
Where futures are purchased to hedge against a possible increase in the
price of securities before the Fund is able to invest its cash (or cash
equivalents) in securities (or options) in an orderly fashion, it is possible
that the market may decline instead; if the Fund then concludes not to invest in
securities or options at that time because of concern as to possible further
market decline or for other reasons, the Fund will realize a loss on the futures
contract that is not offset by a reduction in the price of securities purchased.
In instances involving the purchase of futures contracts by the Fund, an
amount of cash and cash equivalents, equal to the market value of the futures
contracts, will be deposited in a segregated account with the Fund's custodian
and/or in a margin account with a broker to collateralize the position and
thereby insure that the use of such futures is unleveraged.
In addition to the possibility that there may be an imperfect correlation,
or no correlation at all, between movements in the futures and the securities
being hedged, the price of futures may not correlate perfectly with movement in
the cash market due to certain market distortions. Rather than meeting
additional margin deposit requirements, investors may close futures contracts
through off-setting transactions which could distort the normal relationship
between the cash and futures markets. Second, with respect to financial futures
contracts, the liquidity of the futures market depends on participants entering
into off-setting transactions rather than making or taking delivery. To the
extent participants decide to make or take delivery, liquidity in the futures
market could be reduced thus producing distortions. Third, from the point of
view of speculators, the deposit requirements in the futures market are less
onerous than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may also cause temporary
price distortions. Due to the possibility of price distortion in the futures
market, and because of the imperfect correlation between the movements in the
cash market and movements in the price of futures, a correct forecast of general
market trends or interest rate movements by the Adviser may still not result in
a successful hedging transaction over a short time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Fund
intends to purchase or sell futures only on exchanges or boards of trade where
there appear to be active secondary markets, there is no assurance that a liquid
secondary market on any exchange or board of trade will exist for any particular
contract or at any particular time. In such event, it may not be possible to
close a futures investment position, and in the event of adverse price
movements, the Fund would continue to be required to make daily cash payments of
variation margin. However, in the event futures contracts have been used to
hedge portfolio securities, such securities will not be sold until the futures
contract can be terminated. In such circumstances, an increase in the price of
the securities, if any, may partially or completely offset losses on the futures
contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary market in a
futures contract may be adversely affected by "daily price fluctuation limits"
established by commodity exchanges which limit the amount of fluctuation in a
futures contract price during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price beyond
the limit, thus preventing the liquidation of open futures positions. The
trading of futures contracts is also subject to the risk of trading halts,
suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal activity, which could at times make it difficult or
impossible to liquidate existing positions or to recover excess variation margin
payments.
Successful use of futures by the Fund is also subject to the Adviser's
ability to predict correctly movements in the direction of the market. For
example, if the Fund has hedged against the possibility of a decline in the
market adversely affecting securities held in its portfolio and securities
prices increase instead, the Fund will lose part or all of the benefit to the
increased value of its securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations, if
the Fund has insufficient cash, it may have to sell securities to meet daily
variation margin requirements. Such sales of securities may be, but will not
necessarily be, at increased prices which reflect the rising market. The Fund
may have to sell securities at a time when it may be disadvantageous to do so.
V. Options on Futures Contracts.
The Fund may purchase options on the futures contracts described above. A
futures option gives the holder, in return for the premium paid, the right to
buy (call) from or sell (put) to the writer of the option a futures contract at
a specified price at any time during the period of the option. Upon exercise,
the writer of the option is obligated to pay the difference between the cash
value of the futures contract and the exercise price. Like the buyer or seller
of a futures contract, the holder, or writer, of an option has the right to
terminate its position prior to the scheduled expiration of the option by
selling, or purchasing, an option of the same series, at which time the person
entering into the closing transaction will realize a gain or loss.
Investments in futures options involve some of the same considerations that
are involved in connection with investments in futures contracts (for example,
the existence of a liquid secondary market). In addition, the purchase of an
option also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the option purchased.
Depending on the pricing of the option compared to either the futures contract
upon which it is based, or upon the price of the securities being hedged, an
option may or may not be less risky than ownership of the futures contract or
such securities. In general, the market prices of options can be expected to be
more volatile than the market prices on the underlying futures contract.
Compared to the purchase or sale of futures contracts, however, the purchase of
call or put options on futures contracts may frequently involve less potential
risk to the Fund because the maximum amount at risk is the premium paid for the
options (plus transaction costs). Although permitted by its fundamental
investment policies, the Fund does not currently intend to write futures
options, and will not do so in the future absent any necessary regulatory
approvals.
VI. Accounting and Tax Treatment.
Accounting for futures contracts and options will be in accordance with
generally accepted accounting principles.
Generally, futures contracts held by the Fund at the close of the Fund's
taxable year will be treated for federal income tax purposes as sold for their
fair market value on the last business day of such year, a process known as
"marking-to-market." Forty percent of any gain or loss resulting from such
constructive sale will be treated as short-term capital gain or loss and 60% of
such gain or loss will be treated as long-term capital gain or loss without
regard to the length of time the Fund holds the futures contract ("the 40%-60%
rule"). The amount of any capital gain or loss actually realized by the Fund in
a subsequent sale or other disposition of those futures contracts will be
adjusted to reflect any capital gain or loss taken into account by the Fund in a
prior year as a result of the constructive sale of the contracts. With respect
to futures contracts to sell, which will be regarded as parts of a "mixed
straddle" because their values fluctuate inversely to the values of specific
securities held by the Fund, losses from such contracts to sell will be subject
to certain loss deferral rules which limit the amount of loss currently
deductible on either part of the straddle to the amount thereof which exceeds
the unrecognized gain (if any) with respect to the other part of the straddle,
and to certain wash sales regulations. Under short sales rules, which will also
be applicable, the holding period of the securities forming part of the straddle
will (if they have not been held for the long-term holding period) be deemed not
to begin prior to termination of the straddle. With respect to certain futures
contracts, deductions for interest and carrying charges will not be allowed.
Notwithstanding the rules described above, with respect to futures contracts to
sell which are properly identified as such, the Fund may make an election which
will exempt (in whole or in part) those identified futures contracts from being
treated for federal income tax purposes as sold on the last business day of the
Fund's taxable year, but gains and losses will be subject to such short sales,
wash sales, loss deferral rules and the requirement to capitalize interest and
carrying charges. Under temporary regulations, the Fund would be allowed (in
lieu of the foregoing) to elect to either (1) to offset gains or losses from
positions which are part of a mixed straddle by separately identifying each
mixed straddle to which such treatment applies, or (2) to establish a mixed
straddle account for which gains and losses would be recognized and offset on a
periodic basis during the taxable year. Under either election, the 40%-60% rule
will apply to the net gain or loss attributable to the futures contracts, but in
the case of a mixed straddle account election, not more than 50% of net annual
gain in an account may be treated as long-term and no more than 40% of net
annual loss in an account may be treated as short-term. Options on futures
contracts generally receive federal tax treatment similar to that described
above.
Special rules govern the federal income tax treatment of certain
transactions denominated in terms of a currency other than the U.S. dollar or
determined by reference to the value of one or more currencies other than the
U.S. dollar. The types of transactions covered by the special rules include the
following: (i) the acquisition of, or becoming the obligor under, a bond or
other debt instrument (including, to the extent provided in Treasury
regulations, preferred stock); (ii) the accruing of certain trade receivables
and payables; and (iii) the entering into or acquisition of any forward
contract, futures contract, option or similar financial instrument. However,
foreign currency-related regulated futures contracts and nonequity options are
generally not subject to the special currency rules if they are or would be
treated as sold for their fair market value at year-end under the marking-to-
market rules, unless an election is made to have such currency rules apply. The
disposition of a currency other than the U.S. dollar by a U.S. taxpayer is also
treated as a transaction subject to the special currency rules. With respect to
transactions covered by the special rules, foreign currency gain or loss is
calculated separately from any gain or loss on the underlying transaction and is
normally taxable as ordinary gain or loss. The Fund may elect to treat as
capital gain or loss foreign currency gain or loss arising from certain
identified forward contracts, futures contracts and options that are capital
assets in the hands of the Fund and which are not part of a straddle. In
accordance with Treasury regulations, certain transactions subject to the
special currency rules that are part of a "Section 988 hedging transaction" (as
defined in the Code and the Treasury regulations) will be integrated and treated
as a single transaction or otherwise treated consistently for purposes of the
Code. "Section 988 hedging transactions" are not subject to the marking-to-
market or loss deferral rules under the Code. It is possible that some of the
non-U.S. dollar denominated investments that the Fund may make will be subject
to the special currency rules described above. Gain or loss attributable to the
foreign currency component of transactions engaged in by the Fund which are not
subject to the special currency rules (such as foreign equity investment other
than certain preferred stocks) will be treated as capital gain or loss and will
not be segregated from the gain or loss on the underlying transaction.
Qualification as a regulated investment company under the Code requires
that the Fund satisfy certain requirements with respect to the source of its
income during a taxable year. At least 90% of the gross income of the Fund must
be derived from dividends, interest, certain payments with respect to securities
loans, gains from the sale or other disposition of stock, securities or foreign
currencies, and other income (including but not limited to gains from options,
futures or forward contracts) derived with respect to the Fund's business of
investing in such stock, securities or currencies. The Treasury Department may
by regulation exclude from qualifying income foreign currency gains which are
not directly related to the Fund's principal business of investment in stock or
securities, or options and futures with respect to stock or securities. Any
income derived by the Fund from a partnership or trust is treated for this
purpose as derived with respect to the Fund's business of investment in stock,
securities or currencies only to the extent that such income is attributable to
items of income which would have been qualifying income if realized by the Fund
in the same manner as by the partnership or trust.
