As filed with the Securities and Exchange Commission on August 18, 1999
1933 Act Registration No. 33-18255
1940 Act Registration No. 811-5380
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. X
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Post-Effective Amendment No. 37
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and/or X
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REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
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Amendment No. 38 X
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(Check appropriate box or boxes)
FIRSTAR FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
FIRSTAR Funds Center
615 East Michigan Street
Milwaukee, Wisconsin 53201-3011
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (414) 287-3909
W. Bruce McConnel, III, Esquire
Drinker Biddle & Reath LLP
One Logan Square
18th and Cherry Street
Philadelphia, Pennsylvania 19103
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate
box).
immediately upon filing pursuant to paragraph (b)
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on (date) pursuant to paragraph (b)
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60 days after filing pursuant to paragraph (a)(1)
on (date) pursuant to paragraph (a)(1)
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X 75 days after filing pursuant to paragraph (a)(2)
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on pursuant to paragraph (a)(2) of Rule 485.
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If appropriate, check the following box
--- this Post-Effective Amendment designates a new effective date for a
previously filed Post-Effective Amendment.
Title of securities being registered: Shares of common stock.
xxxxxxx
Subject to Completion
October 18, 1999
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
FIRSTAR CORE INTERNATIONAL EQUITY FUND
NOVEMBER , 1999
CONTENTS Page
THE FUND ----
The fund's objective and strategy, principal
risks and expenses.
ADDITIONAL FUND INFORMATION
Types of Investment Risk
INVESTING WITH FIRSTAR FUNDS
Share Classes Available
Sales Charges and Waivers
Purchasing Shares
Buying Shares
Redeeming Shares
Exchanging Shares
Additional Shareowner Services
ADDITIONAL INFORMATION
Dividends, Capital Gains Distributions and Taxes
Management of the Fund
Net Asset Value and Days of Operation
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy and accuracy of this Prospectus. Any
representation to the contrary is a criminal offense.
An investment in the Fund involves investment risks, including the risk that you
may lose money.
THE FUND
OBJECTIVE
The investment objective of the Core International Equity Fund is to
provide maximum, long-term total return consistent with reasonable risk to
principal. This investment objective may be changed by the Board of Directors
without approval of Shareowners, although no change is currently anticipated.
PRINCIPAL INVESTMENT STRATEGIES
The Glenmede Trust Company (the Sub-Adviser) attempts to achieve the Fund's
objective by investing primarily in common stocks and other equity securities of
companies located outside the United States. The Fund is expected to diversify
its investments across companies located in a number of foreign countries, which
may include, but are not limited to, Japan, the United Kingdom, Germany, France,
Switzerland, the Netherlands, Sweden, Australia, Hong Kong and Singapore. The
Fund will invest at least 65% of its total assets in the securities of companies
based in at least three different countries, other than the United States.
Factors considered by the Sub-Adviser in the selection of securities to buy
and sell for this Fund include both country selection and stock selection.
Countries are primarily selected by evaluating countries' valuations relative to
their historical valuations. Economic growth, government policies and other
factors are also considered. Securities are primarily selected by evaluating a
security's valuation relative to the valuations of other securities in the same
country. Growth in company earnings, industry fundamentals, and other factors
are also considered in determining which securities to buy and sell.
PRINCIPAL RISKS
The following principal investment risks are described in more detail under
the heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund may be suitable for you only if you are prepared to invest for the
long-term and are not seeking to speculate on short-term stock market movements.
The Fund's value is expected to be volatile as a result of its investment in
foreign securities.
The Fund is subject to market risk. Market risk is the risk that the
----------- -----------
value of the securities in which the Fund invests may go up or down in response
to the prospects of individual companies and/or general economic conditions.
The Fund's investments in foreign securities are subject to foreign risks.
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Foreign stocks involve special risks not typically associated with
U.S. stocks. The stocks held by the Fund may underperform other types of
stocks, and they may not increase or may decline in value. Foreign investments
may be riskier than U.S. investments because of factors such as foreign
government restrictions, changes in currency exchange rates, incomplete
financial information about the issuers of securities, and political or economic
instability. Foreign stocks may be more volatile and less liquid than U.S.
stocks.
FEES AND EXPENSES OF THE FUND
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This table describes the fees and expenses you may pay if you buy and hold
shares of the Fund.
INSTITUTIONAL RETAIL A RETAIL B
SHARES SHARES SHARES
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SHAREOWNER FEES (fees paid
directly from your investment)
Maximum Sales Charge (Load)
Imposed on Purchases
(as a percentage of offering
price) ...................... None 4.50% None
Maximum Deferred Sales Charge
(Load) (as a percentage of
offering price).............. None None 5.00%<F1>
Maximum Sales Charge (Load)
Imposed on Reinvested
Dividends.................. None None None
Redemption Fees.............. None<F2> None<F2> None<F2>
Exchange Fees................ None None None
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Management Distribution Other Total Annual
Fees<F3> and Service Expenses Fund
(12b-1) <F5> Operating
Fees<F4> Expenses<F6>
ANNUAL FUND OPERATING
EXPENSES (expenses that
are deducted from Fund
assets)
Retail A 1.25% 0.00% 0.90% 2.15%
Retail B 1.25% 0.75% 0.90% 2.90%
Institutional 1.25% 0.00% 0.65% 1.90%
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<F1> A contingent deferred sales charge is imposed on Retail B Shares redeemed
within six years of purchase at a rate of 5% in the first year, 4% in the second
year, 3% in the third and fourth years, 2% in the fifth year, declining to 1% in
the fifth year. Thereafter, the Retail B Shares convert to Retail A Shares,
which do not bear a contingent deferred sales charge.
<F2> A fee of $12.00 is charged for each wire redemption (Retail Shares) and
$15.00 for each non-systematic withdrawal from a Retirement Account for which
Firstar Bank, Milwaukee, N.A. is custodian.
<F3>The Adviser has voluntarily agreed that a portion of its management fee will
not be imposed on the Fund during the current fiscal year. As a result of the
fee waiver, current management fees for the Fund are 1.00% of the Fund's average
daily net assets. This waiver is expected to remain in effect for the current
fiscal year; however, it is voluntary and can be modified or terminated at any
time without the Fund's consent.
<F4> The total of all 12b-1 fees and shareowner servicing fees may not exceed,
in the aggregate, the annual rate of 0.25% of the Fund's average daily net
assets for the Retail A Shares. The Fund does not intend to pay 12b-1 fees with
respect to the Retail A Shares for the current fiscal year. The Fund does not
intend to pay more than 0.75% in 12b-1 fees with respect to the Retail B Shares
for the current fiscal year.
<F5> "Other Expenses" is based on estimated amounts for the current fiscal
year, and includes (1) estimated administration fees, transfer agency fees and
all other ordinary operating expenses of the Fund not listed above and (2) for
the Retail A and Retail B Shares, the payment of a Shareowner Servicing fee to
institutions under a Service Plan (described below under "Management of the
Funds - Shareowner Organizations") equal to 0.25% of the average daily net
assets of the Fund's Retail A Shares and Retail B Shares.
<F6> As a result of the fee waiver set forth in note 4, the Total Annual Fund
Operating Expenses of the Retail A, Retail B and Institutional Shares of the
Fund are estimated to be 1.70%, 2.45% and 1.45%, respectively, for the current
fiscal year. Although the fee waiver is expected to remain in effect for the
current fiscal year, this waiver is voluntary and may be terminated at any time
at the option of the Adviser.
EXAMPLE
The following example is intended to help you compare the cost of investing in
the Fund (without the fee waivers) with the cost of investing in other mutual
funds. The example assumes that you invest $10,000 in the Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The example also assumes that your investment has a 5% return each
year and that the Fund's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs would
be:
1 Year 3 Years
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Retail A Shares. $658 $1,093
Retail B Shares
Assuming complete redemption
at end of period 793 1,198
Assuming no redemption....... 293 898
Institutional.................. 193 597
Retail B Shares convert to Retail A Shares six years after purchase; therefore
Retail A Shares expenses are used in the hypothetical example after year six.
In addition to the compensation itemized above, shareowner organizations may
charge fees for providing services in connection with their clients' investments
in a Fund's shares.
TYPES OF INVESTMENT RISK
The principal risks of investing in the Fund are described previously in
this Prospectus. The following list provides more detail about some of those
risks, along with information on additional types of risks which may apply to
the Fund. Risks associated with particular types of investments the Fund makes
are described in this section and in the Additional Statement referred to on the
back page.
GENERAL RISKS OF INVESTING IN THE FUND
Complete Investment Program
An investment in a single Fund, by itself, does not constitute a complete
investment plan.
Liquidity Risk
Certain securities may be difficult or impossible to sell at the time and price
that the Fund would like. The Fund may have to lower the price, sell other
securities instead or forego an investment opportunity, any of which could have
a negative effect on fund management or performance. This risk applies, for
example, to: variable and floating rate demand notes, variable amount demand
securities and restricted securities which the Fund may purchase and the futures
contracts in which the Fund may engage. Illiquid securities also include
repurchase agreements and time deposits with notice/termination dates of greater
than seven days and certain unlisted over-the-counter options and other
securities traded in the U.S. but are subject to trading restrictions because
they are not registered under the Securities Act of 1933. There may be no
active secondary market for these securities. The Fund may invest up to 15% of
its net assets at the time of purchase in securities that are illiquid. A
domestically traded security which is not registered under the Securities Act of
1933 will not be considered illiquid if the Adviser determines an adequate
investment trading market exists for that security. Because illiquid and
restricted securities may be difficult to sell at an acceptable price, they may
be subject to greater volatility and may result in a loss to the Fund.
Loss of Money
An investment in the Fund is not a deposit of Firstar Bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. An investment in the Fund involves risk, including the risk of losing
money.
Management Risk
A strategy which the Adviser or Sub-Adviser uses may fail to produce the
intended results. The particular securities and types of securities the Fund
holds may underperform other securities and types of securities. There can be
no assurance the Fund will achieve its investment objective. Certain policies of
the Fund, which may not be changed without a shareowner vote, are described in
the Additional Statement.
Other Types of Investments
This Prospectus describes the Fund's principal investment strategies, and the
types of securities in which the Fund principally invests. The Fund may, from
time to time, make other types of investments and pursue other investment
strategies in support of its overall investment goal. These supplemental
investment strategies - and the risk involved - are described in detail in the
Additional Statement, which is referred to on the back cover of this Prospectus.
Portfolio Turnover Risk
The Sub-Adviser will not consider the portfolio turnover rate a limiting factor
in making investment decisions for the Fund. A high rate of portfolio turnover
(100% or more) involves correspondingly greater expenses which must be borne by
the Fund and its shareowners. It may also result in higher short-term capital
gains taxable to shareowners.
Temporary Investment Risk
The Fund may, for temporary defensive purposes, invest a percentage of its total
assets, without limitation, in cash or various short-term instruments. This may
occur for example, when the Fund is attempting to respond to adverse market,
economic, political or other conditions. In particular, the Fund may invest in
money market securities denominated in U.S. or foreign currency. When the
Fund's assets are invested in these instruments, the Fund may not be achieving
its investment objective.
Valuation Risk
This is a risk that the Fund has valued certain securities at a higher or lower
price than the Fund can sell them.
Year 2000 Risk
Like other investment companies and financial service providers, the Fund could
be adversely affected if the computer systems used by its investment adviser
(and sub-adviser) and the Fund's other service providers do not properly process
and calculate date-related information and data beginning on January 1, 2000.
This possibility is commonly known as the "Year 2000 Problem." The Year 2000
Problem arises because most computer systems were designed only to recognize a
two-digit year, not a four-digit year. When the year 2000 begins, these
computers may interpret "00" as the year 1900 and either stop processing date-
related computations or process them incorrectly. These failures could have a
negative impact on the handling of securities trades, pricing and account
services. FIRMCO, the investment adviser to the Fund, The Glenmede Trust
Company, the investment sub-adviser to the Fund, and Firstar Corporation,
FIRMCO's parent company, are taking steps to address the Year 2000 Problem with
respect to the computer systems they use and are working with those entities
with which they have business relationships which may impact the services
provided to the Fund to determine the status of their Year 2000 initiatives. As
of the date of this Prospectus, it is not anticipated shareowners will
experience negative effects on their investment, or on the services provided in
connection therewith, as a result of the Year 2000 Problem relating to the
investment adviser or the Fund's other major service providers; however, there
can be no assurance that these steps taken by these service providers will be
successful, or that interaction with other non-complying computer systems will
not adversely impact the Fund. Also, companies in which the Fund invests could
be adversely affected by the Year 2000 Problem. Also, it is possible that the
normal operations of the Fund will, in any event, be disrupted significantly by
the failure of communications and public utility companies, governmental
entities, financial processors or others to perform their services as a result
of the Year 2000 Problem.
European Currency Unification
Many European countries have adopted a single European currency, the euro. On
January 1, 1999, the euro became legal tender for all countries participating in
the Economic and Monetary Union ("EMU"). A new European Central Bank has been
created to manage the monetary policy of the new unified region. On the same
date, the exchange rates were irrevocably fixed between the EMU member
countries. National currencies will continue to circulate until they are
replaced by euro coins and bank notes by the middle of 2002.
This change is likely to significantly impact the European capital markets in
which the Fund invests and may result in the Fund facing additional risks in
pursuing its investment objective. These risks, which include, but are not
limited to, uncertainty as to proper tax treatment of the currency conversion,
volatility of currency exchange rates as a result of the conversion, uncertainty
as to capital market reaction, conversion costs that may affect issuer
profitability and creditworthiness, and lack of participation by some European
countries, may increase the volatility of the Fund's net asset value per share.
Foreign Risks
When a Fund invests in foreign securities, it will be subject to special risks
not typically associated with domestic issuers resulting from less government
regulation, less public information and less economic, political and social
stability. Foreign securities and, in particular, foreign debt securities are
sensitive to changes in interest rates. In addition, investment in securities
of foreign governments involves the risk that foreign governments may default on
their obligations or may otherwise not respect the integrity of their debt. The
Fund will also be subject to the diplomatic risk that an adverse change in the
diplomatic relations between the U.S. and another country might reduce the value
or liquidity of investments. Future political and economic developments, the
possible imposition of withholding taxes on dividend income, the possible
seizure or nationalization of foreign holdings, the possible establishment of
exchange controls or freezes on the convertibility of currency, or the adoption
of other governmental restrictions might adversely affect an investment in
foreign securities. Additionally, foreign banks and foreign branches of domestic
banks may be subject to less stringent reserve requirements, and to different
accounting, auditing and recordkeeping requirements.
Foreign risks will normally be greatest when the Fund invests in issuers located
in emerging markets. Securities issued in emerging market countries, in
particular, may be more sensitive to certain economic changes and less liquid.
These countries are located in the Asia/Pacific region, Eastern Europe, Latin
and South America and Africa. In general, the securities markets of these
countries are less liquid, are subject to greater price volatility, have smaller
market capitalizations and have problems with securities registration and
custody. In addition, because the securities settlement procedures are less
developed in these countries, the Fund may be required to deliver securities
without receiving payment and also be unable to complete transactions during
market disruptions. As a result of these and other risks, investments in these
countries generally present a greater risk of loss to the Fund.
Investment in foreign securities also involves higher costs than investment in
U.S. securities, including higher transaction and custody costs as well as the
imposition of additional taxes by foreign governments.
The Fund may invest in foreign currency denominated securities. A Fund which
invests in foreign currency denominated securities will also be subject to the
risk of negative foreign currency rate fluctuations. A change in the exchange
rate between U.S. dollars and foreign currency may reduce the value of an
investment made in a security denominated in that foreign currency. The Fund
may hedge against foreign currency risk but is not required to do so.
ADDITIONAL RISKS WHICH APPLY TO PARTICULAR TYPES OF SECURITIES
Other Investment Companies
The Fund may invest its cash balances in other investment companies which invest
in high quality, short-term debt securities. A pro rata portion of the other
investment companies' expenses will be borne by the Fund's shareowners.
Borrowings, Reverse Repurchase Agreements
The Fund may borrow money to the extent allowed (as described in the Additional
Statement) to meet shareowner redemptions from banks or through reverse
repurchase agreements. These strategies involve leveraging. If the securities
held by the Fund decline in value while these transactions are outstanding, the
net asset value of the Fund's outstanding shares will decline in value by
proportionately more than the decline in value of the securities. In addition,
reverse repurchase agreements involve the risks that the interest income earned
by the Fund (from the investment of the proceeds) will be less than the interest
expense of the transaction, that the market value of the securities sold by the
Fund will decline below the price the Fund is obligated to pay to repurchase the
securities, and that the securities may not be returned to the Fund.
INVESTING WITH FIRSTAR FUNDS
This section describes for you the procedures for opening an account and how to
buy, sell or exchange Fund shares.
SHARE CLASSES AVAILABLE
The Fund offers three classes of shares; Retail A, Retail B and Institutional.
INSTITUTIONAL SHARES
- No sales charge
- Available for;
- trust, agency or custodial accounts opened through Firstar Bank,
Milwaukee, N.A.;
- employer-sponsored qualified retirement plans other than those
serviced by certain external organizations who have service
agreements with Firstar or its affiliates, and other than plans
administered by Firstar with assets less than $1 million at the
time Firstar begins plan administration (but including plans
administered by Firstar which owned institutional shares prior
to June 18, 1999). Plans administered by Firstar with assets
less than $1 million at the time Firstar begins plan
administration will become eligible for Institutional shares
when such plans grow to $1 million or greater as further described
in the Additional Statement;
- All clients of FIRMCO; and
- those purchasing through certain broker-dealers who have agreed to
provide certain services with respect to shares of the Funds,
including Waterhouse Securities, Inc. and Jack White, a division
of Waterhouse Securities, Inc. Check with your broker-dealer to see
if you qualify for institutional shares.
RETAIL A SHARES
- Initial sales charge of 4.50% or less
- No deferred sales charge
- Reduced sales charge for larger investments. See "Sales Charges and
Waivers" for more information
- Available to any investor who does not qualify to purchase Institutional
shares
RETAIL B SHARES
- No initial sales charge
- Deferred sales charge - Maximum of 5% for redemptions during the first
year, 4% in the second year, 3% in the third and fourth years, 2% in the
fifth year, 1% in the sixth year and 0% thereafter
- Converts to Retail A shares after six years
- Available to any investor who does not qualify to purchase Institutional
shares
A securities dealer, broker, financial institution or other industry
professional ("shareowner organization") may charge transaction or other fees
for providing administrative or other services in connection with investments in
Fund shares.
Sales Charges and Waivers
INITIAL SALES CHARGES - for Retail A Shares of the Fund:
The public offering price for Retail A Shares is the net asset value of the
Retail A Shares purchased plus any applicable front-end sales charge. A sales
charge will not be assessed on Retail A Shares purchased through reinvestment of
dividends or capital gains distributions. The sales charge is as follows:
<TABLE>
<CAPTION>
Amount of Transaction Sales Charge as a Sales Charge as Shareowner Organization
at Offering Price Percentage of Offering Percentage of Net Reallowances as a
Price Asset Value Percentage of Offering
<S> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00%
$100,000 to $249,999 3.75% 3.90% 3.25%
$250,000 to $499,999 2.50% 2.56% 2.00%
$500,000 to $749,999 2.00% 2.04% 1.50%
$750,000 to $999,999 1.00% 1.01% 0.50%
$1,000,000 and above 0.25% 0.25% 0.25%
</TABLE>
You only pay a sales charge when you buy shares. The Distributor may reallow the
entire sales charge to certain shareowner organizations and the amount reallowed
may change periodically. To the extent that 90% or more of the sales charge is
reallowed, shareowner organizations may be deemed to be underwriters under the
Act.
REDUCING YOUR SALES CHARGES AND WAIVERS - Retail A Shares
To qualify for a reduction of, or exception to the sales charge, you must notify
your shareowner organization or the Distributor at the time of purchase or
exchange. The reduction in sales charge is subject to confirmation of your
holdings through a check of records. The Company may modify or terminate
quantity discounts at any time.
WAIVERS - RETAIL A SHARES
You may purchase retail shares without a sales charge if:
(a) you are an employee, director, retiree or registered representative of
Firstar Corporation or its affiliates or of Firstar Funds, Inc.
(b) you are a spouse, parent, in-law, sibling or child of an individual who
falls within the preceding category (a) above
(c) you make any purchase for your medical savings account for which Firstar
Corporation or an affiliate serves in a custodial capacity
(d) you purchase through certain external organizations that have entered into
a service agreement with Firstar or its affiliates
(e) you are part of an employer-sponsored qualified retirement plan
administered by Firstar with assets less than $1 million at the time Firstar
begins plan administration which commenced administration by Firstar on or after
June 18, 1999
(f) you purchase through certain broker-dealers who have agreed to provide
certain services with respect to shares of the Funds, including Charles Schwab
Mutual Fund Marketplace/R. Check with your broker-dealer to see if you qualify
for this exemption.
REDUCING YOUR SALES CHARGES - RETAIL A SHARES
- - Right of Accumulation - Existing Equity, Balanced and Bond Fund shares can be
combined with new purchases for purposes of calculating reduced sales charges.
- - Letter of Intent - Fund shares purchased in a 13-month period qualify for the
same reduced sales charge as if all purchased at once. You may obtain a reduced
sales charge by means of a written Letter of Intent which expresses your non-
binding commitment to invest in the aggregate $100,000 or more in Retail A
Shares of an Equity, Balanced or Bond Fund within a period of 13 months. Any
investments you make during the period receive the discounted sales charge based
on the full amount of your investment commitment. The Additional Statement
includes details about the Letter of Intent.
For purposes of applying the Rights of Accumulation and Letter of Intent
privileges, the sales charge schedule applies to the combined purchases made by
any individual and/or spouse purchasing securities for his, her or their own
account, or the aggregate investments of a trustee or other fiduciary or IRA for
the benefit of the persons previously listed.
CONTINGENT DEFERRED SALES CHARGE - Retail B Shares
The public offering price for Retail B Shares is the net asset value of the
Retail B Shares purchased. Although investors pay no front-end sales charge on
purchases of Retail B Shares, such shares are subject to a contingent deferred
sales charge at the rates set forth below if they are redeemed within six years
of purchase.
The amount of any contingent deferred sales charge an investor must pay
depends on the number of years that elapse between the purchase date and the
date such Retail B Shares are redeemed. Solely for purposes of this
determination, all payments during a month will be aggregated and deemed to have
been made on the first day of the month.
Number of Years Contingent Deferred Sales Charge
Elapsed Since Purchase (as % of dollar amount subject to the charge)
- ----------------------- ---------------------------------------------
Less than one 5.00%
At least one but less than two 4.00%
At least two but less than three 3.00%
At least three but less than four 3.00%
At least four but less than five 2.00%
At least five but less than six 1.00%
At least six None
The contingent deferred sales charge on Retail B Shares is based on the lesser
of the net asset value of the shares on the redemption date or the original cost
of the shares being redeemed. As a result, no sales charge is imposed on any
increase in the net asset value of an investor's Retail B Shares. In addition,
a contingent deferred sales charge will not be assessed on Retail B Shares
purchased through reinvestment of dividends or capital gains distributions.
When a shareowner redeems his or her Retail B Shares, the redemption request is
processed to minimize the amount of the contingent deferred sales charge that
will be charged. Retail B Shares are redeemed first from those shares that are
not subject to a contingent deferred sales charge (that is, Retail B Shares that
were acquired through reinvestment of dividends or distributions or that qualify
for other deferred sales charge exemptions, if any) and after that from the
Retail B Shares that have been held the longest.
Shareowner organizations will recieve commissions in connection with sales
of Retail B Shares. A commission equal to 4% of the amount invested is paid to
authorized dealers.
The contingent deferred sales charge a shareowner may pay upon redemption
is remitted to the Distributor or other party, which may use such amounts to
defray the expenses associated with the distribution-related services involved
in selling Retail B Shares.
WAIVERS - RETAIL B SHARES
Certain types of redemptions may also qualify for an exemption from the
contingent deferred sales charge. If you think you may be eligible for a
contingent deferred sales charge waiver listed below, be sure to notify your
shareowner organization or the Distributor at the time Retail B Shares are
redeemed. The contingent deferred sales charge with respect to Retail B Shares
is not assessed on:
(i) exchanges described under "Exchange of Shares"
(ii) redemptions in connection with shares sold for certain retirement
distributions or because of disability or death.
(iii) redemptions effected pursuant to a Fund's right to liquidate a
shareowner's account if the aggregate net asset value of Retail B Shares held in
the account is less than the minimum account size set forth under "Redemption
of Shares - Other Transaction Information - Accounts Below the Minimum Balance";
(iv) redemptions in connection with the combination of a Fund with any other
investment company registered under the 1940 Act by merger, acquisition of
assets, or by any other transaction; or
(v) redemptions resulting from a certain tax-free return of an excess
contribution.
In addition to the foregoing exemptions, no contingent deferred sales charge
will be imposed on redemptions made pursuant to the Company's systematic
withdrawal plan. The Funds reserve the right to limit such redemptions without
a contingent deferred sales charge, on an annual basis, to 12% of the value of
your Retail B Shares on the redemption date. See the Additional Statement for
more information.
CONVERSION - RETAIL B SHARES
Retail B Shares will automatically convert into Retail A Shares of the same Fund
six years after the beginning of the calendar month in which the purchase date
occurred. If you acquire Retail B Shares of a Fund by exchange from Retail B
Shares of another Fund, your Retail B Shares will convert into Retail A Shares
of that Fund based on the date of the initial purchase.
If you acquire Retail B Shares through reinvestment of distributions, your
Retail B Shares will convert into Retail A Shares at the earlier of two dates -
either six years after the beginning of the calendar month in which the purchase
date occurred (based on the date of the initial purchase of the shares on which
the distribution was paid) or the date of conversion of the most recently
purchased Retail B Shares that were not acquired through reinvestment of
dividends or distributions. For example, if a shareowner makes a one-time
purchase of Retail B Shares of a Fund and subsequently acquires additional
Retail B Shares of that Fund only through reinvestment of dividends and/or
distributions, all of such shareowner's Retail B Shares of that Fund, including
those acquired through reinvestment, will convert to Retail A Shares of such
fund on the same date.
Upon conversion, the converted shares will be relieved of the distribution and
shareowner servicing fees borne by Retail B Shares, although they will be
subject to the shareowner servicing fees borne by Retail A Shares.
The conversion of Retail B Shares to Retail A Shares will not occur at any time
the Fund is advised that such conversions may constitute taxable events for
federal tax purposes, which the Fund believes is unlikely. If conversions do
not occur as a result of possible taxability, Retail B Shares would continue to
be subject to higher expenses than Retail A Shares for an indeterminate period.
REINSTATEMENT PRIVILEGE
If you sell shares of a Firstar Fund or Firstar Stellar Fund, you may reinvest
some or all of the proceeds in the Retail A Shares of any Firstar Fund within 60
days without a sales charge, as long as your investment professional is notified
before you reinvest. All accounts involved must have the same registration. You
may be subject to taxes as a result of a redemption. Consult your tax adviser
concerning the results of a redemption or reinvestment.
HOW TO DECIDE WHETHER TO BUY RETAIL A OR RETAIL B SHARES
The decision as to which type of Shares to purchase depends on the amount you
invest, the intended length of the investment and your personal situation.
Retail A Shares - If you are making an investment of an amount that qualifies
for a reduced sales charge, you may consider purchasing Retail A Shares.
Retail B Shares - If you plan to hold your investment for a significant period
of time and would prefer not to pay an initial sales charge, you might consider
purchasing Retail B Shares. By not paying a front-end sales charge, your entire
purchase in Retail B Shares is invested from the time you make your initial
investment; however, the distribution and service fee paid by Retail B Shares
will cause your Retail B Shares (until conversion to Retail A Shares) to have a
higher expense ratio and thus, lower performance and lower dividend payments (to
the extent dividends are paid) than Retail A Shares.
PURCHASING SHARES
Shares of the Fund are offered and sold on a continuous basis by the distributor
for the Fund, 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.
MINIMUM INVESTMENTS
RETAIL SHARES
The minimum initial investment for Retail Shares in the Fund is $1,000. The
minimum subsequent investment is $50. The minimum initial investment will be
waived if you participate in the Periodic Investment Plan.
INSTITUTIONAL SHARES
There is no minimum initial or subsequent investment for Institutional Shares.
BUYING SHARES
Purchase requests accompanied by a check or wire payment received by the
transfer agent before 3:00 p.m. Central time on a business day for the Fund will
be executed the same day, at that day's closing price provided that payment is
received by the close of regular trading hours. Orders received after 3:00 p.m.
Central time and orders for which payment is not received by the close of
regular trading hours on the New York Stock Exchange will be executed on the
next business day after receipt of both order and payment in proper form.
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
Through a - Contact your Shareowner - Contact your Shareowner
Shareowner Organization. Organization.
Organization
- -------------------------------------------------------------------------------
By Mail - Complete an application and - Make your check payable to
mail it along with a check Firstar Funds. Please
payable to Firstar Funds, include your sixteen-digit
P.O. Box 3011, Milwaukee, WI account number on your
53201-3011: check and mail it to the
For overnight delivery mail address at the left.
to; 615 E. Michigan St.,
Milwaukee, WI 53202.
- -------------------------------------------------------------------------------
Automatically - Call 1-800-677-FUND to obtain - Complete a Periodic
(Retail A and a purchase application, which Investment Plan Application
B Shares) includes information for a to automatically purchase
Periodic Investment Plan or more shares.
ConvertiFund/R Account.
- Open a ConvertiFund/R
account to automatically
invest proceeds from one
account to another account
of the Firstar Family of
Funds.
- -------------------------------------------------------------------------------
By Wire - Call 1-800-677-FUND prior to - Call 1-800-677-FUND prior
sending the wire in order to to sending the wire in order
obtain a confirmation number to obtain a confirmation
and to ensure prompt and number and to ensure prompt
accurate handling of funds. and accurate handling of
Ask your bank to transmit funds. Ask your bank to
immediately available funds transmit immediately
by wire in the amount of your available funds by wire as
purchase to: described at the left.
Firstar Bank Milwaukee,N.A. Please include your
ABA # 0750-00022 sixteen-digit account
Firstar Trust Department number. The Fund and its
Account # 112-952-137 transfer agent are not
for further credit to [name responsible for the
of Fund] [name/title on the consequences of delays
account]. resulting from the banking
The Fund and its transfer or Federal Reserve Wire
agent are not responsible for system, or from incomplete
the consequences of delays wiring instructions
resulting from the banking or
Federal Reserve Wire system,
or from incomplete wiring
instructions.
- -------------------------------------------------------------------------------
Internet - Not Available. - Use Firstar Funds Direct to
www.firstar exchange from another
funds.com Firstar Fund account with
the same registration
including name, address
and taxpayer ID number.
- Purchase additional shares
using an electronic funds
transfer from your banking
institution for payment.
- Call 1-800-677-FUND to
authorize this service.
- -------------------------------------------------------------------------------
By Telephone - Call 1-800-677-FUND to - Call 1-800-677-FUND to
Exchange exchange from another Firstar exchange from another
Fund account with the same Firstar Fund account with
registration including name, the same registration
address and taxpayer ID including name, address
number. and taxpayer ID number.
- -------------------------------------------------------------------------------
Please Note: All checks must be drawn on a bank located within the United States
and must be payable in U.S. dollars to Firstar Funds. A $25 fee will be imposed
by the Funds' transfer agent if any check used for investment in an account does
not clear, and the investor involved will be responsible for any loss incurred
by the Fund. Prior to the transfer agent receiving a completed application,
investors may make an initial investment; however, redemptions will not be paid
until the transfer agent has received the completed application.
Additional Information on Buying Shares
The Fund will not accept payment in cash or third party checks for the purchase
of shares.
Federal regulations require that each investor provide a Social Security number
or other certified 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.
Payment for shares of the Fund in the amount of $1,000,000 or more may, at the
discretion of the Adviser, be made in the form of securities that are
permissible investments for the Fund.
The Fund may authorize one or more brokers and other shareowner organizations to
accept on their behalf purchase, redemption and exchange orders, and may
authorize such shareowner organizations to designate other intermediaries to
accept purchase, redemption and exchange orders on the Funds' behalf. In these
cases, a Fund will be deemed to have received an order when an authorized
shareowner organization or intermediary accepts the order, and customer orders
will be priced at the Fund's net asset value next computed after they are
accepted by a shareowner organization or intermediary. Shareowner organizations
and intermediaries will be responsible for transmitting accepted orders to the
Fund within the period agreed upon by them. Shareowners should contact their
shareowner organization or intermediaries to learn whether they are authorized
to accept orders for Funds.
It is the responsibility of shareowner organizations to transmit orders and
payment for the purchase of shares by their customers to the transfer agent on a
timely basis and to provide account statements in accordance with the procedures
previously stated.
For Owners of Institutional Shares:
All share purchases are effected pursuant to a customer's account at Firstar
Bank Milwaukee, N.A. Trust Department ("Firstar Trust") or at another chosen
institution or broker-dealer 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 shareowner organizations
involved. Firstar Trust and the other shareowner organizations or their
nominees 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
shareowner organizations. Investors wishing to purchase shares of the Funds
should contact their account representatives.
In the case of participants in certain employee benefit plans investing in
certain Funds, purchase and redemption orders will be processed on a particular
day based on whether a service organization acting on their behalf received the
order by the close of regular trading on that day.
REDEEMING SHARES
SELLING SHARES
Redemption requests received by the transfer agent before 3:00 p.m. Central time
on a business day for the Fund will be executed the same day, at that day's
closing price. Orders received after 3:00 p.m. Central time will be executed on
the next business day.
- -------------------------------------------------------------------------------
Through a - Contact your Shareowner Organization
Shareowner
Organization
- -------------------------------------------------------------------------------
By Phone - Call 1-800-677-FUND with your account name, sixteen digit
account number and amount of redemption (minimum $500).
Redemption proceeds will only be sent to a shareowner's
address or bank account of a commercial bank located
within the United States as shown on the transfer agent's
records. (Available only if telephone redemptions have
been authorized on the account application and if there
has been no change of address by telephone within the
preceding 15 days).
- -------------------------------------------------------------------------------
By Mail - Mail your instructions to the Firstar Funds, P.O. Box
3011, Milwaukee, WI 53201-3011 (via overnight delivery to
615 E. Michigan Street, Milwaukee, WI 53202). Include the
number of shares or the amount to be redeemed, your
sixteen-digit account number and Social Security number or
other taxpayer identification number. Your instructions
must be signed by all persons required to sign for
transactions exactly as their names appear on the account.
If the redemption amount exceeds $50,000, or if the
proceeds are to be sent elsewhere than the address of
record, or the address of record has been changed by
telephone within the preceding 15 days, each signature
must be guaranteed in writing by either a commercial bank
that is a member of the FDIC, a trust company, a credit
union, a savings association, a member firm of a national
securities exchange or other eligible guarantor
institution.
- -------------------------------------------------------------------------------
Internet - Use Firstar Funds Direct to redeem up to $25,000. Call
www.firstar 1-800-677-FUND to authorize this service.
funds.com
- -------------------------------------------------------------------------------
Automatically - Call 1-800-677-FUND for a Systematic Withdrawal Plan
application ($5,000 account minimum and $50 minimum per
transaction).
- -------------------------------------------------------------------------------
Guarantees must be signed by an eligible guarantor institution and "Signature
Guaranteed" must appear with the signature.
The Fund may require additional supporting documents for redemptions made by
corporations, executors, administrators, trustees and guardians. A redemption
request will not be deemed to be properly received until the transfer agent
receives all required documents in proper form. Purchases of additional shares
concurrently with withdrawals could be disadvantageous because of the sales
charge involved in the additional purchases.
ADDITIONAL TRANSACTION INFORMATION
Telephone Requests
In order to arrange for telephone redemptions after you have opened your account
or to change the bank or account designated to receive redemption proceeds, send
a written request to the Firstar Mutual Fund Services, LLC or contact your
registered representative. Each shareowner of the account must sign the
request. The Funds may request further documentation from corporations,
executors, administrators, trustees and guardians.
The Funds reserve the right to refuse a telephone redemption if they believe it
is advisable to do so. Procedures for redeeming shares by telephone may be
modified or terminated by the Funds at any time upon notice to shareowners.
During periods of substantial economic or market change, telephone redemptions
may be difficult to implement. If a shareowner is unable to contact the
transfer agent by telephone, shares may also be redeemed by delivering the
redemption request to the transfer agent.
In an effort to prevent unauthorized or fraudulent purchase and redemption
requests by telephone, Firstar employs reasonable procedures to confirm that
such instructions are genuine. Among the procedures used to determine
authenticity, investors electing to transact by telephone will be required to
provide their account number (unless opening a new account). All telephone
transactions will be recorded and confirmed in writing. 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 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.
Certificates
Certificates are only issued upon shareowner request. If certificates have been
issued, the transfer agent must receive the certificates, properly endorsed or
accompanied by a properly executed stock power and accompanied by signature
guarantees, prior to a redemption request.
Additional Redemption Information
The Fund will make payment for redeemed shares typically within one or two
business days, but no later than the seventh day after receipt by the transfer
agent of a request in proper form, except as provided by SEC rules. HOWEVER, IF
ANY PORTION OF THE SHARES TO BE REDEEMED REPRESENTS AN INVESTMENT MADE BY CHECK,
THE FUND WILL DELAY THE PAYMENT OF THE REDEMPTION PROCEEDS UNTIL THE TRANSFER
AGENT IS REASONABLY SATISFIED THAT THE CHECK HAS BEEN COLLECTED, WHICH MAY TAKE
TWELVE DAYS FROM THE PURCHASE DATE. An investor must have filed a purchase
application before any redemption requests can be paid.
Accounts Below the Minimum Balance
If your account falls below $1,000, the Fund may redeem your account. The Funds
will impose no charge and will give you sixty days written notice prior to any
redemption. The Funds may also redeem shares involuntarily if it is appropriate
to do so to carry out the Funds' responsibilities under the 1940 Act and, in
certain cases, may make payment for redemption in securities. Investors would
bear any brokerage or other transaction costs incurred in converting the
securities so received to cash. See the Additional Statement referred to on the
last page for examples of when such redemptions might be appropriate.
EXCHANGING OF SHARES
You may exchange your shares for Money Market Fund shares (except that Retail B
shares are not exchangeable for Institutional Money Market Fund shares) or for
shares of other Firstar Funds within the same share class if you are eligible to
purchase the class at the time of the exchange. Unless you qualify for a sales
charge exemption, an initial sales charge will be imposed on the exchange if the
shares of the Fund being acquired have an initial sales charge and the shares
being redeemed were purchased without a sales charge. Retail B shares acquired
in an exchange will be subject to a contingent deferred sales charge upon
redemption in accordance with this prospectus. For purposes of computing the
contingent deferred sales charge, the length of time of ownership will be
measured from the date of the original purchase of Retail B shares.
Telephone exchange privileges automatically apply to each shareowner of record
unless the transfer agent receives written instructions canceling the privilege.
Firstar reserves the right to terminate the exchange privilege of any party who
requests more than four exchanges within a calendar year. Firstar may do so
with prior notice based on a consideration of both the number of exchanges 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.
For federal income tax purposes, an exchange of shares is a taxable event and,
accordingly, an investor may realize a capital gain or loss. 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; however, Firstar reserves the right
to impose a charge in the future. In addition, shareowner organizations may
charge a fee for providing administrative or other services in connection with
exchanges. The Fund reserves 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. Also keep in mind:
- -- Exchanges are available only in states where exchanges may be legally made.
- -- The minimum amount which may be exchanged is $1,000.
- -- If any portion of the shares to be exchanged represents an investment made by
check, the Fund will delay the acquisition of new shares in an exchange until
the transfer agent is reasonably satisfied that the check has been collected,
which may take up to twelve days from the purchase date.
- -- It may be difficult to make telephone exchanges in times of drastic economic
or market changes.
Additional Shareowner Services
Shareowner Reports
Shareowners will be provided with a report showing portfolio investments and
other information at least semiannually; and after the close of the Fund's
fiscal year with an annual report containing audited financial statements. To
eliminate unnecessary duplication, only one copy of shareowner reports will be
sent to shareowners with the same mailing address. Shareowners may request
duplicate copies free of charge.
Account statements will be mailed after each purchase, reinvestment of dividends
and redemption. Statements of accounts shall be conclusive if not objected to in
writing within 10 Days after transmitted by mail. Generally, the Fund does not
send statements for funds held in brokerage, retirement or other similar
accounts.
Firstar Funds Website (www.firstarfunds.com)
The site offers educational information and interactive financial planning tools
as well as product-specific information.
Generally, Shareowners can request purchases, exchanges and redemptions of Fund
shares online via the Internet after an account is opened. Redemption requests
of up to $25,000 will be accepted through the Internet. Payment for shares
purchased online must be made by electronic funds transfer from your banking
institution. To authorize this service, call Firstar Mutual Fund Services, LLC
at 1-800-677-FUND.
Firstar Funds and their agents will not be responsible for any losses resulting
from unauthorized online transactions when procedures are followed which are
designed to confirm that the online 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 online. If this happens, you may
initiate transactions in your share accounts by mail or as otherwise described
in the prospectus.
Automated Teleresponse Service
Shareowners using a touch-tone/R telephone can access information on the Fund 24
hours a day, seven days a week. When calling Firstar Mutual Fund Services, LLC
at 1-800-677-FUND, shareowners may choose to use the automated information
feature or, during regular business hours (8:00 a.m. to 7:00 p.m. Central time,
Monday through Friday), speak with a Firstar representative.
Retirement Plans
The Fund offers individual retirement accounts including SIMPLE and SEP IRAs.
For details concerning Retirement Accounts (including service fees), please call
Firstar Funds Center at 1-800-677-FUND.
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAXES
Dividends and Capital Gains Distributions
- -----------------
Reinvested
dividends and
distributions
receive the
same tax
treatment as
those paid in
cash.
- -----------------
Dividends from net investment income of the Fund are declared and paid annually.
Any capital gains are distributed annually. A shareowner's dividends and capital
gains distributions will be reinvested automatically in additional shares unless
the Fund is notified that the shareowner elects to receive distributions in
cash.
If a shareowner has elected to receive dividends and/or capital gain
distributions in cash and the postal or other delivery service is unable to
deliver checks to shareowner's address of record, such shareowner's distribution
option will automatically be converted to having all dividend and other
distributions reinvested in additional shares. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.
Federal Taxes
The Fund contemplates declaring as dividends each year all, or substantially
all, of its taxable income, including its net capital gain (the excess of long
term capital gain over short-term capital loss). You will be subject to income
tax on these distributions regardless of whether they are paid in cash or
reinvested in additional shares. Distributions attributable to the net capital
gain of the Fund will be taxable to you as long-term capital gain, regardless of
how long you have held your shares. Other Fund distributions will generally be
taxable as ordinary income. You will be notified annually of the tax status of
distributions to you.
You should note that if you purchase shares just prior to a capital gain
distribution, the purchase price will reflect the amount of the upcoming
distribution, but you will be taxable on the entire amount of the distribution
received, even though, as an economic matter, the distribution simply
constitutes a return of capital. This is known as "buying into a dividend."
You will recognize taxable gain or loss on a sale, exchange or redemption of
your shares, including an exchange for shares of another Fund, based on the
difference between your tax basis in the shares and the amount you receive for
them. (To aid in computing your tax basis, you generally should retain your
account statements for the periods during which you held shares.) Any loss
realized on shares held for six months or less will be treated as a long-term
capital loss to the extent of any capital gain dividends that were received on
the shares.
The one major exception to these tax principles is that distributions on, and
sales, exchanges and redemptions of, shares held in an IRA (or other tax-
qualified plan) will not be currently taxable.
It is expected that the Fund will be subject to foreign withholding taxes with
respect to dividends or interest received from sources in foreign countries.
The Fund may make an election to treat a proportionate amount of such taxes as
constituting a distribution to each Shareowner, which would allow each
Shareowner either (1) to credit such proportionate amount of taxes against U.S.
federal income tax liability or (2) to take such amount as an itemized
deduction.
The foregoing is only a summary of certain tax considerations under current law,
which may be subject to change in the future. You should consult your tax
adviser for further information regarding federal, state, local and/or foreign
tax consequences relevant to your specific situation.
State and Local Taxes
Shareowners may also be subject to state and local taxes on distributions and
redemptions. State income taxes may not apply, however, to the portions of the
Fund's distributions, if any, that are attributable to interest on Federal
securities or interest on securities of the particular state. Shareowners
should consult their tax advisers regarding the tax status of distributions in
their state and locality.
MANAGEMENT OF THE FUNDS
Advisory Services
FIRMCO, a Wisconsin Limited Liability Company and subsidiary of Firstar
Corporation, a bank holding company, serves as investment adviser to the Fund.
FIRMCO, with principal offices at Firstar Center, 777 East Wisconsin Avenue, 8th
Floor, Milwaukee, Wisconsin 53202, has provided investment advisory services
since 1986. FIRMCO currently has $25.1 billion in assets under management.
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 investment objective and policies of the Fund, the Adviser is
responsible for the Fund's investment program, general investment criteria, and
policies.
The Adviser has retained The Glenmede Trust Company ("Glenmede") as Sub-Adviser
for the Core International Equity Fund. Glenmede is a limited purpose trust
company chartered in 1956, with principal offices at One Liberty Place, 1650
Market Street, Suite 1200, Philadelphia, Pennsylvania 19103. Glenmede currently
has over $14.4 billion in assets in the accounts for which it serves in various
capacities including as executor, trustee or investment advisor. 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.
The Sub-Adviser 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 Sub-Adviser
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 will receive from the Fund a fee, calculated daily and payable
monthly, at the annual rates (as a percentage of the Fund's average daily net
assets) of 1.25% on the Fund's first $50 million and 1.05% of the Fund's average
daily net assets in excess of $50 million.
The Sub-Adviser is entitled to a fee, payable by the Adviser, for its services
and expenses incurred with respect to the 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): 0.50% on the Fund's first $50 million and 0.30% of
the Fund's average daily net assets in excess of $50 million.
Fund Manager
Andrew B. Williams manages the Fund for the Sub-Adviser. Mr. Williams
joined the Sub-Adviser in 1985 and is a Senior Vice President of Glenmede.
Performance History
The Firstar Core International Equity Fund is managed by Andrew B.
Williams of The Glenmede Trust Company. Mr. Williams 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 Glenmede
International Portfolio (the "Glenmede Fund"). The Glenmede Fund has been
managed by Mr. Williams since November 17, 1988.
Shares of the Glenmede Fund do not bear a sales load. Retail A Shares of
the Firstar Core International Equity Fund bear a maximum front-end sales load
of 4.50% and Retail B Shares of the Firstar Core International Equity Fund bear
a maximum contingent deferred sales load of 5.00%.
The following table sets forth the performance of the Glenmede Fund for
the periods represented, and also sets forth that performance adjusted to
reflect the maximum sales loads applicable to the Firstar Core International
Equity Fund.
GLENMEDE FUND PERFORMANCE
Average Annual Total Return
Five Ten
One Year Years Years
Ended Ended Ended
9/30/99 9/30/99 9/30/99
Glenmede Fund
Glenmede Fund
(w/Retail A Load)
Glenmede Fund
(w/ Retail B Load)
MSCI EAFE/R Index
The MSCI EAFE/R Index is an unmanaged capitalization weighted composite
portfolio consisting of equity total returns of companies in Australia, New
Zealand, Europe and the Far East. Investors cannot invest directly in the
index.
During the period October 1, 1989 through September 30, 1999, the
expense ratio of the Glenmede Fund ranged between 0.14% and 0.13% of the Fund's
average net assets, [and no fees were waived]. During the period October 1,
1989 through September 30, 1999, management fees for the Glenmede Fund ranged
between and of the Fund's average net assets, [and no fees were
--- ----
waived]. [In the absense of fee waivers, performance would be reduced.]
These fees were paid directly to The Glenmede Trust Company and are
not reflected in the Glenmede Fund's expense ratio or in the performance chart
above. The expense ratio of the Firstar Core International Equity Fund for the
current fiscal year is anticipated to be 1.70% of the Fund's average net assets
for Retail A Shares, 2.45% of average net assets for Retail B Shares, and
1.45% of average net assets for Institutional Shares (2.15%, 2.90%, and 1.90%,
respectively, without waivers).
Performance quotations of the Glenmede Fund represent past performance
of the Glenmede Fund, which is separate and distinct from the Firstar Core
International Equity Fund; do not represent past performance of the Core
International Equity Fund; and should not be considered as representative of
future results of the Core International Equity Fund.
Performance assumes the reinvestment of all net investment income and capital
gains and reflects fee waivers.
Administrative Services
Firstar Mutual Fund Services, LLC and B. C. Ziegler and Company
("Ziegler") serve as the Co-Administrators (the "Co-Administrators") and
receive fees for those services.
Shareowner Organizations - Retail A and B Shares
The Fund has adopted distribution and service plans for the Retail A and
Retail B shares. Under the distribution and service plans, the Fund may pay
distribution fees for the sale and distribution of its shares and service fees
for shareowner services. These fees are regulated by Rule 12b-1 under the
Investment Company Act of 1940 and are subject to the NASD Conduct Rules.
Because these fees are paid out of the Fund's assets on an ongoing basis, over
time, these fees will increase the cost of your investment and may cost you
more than paying other types of sales charges.
The Fund also has adopted service plans for the Retail A and B shares,
under which the Fund may pay service fees for shareowner services to Retail A
and B shareowners.
For their services with respect to the Retail A shares, shareowner
organizations may be entitled to receive fees from the Fund at an annual rate
of up to 0.25% of the average daily net asset value of the shares covered by
their agreement for distribution and/or shareowner support services. Under
the distribution and service plan for the Retail B shares, the Distributor is
entitled to receive fees at an annual rate of up to 0.75% of the average daily
net asset value of the Retail B shares for distribution services with respect
to the Retail B shares. For their services with respect to the Retail B
shares, shareowner organizations may be entitled to receive fees from the Fund
at an annual rate of up to 0.25%, and 0.25% of the average daily net asset
value of the shares covered by their agreement, respectively, for shareowner
liaison under the distribution and service plan and for other support services
under the service plan (as described below).
Under these Plans, the Fund may enter into agreements with shareowner
organizations, including affiliates of the Adviser (such as FIS). The
shareowner organizations are required to provide a schedule of any fees that
they may charge to their customers relating to the investment of their assets in
shares covered by the agreements. Investors should read this Prospectus in
light of such fee schedules and under the terms of their shareowner
organization's agreement with Firstar. In addition, investors should contact
their shareowner organizations with respect to the availability of shareowner
services and the particular shareowner organization's procedures for purchasing
and redeeming shares. It is the responsibility of shareowner organizations to
transmit purchase and redemption orders and record those orders in customers'
accounts on a timely basis in accordance with their agreements with customers.
The Fund makes no payments to its Distributor under the Plans for the
Retail A shares or under the service plan for the Retail B shares. The Fund
makes payments to its Distributor under the distribution and service plan for
distribution services with respect to the Retail B shares. Payments to
shareowner organizations, including affiliates of the Adviser, under the plans,
and to the Distributor under the distribution and service plan for the Retail B
shares are not tied directly to their own out-of-pocket expenses and therefore
may be used as they elect (for example, to defray their overhead expenses), and
may exceed their direct and indirect costs.
Shareowner organizations will provide support and/or, in the case of the
distribution and service plan for the Retail A shares, distribution services to
their customers who are the shareowners of the Fund. Under the Service
Agreements, shareowner support services may include:
- - assisting investors in processing purchase, exchange and redemption requests
- - processing dividend and distribution payments from the Fund
- - providing information periodically to customers showing their positions in
Fund shares
- - providing sub-accounting
- - forwarding sales literature and advertising
Shareowner liaison services may include responding to customers' inquires
and providing information on their investments, and other personal and account
maintenance services within NASD Rules.
The Glass-Steagall Act and other applicable laws, among other things,
prohibit banks from engaging in the business of underwriting securities.
Accordingly, banks will be engaged under agreements with Firstar only to perform
the administrative and investor servicing functions described above, and will
represent to Firstar that in no event will the services provided by them under
the agreements be primarily intended to result in the sale of Fund shares.
Conflict-of-interest restrictions may apply to the receipt of compensation
paid by Firstar to a shareowner organization in connection with the investment
of fiduciary funds in Fund shares. Institutions, including banks regulated by
the Comptroller of the Currency and investment advisers and other money managers
subject to the jurisdiction of the SEC, the Department of Labor or state
securities commissions, are urged to consult legal counsel before entering into
agreements with Firstar.
Custodian, Transfer and Dividend Disbursing Agent, and Accounting Services Agent
Firstar Mutual Fund Services, LLC, an affiliate of the Adviser, provides
transfer agency, dividend disbursing agency and accounting services for the
Fund and receives fees for these services. Inquiries to the transfer agent may
be sent to: Firstar Mutual Fund Services, LLC, P.O. Box 3011, Milwaukee,
Wisconsin 53201-3011. Firstar Bank, Milwaukee, N.A., an affiliate of the
Adviser, provides custodial services for the Fund and receives fees for those
services.
NET ASSET VALUE AND DAYS OF OPERATION
The price of the Retail A, Retail B and Institutional shares (each, a
"class") is based on net asset value per share. This amount is calculated
separately for each class of shares by dividing the value of all securities and
other assets attributable to the class, less the liabilities attributable to
that class, by the number of outstanding shares of that class. The price at
which a purchase or redemption is effected is based on the next calculation of
net asset value after the order is accepted.
Net asset value 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.
The Fund's investments are valued based on market quotations, except that
restricted securities and 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.
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. The Fund's foreign securities may trade on weekends or other days
when the Fund does not price its shares. Accordingly, the net asset value per
share of the Fund may change on days when shareowners will not be able to
purchase or redeem the Fund's shares.
The Fund's securities may be valued based on valuations provided by an
independent pricing service. The Adviser reviews these valuations. 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 CORE 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 FUND'S ADDITIONAL
STATEMENT 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 FUND OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR BY
ITS DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
FOR MORE INFORMATION
STATEMENT OF ADDITIONAL INFORMATION
Additional information about the Funds and their policies is also available in
the Funds' Statement of Additional Information ("Additional Statement"). The
Additional Statement is incorporated by reference into this Prospectus (and is
legally considered part of this Prospectus).
The Funds' Additional Statement is available free upon request by calling
Firstar Funds at 1-800-677-FUND or 1-414-287-3808.
To obtain other information and for shareowner inquiries:
By telephone - call 1-800-677-FUND or 1-414-287-3808
By mail - Firstar Funds, Inc., 615 East Michigan Street
P.O. Box 3011
Milwaukee, Wisconsin 53201-3011
By e-mail - [email protected]
------------------------
On the Internet - Text only version of the Funds' documents are located online
and may be downloaded from: SEC - http://www.sec.gov
------------------
You may review and obtain copies of Fund documents by visiting the SEC's Public
Reference Room in Washington, D.C. You may also obtain copies of Fund documents
by sending your request and a duplicating fee to the SEC's Public Reference
Section, Washington, D.C. 20549-6009. Information on the operation of the
public reference room may be obtained by calling the SEC at 1-800-SEC-0330.
The Fund's Investment Company Act File Number is 811-5380
xxxxxxx
Subject to Completion
October 18, 1999
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
FIRSTAR MIDCAP INDEX FUND
NOVEMBER , 1999
CONTENTS
Page
----
THE FUND
The fund's objective and strategy, principal
risks and expenses.
ADDITIONAL FUND INFORMATION
Types of Investment Risk
INVESTING WITH FIRSTAR FUNDS
Share Classes Available
Sales Charges and Waivers
Purchasing Shares
Buying Shares
Redeeming Shares
Exchanging Shares
Additional Shareowner Services
ADDITIONAL INFORMATION
Dividends, Capital Gains Distributions and Taxes
Management of the Fund
Net Asset Value and Days of Operation
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy and accuracy of this Prospectus. Any
representation to the contrary is a criminal offense.
An investment in the Fund involves investment risks, including the risk that you
may lose money.
THE FUND
OBJECTIVE
The investment objective of the 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 MidCap 400 Index. The
investment objective may be changed by the Board of Directors without approval
of Shareowners, although no change is currently anticipated.
PRINCIPAL INVESTMENT STRATEGIES
Under normal market conditions, the Fund intends to invest substantially
all of its total assets in securities included in the S&P MidCap 400 Index, and
in any event the Fund will invest at least 80% of its net assets in securities
included in that index. The Fund uses the S&P MidCap 400 Index as the standard
performance comparison because it is composed of 400 selected common stocks of
medium-size domestic companies with market capitalizations between approximately
$148 million and $13 billion.
The S&P MidCap 400 Index is an unmanaged, capitalization-weighted index of
common stocks representing all major industries in the mid-range of the U.S.
stock market.
Rather than using traditional methods of investment management, index funds
such as the Firstar MidCap Index Fund are managed 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 MidCap 400 Index.
The Fund does not expect to hold all of the stocks included in the S&P
MidCap 400 Index at any particular time; however, the Adviser believes it will
be able to construct and maintain the Fund's investment portfolio so that it
reasonably tracks the performance of the S&P MidCap 400 Index by using a
capitalization weighting and sector balancing technique.
The Adviser believes the quarterly performance of the Fund and the S&P MidCap
400 Index will be within +/-0.3% under normal market conditions. The Adviser
believes that through the application of a capitalization weighting and sector
balancing technique it will be able to construct and maintain the Fund's
investment portfolio so it reasonably tracks the performance of the S&P MidCap
400 Index. In the event the performance of the Fund is not comparable to the
performance of the S&P MidCap 400 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.
The Fund may invest in futures contracts.
PRINCIPAL RISKS
The following principal investment risks are described in more detail under
the heading "Types of Investment Risk." Some additional risks which apply to the
Fund are also described under that heading.
The Fund is subject to market risk. Market risk is the risk that the value
----------- -----------
of the securities in which the Fund invests may go up or down in response to the
prospects of individual companies and/or general economic conditions. Your
investment follows the mid-cap portion of the U.S. stock market, as measured by
the S&P MidCap 400 Index, during upturns as well as downturns. Because of its
indexing strategy, the Fund cannot take steps to reduce market volatility or to
lessen the effects of a declining market. Whenever mid-cap stocks perform less
than large- or small-cap stocks, the Fund may underperform funds that have
exposure to those segments. Further, the Fund will not necessarily dispose of a
security in response to adverse events affecting the issuer of a security (such
as adverse credit factors or failure to pay dividends).
If a large number of shareowners were to redeem shares, however, the
Adviser may be forced to reduce the number of issuers represented in the
portfolio. This could have an adverse effect on the accuracy with which the
Fund matches the performance of the S&P MidCap 400 Index.
The Adviser may be required to sell common stock if the issuer is
eliminated from the S&P MidCap 400 Index. Such sales may result in:
- lower prices, or
- losses that may not have been incurred if the Adviser did not have to
purchase or sell the securities.
The Fund's futures transactions involve derivatives risk. Derivatives risk
---------------- ----------------
is the risk of loss from transactions which may be more sensitive to or
otherwise not react in tandem with interest rate changes or market moves and may
be leveraged. Futures contracts could cause the Fund to track the Index less
closely if they don't perform as expected.
Standard & Poor's makes no representation or warranty regarding the
advisability of investing in index funds or the ability of the S&P MidCap 400
Index to track general stock market performance.
FEES AND EXPENSES OF THE FUND
- -----------------------------
This table describes the fees and expenses you may pay if you buy and hold
shares of the Fund.
INSTITUTIONAL RETAIL A RETAIL B
SHARES SHARES SHARES
------------- -------- --------
SHAREOWNER FEES (fees paid directly
from your investment)
Maximum Sales Charge (Load) Imposed
on Purchases (as a percentage of
offering price) .................. None 4.50% None
Maximum Deferred Sales Charge
(Load) (as a percentage of
offering price) ................... None None 5.00%<F1>
Maximum Sales Charge (Load) Imposed
on Reinvested Dividends ........... None None None
Redemption Fees .................... None<F2> None<F2> None<F2>
Exchange Fees ...................... None None None
- ------------------------------------------------------------------------------
Management Distribution Other Total Annual
Fees and Service Expenses Fund
<F3> (12b-1) Fees <F5> Operating
<F4> Expenses<F6>
ANNUAL FUND OPERATING
EXPENSES (expenses that
are deducted from Fund
assets)
Retail A 0.25% 0.00% 0.70% 0.95%
Retail B 0.25% 0.75% 0.70% 1.70%
Institutional 0.25% 0.00% 0.45% 0.70%
- -------------------------------------------------------------------------------
<F1>A contingent deferred sales charge is imposed on Retail B Shares redeemed
within six years of purchase at a rate of 5% in the first year, 4% in the second
year, 3% in the third and fourth years, 2% in the fifth year, declining to 1% in
the sixth year. Thereafter, Retail B Shares convert to Retail A Shares, which
do not bear a contingent deferred sales charge.
<F2>A fee of $12.00 is charged for each wire redemption (Retail Shares) and
$15.00 for each non-systematic withdrawal from a Retirement Account for which
Firstar Bank, Milwaukee, N.A. is custodian.
<F3>The Adviser has voluntarily agreed that a portion of its management fee will
not be imposed on the Fund during the current fiscal year. As a result of the
fee waiver, current management fees for the Fund are 0.05% of the Fund's average
daily net assets. This waiver is expected to remain in effect for the current
fiscal year; however, it is voluntary and can be modified or terminated at any
time without the Fund's consent.
<F4>The total of all 12b-1 fees and shareowner servicing fees may not exceed, in
the aggregate, the annual rate of 0.25% of the Fund's average daily net assets
for the Retail A Shares. The Fund does not intend to pay 12b-1 fees with
respect to the Retail A Shares for the current fiscal year. The Fund does not
intend to pay more than 0.75% in 12b-1 fees with respect to the Retail B Shares
for the current fiscal year.
<F5>"Other Expenses" is based on estimated amounts for the current fiscal year
and includes (1) estimated administration fees, transfer agency fees and all
other ordinary operating expenses of the Fund not listed above and (2) for the
Retail A and Retail B Shares, the payment of a Shareowner Servicing fee to
institutions under a Service Plan (described below under "Management of the
Funds _ Shareowner Organizations") equal to 0.25% of the average daily net
assets of the Fund's Retail A Shares and Retail B Shares.
<F6>As a result of the fee waiver set forth in note 4, the Total Fund Operating
Expenses of the Retail A, Retail B and Institutional Shares of the Fund are
estimated to be 0.75%, 1.50% and 0.50%, respectively, for the current fiscal
year. Although the fee waiver is expected to remain in effect for the current
fiscal year, this waiver is voluntary and may be terminated at any time at the
option of the Adviser.
EXAMPLE
The following example is intended to help you compare the cost of investing in
the Fund (without the fee waivers) with the cost of investing in other mutual
funds. The example assumes that you invest $10,000 in the Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The example also assumes your investment has a 5% return each year and
that the Fund's operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
1 Year 3 Years
------ -------
Retail A Shares $543 $739
Retail B Shares
Assuming complete redemption at
end of period 673 836
Assuming no redemption 173 536
Institutional 72 224
Retail B Shares convert to Retail A Shares six years after purchase; therefore,
Retail A Shares expenses are used in the hypothetical example after year six.
In addition to the compensation itemized above, shareowner organizations may
charge fees for providing services in connection with their clients' investments
in the Fund's shares.
TYPES OF INVESTMENT RISK
The principal risks of investing in the Fund are described previously in
this Prospectus. The following list provides more detail about some of those
risks, along with information on additional types of risks which may apply to
the Fund. Risks associated with particular types of investments the Fund makes
are described in this section and in the Additional Statement referred to on the
back page.
GENERAL RISKS OF INVESTING IN THE FUND
Complete Investment Program
An investment in a single Fund, by itself, does not constitute a complete
investment plan.
Derivatives Risk
The term derivative covers a wide number of investments, but in general it
refers to any financial instrument whose value is derived, at least in part,
from the price of another security or a specified index, asset or rate. Some
derivatives may be more sensitive to or otherwise not react in tandem with
interest rate changes or market moves, and some may be susceptible to changes in
yields or values due to their structure or contract terms. Loss may result from
the Fund's investments in options, futures, swaps, structured securities and
other derivative instruments which may be leveraged. The Fund may use
derivatives to: increase yield; hedge against a decline in principal value;
invest with greater efficiency and lower cost than is possible through direct
investment; adjust the Fund's duration; or provide daily liquidity.
Hedging is the use of one investment to offset the effects of another
investment. To the extent that a derivative is used as a hedge against an
opposite position that the Fund also holds, a loss generated by the derivative
should be substantially offset by gains on the hedged investment, and vice
versa. While hedging can reduce or eliminate losses, it can also reduce or
eliminate gains. Hedging also involves correlation risk - the risk that changes
in the value of a hedging instrument may not match those of the asset being
hedged.
To the extent that a derivative is not used as a hedge, the Fund is directly
exposed to the risks of that derivative. Gains or losses from speculative
positions in a derivative may be substantially greater than the derivative's
original cost.
Liquidity Risk
Certain securities may be difficult or impossible to sell at the time and price
that the Fund would like. The Fund may have to lower the price, sell other
securities instead or forego an investment opportunity, any of which could have
a negative effect on fund management or performance. This risk applies, for
example, to: variable and floating rate demand notes, variable amount demand
securities and restricted securities which the Fund may purchase and the futures
contracts in which the Fund may engage. Illiquid securities also include
repurchase agreements and time deposits with notice/termination dates of greater
than seven days and certain unlisted over-the-counter options and other
securities traded in the U.S. but are subject to trading restrictions because
they are not registered under the Securities Act of 1933. There may be no
active secondary market for these securities. The Fund may invest up to 15% of
its net assets at the time of purchase in securities that are illiquid. A
domestically traded security which is not registered under the Securities Act of
1933 will not be considered illiquid if the Adviser determines an adequate
investment trading market exists for that security. Because illiquid and
restricted securities may be difficult to sell at an acceptable price, they may
be subject to greater volatility and may result in a loss to the Fund.
Loss of Money
An investment in the Fund is not a deposit of Firstar Bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. An investment in the Fund involves risk, including the risk of losing
money.
Management Risk
A strategy which the Adviser uses may fail to produce the intended results. The
particular securities and types of securities the Fund holds may underperform
other securities and types of securities. There can be no assurance the Fund
will achieve its investment objective. Certain policies of the Fund, which may
not be changed without a shareowner vote, are described in the Additional
Statement.
Market Risk
The value of the securities in which the Fund invests may go up or down in
response to the prospects of individual companies and/or general economic
conditions. Price changes may be temporary or last for extended periods.
Other Types of Investments
This Prospectus describes the Fund's principal investment strategies, and the
types of securities in which the Fund principally invests. The Fund may, from
time to time, make other types of investments and pursue other investment
strategies in support of its overall investment goal. These supplemental
investment strategies - and the risk involved - are described in detail in the
Additional Statement, which is referred to on the back cover of this Prospectus.
Portfolio Turnover Risk
The Adviser will not consider the portfolio turnover rate a limiting factor in
making investment decisions for the Fund. A high rate of portfolio turnover
(100% or more) involves correspondingly greater expenses which must be borne by
the Fund and its shareowners. It may also result in higher short-term capital
gains taxable to shareowners.
Temporary Investment Risk
The Fund may, for temporary defensive purposes, invest a percentage of its total
assets, without limitation, in cash or various short-term instruments. This may
occur for example, when the Fund is attempting to respond to adverse market,
economic, political or other conditions. When the Fund's assets are invested in
these instruments, the Fund may not be achieving its investment objective.
Valuation Risk
This is a risk that the Fund has valued certain securities at a higher or lower
price than the Fund can sell them.
Year 2000 Risk
Like other investment companies and financial service providers, the Fund could
be adversely affected if the computer systems used by its investment adviser and
the Fund's other service providers do not properly process and calculate date-
related information and data beginning on January 1, 2000. This possibility is
commonly known as the "Year 2000 Problem." The Year 2000 Problem arises because
most computer systems were designed only to recognize a two-digit year, not a
four-digit year. When the year 2000 begins, these computers may interpret "00"
as the year 1900 and either stop processing date-related computations or process
them incorrectly. These failures could have a negative impact on the handling
of securities trades, pricing and account services. FIRMCO, the investment
adviser to the Fund, and Firstar Corporation, FIRMCO's parent company, are
taking steps to address the Year 2000 Problem with respect to the computer
systems they use and are working with those entities with which they have
business relationships which may impact the services provided to the Fund to
determine the status of their Year 2000 initiatives. As of the date of this
Prospectus, it is not anticipated shareowners will experience negative effects
on their investment, or on the services provided in connection therewith, as a
result of the Year 2000 Problem relating to the investment adviser or the Fund's
other major service providers; however, there can be no assurance that these
steps taken by these service providers will be successful, or that interaction
with other non-complying computer systems will not adversely impact the Fund.
Also, companies in which the Fund invests could be adversely affected by the
Year 2000 Problem. Also, it is possible that the normal operations of the Fund
will in any event, be disrupted significantly by the failure of communications
and public utility companies, governmental entities, financial processors or
others to perform their services as a result of the Year 2000 Problem.
Foreign Risks - to the extent the Fund invests in foreign securities
When the Fund invests in foreign securities, it will be subject to special risks
not typically associated with domestic issuers resulting from less government
regulation, less public information and less economic, political and social
stability. Foreign securities and, in particular, foreign debt securities are
sensitive to changes in interest rates. In addition, investment in securities
of foreign governments involves the risk that foreign governments may default on
their obligations or may otherwise not respect the integrity of their debt. The
Fund will also be subject to the diplomatic risk that an adverse change in the
diplomatic relations between the U.S. and another country might reduce the value
or liquidity of investments. Future political and economic developments, the
possible imposition of withholding taxes on dividend income, the possible
seizure or nationalization of foreign holdings, the possible establishment of
exchange controls or freezes on the convertibility of currency, or the adoption
of other governmental restrictions might adversely affect an investment in
foreign securities. Additionally, foreign banks and foreign branches of domestic
banks may be subject to less stringent reserve requirements, and to different
accounting, auditing and recordkeeping requirements.
Foreign risks will normally be greatest when the Fund invests in issuers located
in emerging markets. Securities issued in emerging market countries, in
particular, may be more sensitive to certain economic changes and less liquid.
These countries are located in the Asia/Pacific region, Eastern Europe, Latin
and South America and Africa. In general, the securities markets of these
countries are less liquid, are subject to greater price volatility, have smaller
market capitalizations and have problems with securities registration and
custody. In addition, because the securities settlement procedures are less
developed in these countries, the Fund may be required to deliver securities
without receiving payment and also be unable to complete transactions during
market disruptions. As a result of these and other risks, investments in these
countries generally present a greater risk of loss to the Fund.
Investment in foreign securities also involves higher costs than investment in
U.S. securities, including higher transaction and custody costs as well as the
imposition of additional taxes by foreign governments.
The Fund may invest in foreign currency denominated securities. A Fund which
invests in foreign currency denominated securities will also be subject to the
risk of negative foreign currency rate fluctuations. A change in the exchange
rate between U.S. dollars and foreign currency may reduce the value of an
investment made in a security denominated in that foreign currency.
Small Cap Stock Risk
Smaller capitalization stocks involve greater risks than those associated with
larger, more established companies. Small company stocks may be subject to more
abrupt or erratic price movements, for reasons including that the stocks are
traded in lower volume and that the issuers are more sensitive to changing
conditions and have less certain growth prospects. Also, there are fewer market
makers for these stocks and wider spreads between quoted bid and asked prices in
the over-the counter market for these stocks. Small cap stocks tend to be less
liquid, particularly during periods of market disruption. There normally is
less publicly available information concerning these securities. Small
companies in which the Fund may invest may have limited product lines, markets
or financial resources, or may be dependent on a small management group. In
particular, investments in unseasoned companies present risks considerably
greater than investments in more established companies.
ADDITIONAL RISKS WHICH APPLY TO PARTICULAR TYPES OF SECURITIES
Other Investment Companies
The Fund may invest its cash balances in other investment companies which invest
in high quality, short-term debt securities. A pro rata portion of the other
investment companies' expenses will be borne by the Fund's shareowners.
Borrowings, Reverse Repurchase Agreements
The Fund may borrow money to the extent allowed (as described in the Additional
Statement) to meet shareowner redemptions from banks or through reverse
repurchase agreements. These strategies involve leveraging. If the securities
held by the Fund decline in value while these transactions are outstanding, the
net asset value of the Fund's outstanding shares will decline in value by
proportionately more than the decline in value of the securities. In addition,
reverse repurchase agreements involve the risks that the interest income earned
by the Fund (from the investment of the proceeds) will be less than the interest
expense of the transaction, that the market value of the securities sold by the
Fund will decline below the price the Fund is obligated to pay to repurchase the
securities, and that the securities may not be returned to the Fund.
Options
An option is a type of derivative instrument that gives the holder the right
(but not the obligation) to buy (a "call") or sell (a "put") an asset in the
future at an agreed upon price prior to the expiration date of the option.
Options can be used to manage exposure to certain markets, enhance income or
hedge against a decline in value of portfolio securities. 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 value of options can be highly volatile, and their use can result in loss if
the Adviser is incorrect in its expectation of price fluctuations. The
successful use of options for hedging purposes also depends in part on the
ability of the Adviser to manage future price fluctuations and the degree of
correlation between the options and securities markets.
The Fund may purchase put and call options in an amount not to exceed 5% of
their respective net assets.
In addition, the Fund may write call options on securities and on various stock
or bond indices. The Fund may write a call option only if the option is
covered. The Fund may cover a call option by owning the security underlying the
option or through other means which would allow for immediate satisfaction of
its obligation. Such options will be listed on a national securities exchange.
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 during the current year. In
order to close out an option position, the 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).
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.
The Additional Statement includes additional information relating to option
trading practices and related risks.
Futures Contracts and Related Options
A futures contract is a type of derivative instrument that obligates the holder
to buy or sell an asset in the future at an agreed upon price. For example, a
futures contract may obligate the Fund, at maturity, to take or make delivery of
certain domestic or foreign securities, the cash value of a securities index or
a stated quantity of a foreign currency. When the Fund purchases an option on a
futures contract, it has the right to assume a position as a purchaser or seller
of a futures contract at a specified exercise price during the option period.
When the Fund sells an option on a futures contract it becomes obligated to
purchase or sell a futures contract if the option is exercised.
The Fund may invest in futures contracts and options on futures contracts for
hedging purposes, to have fuller exposure to price movements in a stock or bond
index, to increase total return or to maintain liquidity to meet potential
shareowner redemptions, invest cash balances or dividends or minimize trading
costs. In addition, the Fund may purchase and sell futures and related options
(based only on the S&P MidCap 400 Index) to maintain cash reserves while
simulating full investment in the stocks underlying the S&P MidCap 400 Index, to
keep substantially all of its assets exposed to the market (as represented by
the S&P MidCap 400 Index), and to reduce transaction costs.
Futures contracts and options present the following risks: imperfect correlation
between the change in market value of the Fund's securities and the price of
futures contracts and options; the possible inability to close a futures
contract when desired; losses due to unanticipated market movements which are
potentially unlimited; and the possible inability of the investment management
team to correctly predict the direction of securities prices, interest rates,
currency exchange rates and other economic factors. The Fund may buy and sell
futures contracts and related options on foreign exchanges or boards of trade
(which do not offer the same protections as U.S. exchanges).
The Fund's commodities transactions must constitute bona fide hedging or other
permissible transactions pursuant to regulations promulgated by the Commodities
and Futures Trading Commission ("CFTC"). In addition, the 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, the 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 registration as a "commodity
pool operator."
The Fund intends to limit its transactions in futures contracts so that not more
than 10% of the Fund's 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 Additional
Statement.
INVESTING WITH FIRSTAR FUNDS
This section describes for you the procedures for opening an account and how to
buy, sell or exchange Fund shares.
SHARE CLASSES AVAILABLE
The Fund offers three classes of shares; Retail A, Retail B and Institutional.
INSTITUTIONAL SHARES
- No sales charge
- Available for;
- trust, agency or custodial accounts opened through Firstar Bank,
Milwaukee, N.A.;
- employer-sponsored qualified retirement plans other than those serviced
by certain external organizations who have service agreements with Firstar
or its affiliates, and other than plans administered by Firstar with assets
less than $1 million at the time Firstar begins plan administration (but
including plans administered by Firstar which owned institutional shares
prior to June 18, 1999). Plans administered by Firstar with assets less
than $1 million at the time Firstar begins plan administration will become
eligible for Institutional shares when such plans grow to $1 million or
greater as further described in the Additional Statement;
- All clients of FIRMCO; and
- those purchasing through certain broker-dealers who have agreed to
provide certain services with respect to shares of the Funds, including
Waterhouse Securities, Inc. and Jack White, a division of Waterhouse
Securities, Inc. Check with your broker-dealer to see if you qualify for
institutional shares.
RETAIL A SHARES
- - Initial sales charge of 4.50% or less
- - No deferred sales charge
- - Reduced sales charge for larger investments. See "Sales Charges and Waivers"
for more information
- - Available to any investor who does not qualify to purchase Institutional
shares
RETAIL B SHARES
- - No initial sales charge
- - Deferred sales charge _ Maximum of 5% for redemptions during the first year,
4% in the second year, 3% in the third and fourth years, 2% in the fifth
year, 1% in the sixth year and 0% thereafter
- - Converts to Retail A shares after six years
- - Available to any investor who does not qualify to purchase Institutional
shares
A securities dealer, broker, financial institution or other industry
professional ("shareowner organization") may charge transaction or other fees
for providing administrative or other services in connection with investments in
Fund shares.
SALES CHARGES AND WAIVERS
INITIAL SALES CHARGES - for Retail A Shares of the Fund:
The public offering price for Retail A Shares is the net asset value of the
Retail A Shares purchased plus any applicable front-end sales charge. A sales
charge will not be assessed on Retail A Shares purchased through reinvestment of
dividends or capital gains distributions. The sales charge is as follows:
Shareowner
Organization
Sales Charge as a Sales Charge as Reallowance as a
Amount of Transaction Percentage of Percentage of Percentage of
at Offering Price Offering Price Net Asset Value Offering Price
Less than $100,000 4.50% 4.71% 4.00%
$100,000 to $249,999 3.75% 3.90% 3.25%
$250,000 to $499,999 2.50% 2.56% 2.00%
$500,000 to $749,999 2.00% 2.04% 1.50%
$750,000 to $999,999 1.00% 1.01% 0.50%
$1,000,000 and above 0.25% 0.25% 0.25%
You only pay a sales charge when you buy shares. The Distributor may reallow the
entire sales charge to certain shareowner organizations and the amount reallowed
may change periodically. To the extent that 90% or more of the sales charge is
reallowed, shareowner organizations may be deemed to be underwriters under the
Act.
REDUCING YOUR SALES CHARGES AND WAIVERS - Retail A Shares
To qualify for a reduction of, or exception to the sales charge, you must notify
your shareowner organization or the Distributor at the time of purchase or
exchange. The reduction in sales charge is subject to confirmation of your
holdings through a check of records. The Company may modify or terminate
quantity discounts at any time.
WAIVERS - RETAIL A SHARES
You may purchase retail shares without a sales charge if:
(a) you are an employee, director, retiree or registered representative of
Firstar Corporation or its affiliates or of Firstar Funds, Inc.
(b) you are a spouse, parent, in-law, sibling or child of an individual who
falls within the preceding category (a) above
(c) you make any purchase for your medical savings account for which Firstar
Corporation or an affiliate serves in a custodial capacity
(d) you purchase through certain external organizations that have entered into a
service agreement with Firstar or its affiliates
(e) you are part of an employer-sponsored qualified retirement plan
administered by Firstar with assets less than $1 million at the time Firstar
begins plan administration which commenced administration by Firstar on or after
June 18, 1999
(f) you purchase through certain broker-dealers who have agreed to provide
certain services with respect to shares of the Funds, including Charles Schwab
Mutual Fund Marketplace/R. Check with your broker-dealer to see if you qualify
for this exemption
REDUCING YOUR SALES CHARGES - RETAIL A SHARES
- - Right of Accumulation - Existing Equity, Balanced and Bond Fund shares can be
combined with new purchases for purposes of calculating reduced sales charges.
- - Letter of Intent - Fund shares purchased in a 13-month period qualify for the
same reduced sales charge as if all purchased at once. You may obtain a reduced
sales charge by means of a written Letter of Intent which expresses your non-
binding commitment to invest in the aggregate $100,000 or more in Retail A
Shares of an Equity, Balanced or Bond Fund within a period of 13 months. Any
investments you make during the period receive the discounted sales charge based
on the full amount of your investment commitment. The Additional Statement
includes details about the Letter of Intent.
For purposes of applying the Rights of Accumulation and Letter of Intent
privileges, the sales charge schedule applies to the combined purchases made by
any individual and/or spouse purchasing securities for his, her or their own
account, or the aggregate investments of a trustee or other fiduciary or IRA for
the benefit of the persons previously listed.
CONTINGENT DEFERRED SALES CHARGE - Retail B Shares
The public offering price for Retail B Shares is the net asset value of the
Retail B Shares purchased. Although investors pay no front-end sales charge on
purchases of Retail B Shares, such shares are subject to a contingent deferred
sales charge at the rates set forth below if they are redeemed within six years
of purchase.
The amount of any contingent deferred sales charge an investor must pay
depends on the number of years that elapse between the purchase date and the
date such Retail B Shares are redeemed. Solely for purposes of this
determination, all payments during a month will be aggregated and deemed to have
been made on the first day of the month.
Number of Years Contingent Deferred Sales Charge
Elapsed Since Purchase (as % of dollar amount subject to the charge)
- ---------------------- -------------------------------------------
Less than one 5.00%
At least one but less than two 4.00%
At least two but less than three 3.00%
At least three but less than four 3.00%
At least four but less than five 2.00%
At least five but less than six 1.00%
At least six None
The contingent deferred sales charge on Retail B Shares is based on the lesser
of the net asset value of the shares on the redemption date or the original cost
of the Shares being redeemed. As a result, no sales charge is imposed on any
increase in the net asset value of an investor's Retail B Shares. In addition,
a contingent deferred sales charge will not be assessed on Retail B Shares
purchased through reinvestment of dividends or capital gains distributions.
When a shareowner redeems his or her Retail B Shares, the redemption request is
processed to minimize the amount of the contingent deferred sales charge that
will be charged. Retail B Shares are redeemed first from those shares that are
not subject to a contingent deferred sales charge (that is, Retail B Shares that
were acquired through reinvestment of dividends or distributions or that qualify
for other deferred sales charge exemptions, if any) and after that from the
Retail B Shares that have been held the longest.
Shareowner organizations will receive commissions in connection with sales
of Retail B Shares. A commission equal to 4% of the amount invested is paid to
authorized dealers.
The contingent deferred sales charge a shareowner may pay upon redemption
is remitted to the Distributor or other party, which may use such amounts to
defray the expenses associated with the distribution-related services involved
in selling Retail B Shares.
WAIVERS - RETAIL B SHARES
Certain types of redemptions may also qualify for an exemption from the
contingent deferred sales charge. If you think you may be eligible for a
contingent deferred sales charge waiver listed below, be sure to notify your
shareowner organization or the Distributor at the time Retail B Shares are
redeemed. The contingent deferred sales charge with respect to Retail B Shares
is not assessed on:
(i) exchanges described under "Exchange of Shares"
(ii) redemptions in connection with shares sold for certain retirement
distributions or because of disability or death.
(iii) redemptions effected pursuant to a Fund's right to liquidate a
shareowner's account if the aggregate net asset value of Retail B Shares held in
the account is less than the minimum account size set forth under "Redemption
of Shares - Other Transaction Information - Accounts Below the Minimum Balance";
(iv) redemptions in connection with the combination of a Fund with any other
investment company registered under the 1940 Act by merger, acquisition of
assets, or by any other transaction; or
(v) redemptions resulting from a certain tax-free return of an excess
contribution.
In addition to the foregoing exemptions, no contingent deferred sales charge
will be imposed on redemptions made pursuant to the Company's systematic
withdrawal plan. The Funds reserve the right to limit such redemptions without
a contingent deferred sales charge, on an annual basis, to 12% of the value of
your Retail B Shares on the redemption date. See the Additional Statement for
more information.
CONVERSION - RETAIL B SHARES
Retail B Shares will automatically convert into Retail A Shares of the same Fund
six years after the beginning of the calendar month in which the purchase date
occurred. If you acquire Retail B Shares of a Fund by exchange from Retail B
Shares of another Fund, your Retail B Shares will convert into Retail A Shares
of that Fund based on the date of the initial purchase.
If you acquire Retail B Shares through reinvestment of distributions, your
Retail B Shares will convert into Retail A Shares at the earlier of two dates _
either six years after the beginning of the calendar month in which the purchase
date occurred (based on the date of the initial purchase of the shares on which
the distribution was paid) or the date of conversion of the most recently
purchased Retail B Shares that were not acquired through reinvestment of
dividends or distributions. For example, if a shareowner makes a one-time
purchase of Retail B Shares of a Fund and subsequently acquires additional
Retail B Shares of that Fund only through reinvestment of dividends and/or
distributions, all of such shareowner's Retail B Shares of that Fund, including
those acquired through reinvestment, will convert to Retail A Shares of such
fund on the same date.
Upon conversion, the converted shares will be relieved of the distribution and
shareowner servicing fees borne by Retail B Shares, although they will be
subject to the shareowner servicing fees borne by Retail A Shares.
The conversion of Retail B Shares to Retail A Shares will not occur at any time
the Fund is advised that such conversions may constitute taxable events for
federal tax purposes, which the Fund believes is unlikely. If conversions do
not occur as a result of possible taxability, Retail B Shares would continue to
be subject to higher expenses than Retail A Shares for an indeterminate period.
REINSTATEMENT PRIVILEGE
If you sell shares of a Firstar Fund or Firstar Stellar Fund, you may reinvest
some or all of the proceeds in the Retail A Shares of any Firstar Fund within 60
days without a sales charge, as long as your investment professional is notified
before you reinvest. All accounts involved must have the same registration. You
may be subject to taxes as a result of a redemption. Consult your tax adviser
concerning the results of a redemption or reinvestment.
HOW TO DECIDE WHETHER TO BUY RETAIL A OR RETAIL B SHARES
The decision as to which type of Shares to purchase depends on the amount you
invest, the intended length of the investment and your personal situation.
Retail A Shares - If you are making an investment of an amount that qualifies
for a reduced sales charge, you may consider purchasing Retail A Shares.
Retail B Shares - If you plan to hold your investment for a significant period
of time and would prefer not to pay an initial sales charge, you might consider
purchasing Retail B Shares. By not paying a front-end sales charge, your entire
purchase in Retail B Shares is invested from the time you make your initial
investment; however, the distribution and service fee paid by Retail B Shares
will cause your Retail B Shares (until conversion to Retail A Shares) to have a
higher expense ratio and thus, lower performance and lower dividend payments (to
the extent dividends are paid) than Retail A Shares.
PURCHASING SHARES
Shares of the Fund are offered and sold on a continuous basis by the distributor
for the Fund, 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.
MINIMUM INVESTMENTS
RETAIL SHARES
The minimum initial investment for Retail Shares in the Fund is $1,000. The
minimum subsequent investment is $50. The minimum initial investment will be
waived if you participate in the Periodic Investment Plan.
INSTITUTIONAL SHARES
There is no minimum initial or subsequent investment for Institutional Shares.
BUYING SHARES
Purchase requests accompanied by a check or wire payment received by the
transfer agent before 3:00 p.m. Central time on a business day for the Fund will
be executed the same day, at that day's closing price provided that payment is
received by the close of regular trading hours. Orders received after 3:00 p.m.
Central time and orders for which payment is not received by the close of
regular trading hours on the New York Stock Exchange will be executed on the
next business day after receipt of both order and payment in proper form.
- -------------------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- -------------------------------------------------------------------------------
Through a Shareowner - Contact your Shareowner - Contact your Shareowner
Organization Organization. Organization.
- -------------------------------------------------------------------------------
By Mail - Complete an application and - Make your check
mail it along with a check payable to Firstar
payable to Firstar Funds, Funds. Please include
P.O. Box 3011, your sixteen-digit
Milwaukee, WI 53201-3011: account number on your
For overnight delivery mail check and mail it to
to; 615 E. Michigan St., the address at the
Milwaukee, WI 53202. left.
- -------------------------------------------------------------------------------
Automatically - Call 1-800-677-FUND to - Complete a Periodic
(Retail A and B obtain a purchase Investment Plan
Shares) application, which includes Application to
information for a Periodic automatically purchase
Investment Plan or more shares.
ConvertiFund/R Account.
- Open a ConvertiFund/R
account to
automatically invest
proceeds from one
account to another
account of the Firstar
Family of Funds.
- -------------------------------------------------------------------------------
By Wire - Call 1-800-677-FUND prior - Call 1-800-677-FUND
to sending the wire in prior to sending the
order to obtain a wire in order to
confirmation number and to obtain a confirmation
ensure prompt and accurate number and to ensure
handling of funds. Ask prompt and accurate
your bank to transmit handling of funds. Ask
immediately available funds your bank to transmit
by wire in the amount of immediately available
your purchase to: funds by wire as
Firstar Bank Milwaukee, described at the left.
N.A. ABA #0750-00022 Please include your
Firstar Trust Department sixteen-digit account
Account #112-952-137 number. The Fund and
for further credit to its transfer agent are
[name of Fund] not responsible for the
[name /title on the consequences of delays
account]. resulting from
The Fund and its transfer the banking or Federal
agent are not responsible Reserve Wire system,
for the consequences of or from incomplete
delays resulting from the wiring instructions.
banking or Federal Reserve
Wire system, or from
incomplete wiring
instructions.
- -------------------------------------------------------------------------------
Internet - Not Available - Use Firstar Funds
www.firstarfunds.com Direct to exchange
from another Firstar
Fund account with the
same registration
including name,
address and taxpayer
ID number.
- Purchase additional
shares using an
electronic funds
transfer from your
banking institution
for payment.
- Call 1-800-677-FUND to
authorize this service.
- -------------------------------------------------------------------------------
By Telephone - Call 1-800-677-FUND to - Call 1-800-677-FUND to
Exchange exchange from another exchange from another
Firstar Fund account with Firstar Fund account
the same registration with the same
including name, address and registration including
taxpayer ID number. name, address and
taxpayer ID number.
- -------------------------------------------------------------------------------
Please Note: All checks must be drawn on a bank located within the United States
and must be payable in U.S. dollars to Firstar Funds. A $25 fee will be imposed
by the Funds' transfer agent if any check used for investment in an account does
not clear, and the investor involved will be responsible for any loss incurred
by the Fund. Prior to the transfer agent receiving a completed application,
investors may make an initial investment; however, redemptions will not be paid
until the transfer agent has received the completed application.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Additional Information on Buying Shares
- -------------------------------------------------------------------------------
The Fund will not accept payment in cash or third party checks for the purchase
of shares.
Federal regulations require that each investor provide a Social Security number
or other certified 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.
Payment for shares of the Fund in the amount of $1,000,000 or more may, at the
discretion of the Adviser, be made in the form of securities that are
permissible investments for the Fund.
The Fund may authorize one or more brokers and other shareowner organizations to
accept on their behalf purchase, redemption and exchange orders, and may
authorize such shareowner organizations to designate other intermediaries to
accept purchase, redemption and exchange orders on the Funds' behalf. In these
cases, a Fund will be deemed to have received an order when an authorized
shareowner organization or intermediary accepts the order, and customer orders
will be priced at the Fund's net asset value next computed after they are
accepted by a shareowner organization or intermediary. Shareowner organizations
and intermediaries will be responsible for transmitting accepted orders to the
Fund within the period agreed upon by them. Shareowners should contact their
shareowner organization or intermediaries to learn whether they are authorized
to accept orders for Funds.
It is the responsibility of shareowner organizations to transmit orders and
payment for the purchase of shares by their customers to the transfer agent on a
timely basis and to provide account statements in accordance with the procedures
previously stated.
- -------------------------------------------------------------------------------
For Owners of Institutional Shares:
- -------------------------------------------------------------------------------
All share purchases are effected pursuant to a customer's account at Firstar
Bank Milwaukee, N.A. Trust Department ("Firstar Trust") or at another chosen
institution or broker-dealer 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 shareowner organizations
involved. Firstar Trust and the other shareowner organizations or their
nominees 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
shareowner organizations. Investors wishing to purchase shares of the Funds
should contact their account representatives.
In the case of participants in certain employee benefit plans investing in
certain Funds, purchase and redemption orders will be processed on a particular
day based on whether a service organization acting on their behalf received the
order by the close of regular trading on that day.
REDEEMING SHARES
SELLING SHARES
Redemption requests received by the transfer agent before 3:00 p.m. Central time
on a business day for the Fund will be executed the same day, at that day's
closing price. Orders received after 3:00 p.m. Central time will be executed on
the next business day.
- -------------------------------------------------------------------------------
Through a Shareowner - Contact your Shareowner Organization
Organization
- -------------------------------------------------------------------------------
By Phone - Call 1-800-677-FUND with your account name, sixteen
digit account number and amount of redemption
(minimum $500). Redemption proceeds will only be
sent to a shareowner's address or bank account of a
commercial bank located within the United States as
shown on the transfer agent's records. (Available
only if telephone redemptions have been authorized
on the account application and if there has been no
change of address by telephone within the preceding
15 days).
- -------------------------------------------------------------------------------
By Mail - Mail your instructions to the Firstar Funds, P.O.
Box 3011, Milwaukee, WI 53201-3011 (via overnight
delivery to 615 E. Michigan Street, Milwaukee, WI
53202). Include the number of shares or the amount
to be redeemed, your sixteen-digit account number
and Social Security number or other taxpayer
identification number. Your instructions must be
signed by all persons required to sign for
transactions exactly as their names appear on the
account. If the redemption amount exceeds $50,000,
or if the proceeds are to be sent elsewhere than the
address of record, or the address of record has been
changed by telephone within the preceding 15 days,
each signature must be guaranteed in writing by
either a commercial bank that is a member of the
FDIC, a trust company, a credit union, a savings
association, a member firm of a national securities
exchange or other eligible guarantor institution.
- -------------------------------------------------------------------------------
Internet - Use Firstar Funds Direct to redeem up to $25,000.
www.firstarfunds.com Call 1-800-677-FUND to authorize this service.
- -------------------------------------------------------------------------------
Automatically - Call 1-800-677-FUND for a Systematic Withdrawal Plan
application ($5,000 account minimum and $50 minimum
per transaction).
Guarantees must be signed by an eligible guarantor institution and "Signature
Guaranteed" must appear with the signature.
- -------------------------------------------------------------------------------
The Fund may require additional supporting documents for redemptions made by
corporations, executors, administrators, trustees and guardians. A redemption
request will not be deemed to be properly received until the transfer agent
receives all required documents in proper form. Purchases of additional shares
concurrently with withdrawals could be disadvantageous because of the sales
charge involved in the additional purchases.
- -------------------------------------------------------------------------------
ADDITIONAL TRANSACTION INFORMATION
- -------------------------------------------------------------------------------
Telephone Requests
- -------------------------------------------------------------------------------
In order to arrange for telephone redemptions after you have opened your account
or to change the bank or account designated to receive redemption proceeds, send
a written request to the Firstar Mutual Fund Services, LLC or contact your
registered representative. Each shareowner of the account must sign the
request. The Fund may request further documentation from corporations,
executors, administrators, trustees and guardians.
The Funds reserve the right to refuse a telephone redemption if they believe it
is advisable to do so. Procedures for redeeming shares by telephone may be
modified or terminated by the Funds at any time upon notice to shareowners.
During periods of substantial economic or market change, telephone redemptions
may be difficult to implement. If a shareowner is unable to contact the
transfer agent by telephone, shares may also be redeemed by delivering the
redemption request to the transfer agent.
In an effort to prevent unauthorized or fraudulent purchase and redemption
requests by telephone, Firstar employs reasonable procedures to confirm that
such instructions are genuine. Among the procedures used to determine
authenticity, investors electing to transact by telephone will be required to
provide their account number (unless opening a new account). All telephone
transactions will be recorded and confirmed in writing. 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 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.
- -------------------------------------------------------------------------------
Certificates
- -------------------------------------------------------------------------------
Certificates are only issued upon shareowner request. If certificates have been
issued, the transfer agent must receive the certificates, properly endorsed or
accompanied by a properly executed stock power and accompanied by signature
guarantees, prior to a redemption request.
- -------------------------------------------------------------------------------
Additional Redemption Information
- -------------------------------------------------------------------------------
The Fund will make payment for redeemed shares typically within one or two
business days, but no later than the seventh day after receipt by the transfer
agent of a request in proper form, except as provided by SEC rules. HOWEVER, IF
ANY PORTION OF THE SHARES TO BE REDEEMED REPRESENTS AN INVESTMENT MADE BY CHECK,
THE FUND WILL DELAY THE PAYMENT OF THE REDEMPTION PROCEEDS UNTIL THE TRANSFER
AGENT IS REASONABLY SATISFIED THAT THE CHECK HAS BEEN COLLECTED, WHICH MAY TAKE
TWELVE DAYS FROM THE PURCHASE DATE. An investor must have filed a purchase
application before any redemption requests can be paid.
- -------------------------------------------------------------------------------
Accounts Below the Minimum Balance
- -------------------------------------------------------------------------------
If your account falls below $1,000, the Fund may redeem your account. The Fund
will impose no charge and will give you sixty days written notice prior to any
redemption. The Fund may also redeem shares involuntarily if it is appropriate
to do so to carry out the Fund's responsibilities under the 1940 Act and, in
certain cases, may make payment for redemption in securities. Investors would
bear any brokerage or other transaction costs incurred in converting the
securities so received to cash. See the Additional Statement referred to on the
last page for examples of when such redemptions might be appropriate.
- -------------------------------------------------------------------------------
EXCHANGING SHARES
- -------------------------------------------------------------------------------
You may exchange your shares for Money Market Fund shares (except that Retail B
shares are not exchangeable for Institutional Money Market Fund shares) or for
shares of other Firstar Funds within the same share class if you are eligible to
purchase the class at the time of the exchange. Unless you qualify for a sales
charge exemption, an initial sales charge will be imposed on the exchange if the
shares of the Fund being acquired have an initial sales charge and the shares
being redeemed were purchased without a sales charge. Retail B shares acquired
in an exchange will be subject to a contingent deferred sales charge upon
redemption in accordance with this prospectus. For purposes of computing the
contingent deferred sales charge, the length of time of ownership will be
measured from the date of the original purchase of Retail B shares.
Telephone exchange privileges automatically apply to each shareowner of record
unless the transfer agent receives written instructions canceling the privilege.
Firstar reserves the right to terminate the exchange privilege of any party who
requests more than four exchanges within a calendar year. Firstar may do so
with prior notice based on a consideration of both the number of exchanges 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.
For federal income tax purposes, an exchange of shares is a taxable event and,
accordingly, an investor may realize a capital gain or loss. 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; however, Firstar reserves the right
to impose a charge in the future. In addition, shareowner organizations may
charge a fee for providing administrative or other services in connection with
exchanges. The Fund reserves 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. Also keep in mind:
- -- Exchanges are available only in states where exchanges may be legally made.
- -- The minimum amount which may be exchanged is $1,000.
- -- If any portion of the shares to be exchanged represents an investment made by
check, the Fund will delay the acquisition of new shares in an exchange until
the transfer agent is reasonably satisfied that the check has been collected,
which may take up to twelve days from the purchase date.
- -- It may be difficult to make telephone exchanges in times of drastic economic
or market changes.
Additional Shareowner Services
- -------------------------------------------------------------------------------
Shareowner Reports
- -------------------------------------------------------------------------------
Shareowners will be provided with a report showing portfolio investments and
other information at least semiannually; and after the close of the Fund's
fiscal year with an annual report containing audited financial statements. To
eliminate unnecessary duplication, only one copy of shareowner reports will be
sent to shareowners with the same mailing address. Shareowners may request
duplicate copies free of charge.
Account statements will be mailed after each purchase, reinvestment of dividends
and redemption. Statements of accounts shall be conclusive if not objected to in
writing within 10 Days after transmitted by mail. Generally, the Fund does not
send statements for funds held in brokerage, retirement or other similar
accounts.
- -------------------------------------------------------------------------------
Firstar Funds Website (www.firstarfunds.com)
- -------------------------------------------------------------------------------
The site offers educational information and interactive financial planning tools
as well as product-specific information.
Generally, Shareowners can request purchases, exchanges and redemptions of Fund
shares online via the Internet after an account is opened. Redemption requests
of up to $25,000 will be accepted through the Internet. Payment for shares
purchased online must be made by electronic funds transfer from your banking
institution. To authorize this service, call Firstar Mutual Fund Services, LLC
at 1-800-677-FUND.
Firstar Funds and their agents will not be responsible for any losses resulting
from unauthorized online transactions when procedures are followed which are
designed to confirm that the online 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 online. If this happens, you may
initiate transactions in your share accounts by mail or as otherwise described
in the prospectus.
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Automated Teleresponse Service
- -------------------------------------------------------------------------------
Shareowners using a touch-tone/R telephone can access information on the Fund 24
hours a day, seven days a week. When calling Firstar Mutual Fund Services, LLC
at 1-800-677-FUND, shareowners may choose to use the automated information
feature or, during regular business hours (8:00 a.m. to 7:00 p.m. Central time,
Monday through Friday), speak with a Firstar representative.
- -------------------------------------------------------------------------------
Retirement Plans
- -------------------------------------------------------------------------------
The Fund offers individual retirement accounts including SIMPLE and SEP IRAs.
For details concerning Retirement Accounts (including service fees), please call
Firstar Funds Center at 1-800-677-FUND.
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAXES
- -------------------------------------------------------------------------------
Dividends and Capital Gains Distributions
- -------------------------------------------------------------------------------
Dividends from net investment income of the Fund are declared and paid
quarterly.
- -------------------------------------------------------------------------------
Reinvested dividends and distributions receive the same tax treatment as those
paid in cash.
- -------------------------------------------------------------------------------
Any capital gains are distributed annually. A shareowner's dividends and capital
gains distributions will be reinvested automatically in additional shares unless
the Fund is notified that the shareowner elects to receive distributions in
cash.
If a shareowner has elected to receive dividends and/or capital gain
distributions in cash and the postal or other delivery service is unable to
deliver checks to shareowner's address of record, such shareowner's distribution
option will automatically be converted to having all dividend and other
distributions reinvested in additional shares. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.
- -------------------------------------------------------------------------------
Federal Taxes
- -------------------------------------------------------------------------------
The Fund contemplates declaring as dividends each year all, or substantially
all, of its taxable income, including its net capital gain (the excess of long-
term capital gain over short-term capital loss). You will be subject to income
tax on these distributions regardless of whether they are paid in cash or
reinvested in additional shares. Distributions attributable to the net capital
gain of the Fund will be taxable to you as long-term capital gain, regardless of
how long you have held your shares. Other Fund distributions will generally be
taxable as ordinary income. You will be notified annually of the tax status of
distributions to you.
You should note that if you purchase shares just prior to a capital gain
distribution, the purchase price will reflect the amount of the upcoming
distribution, but you will be taxable on the entire amount of the distribution
received, even though, as an economic matter, the distribution simply
constitutes a return of capital. This is known as "buying into a dividend."
You will recognize taxable gain or loss on a sale, exchange or redemption of
your shares, including an exchange for shares of another Fund, based on the
difference between your tax basis in the shares and the amount you receive for
them. (To aid in computing your tax basis, you generally should retain your
account statements for the periods during which you held shares.) Any loss
realized on shares held for six months or less will be treated as a long-term
capital loss to the extent of any capital gain dividends that were received on
the shares.
The one major exception to these tax principles is that distributions on, and
sales, exchanges and redemptions of, shares held in an IRA (or other tax-
qualified plan) will not be currently taxable.
The foregoing is only a summary of certain tax considerations under current law,
which may be subject to change in the future. You should consult your tax
adviser for further information regarding federal, state, local and/or foreign
tax consequences relevant to your specific situation.
- -------------------------------------------------------------------------------
State and Local Taxes
- -------------------------------------------------------------------------------
Shareowners may also be subject to state and local taxes on distributions and
redemptions. State income taxes may not apply, however, to the portions of the
Fund's distributions, if any, that are attributable to interest on Federal
securities or interest on securities of the particular state. Shareowners
should consult their tax advisers regarding the tax status of distributions in
their state and locality.
MANAGEMENT OF THE FUNDS
- -------------------------------------------------------------------------------
Advisory Services
- -------------------------------------------------------------------------------
FIRMCO, a Wisconsin Limited Liability Company and subsidiary of Firstar
Corporation, a bank holding company, serves as investment adviser to the Fund.
FIRMCO, with principal offices at Firstar Center, 777 East Wisconsin Avenue, 8th
Floor, Milwaukee, Wisconsin 53202, has provided investment advisory services
since 1986. FIRMCO currently has $25.1 billion in assets under management.
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 the Fund, the Adviser
manages the Fund's portfolio securities and maintains records relating to such
purchases and sales.
The Adviser 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, to
take into account the sale of Fund shares if the Adviser 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 will receive from the Fund a fee, calculated daily and payable
monthly, at the annual rate (as a percentage of the Fund's average daily net
assets) of 0.25%.
- -------------------------------------------------------------------------------
Administrative Services
- -------------------------------------------------------------------------------
Firstar Mutual Fund Services, LLC and B. C. Ziegler and Company
("Ziegler") serve as the Co-Administrators (the "Co-Administrators") and receive
fees for those services.
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Shareowner Organizations - Retail A and B Shares
- -------------------------------------------------------------------------------
The Fund has adopted distribution and service plans for the Retail A and
Retail B shares. Under the distribution and service plans, the Fund may pay
distribution fees for the sale and distribution of its shares and service fees
for shareowner services. These fees are regulated by Rule 12b-1 under the
Investment Company Act of 1940 and are subject to the NASD Conduct Rules.
Because these fees are paid out of the Fund's assets on an ongoing basis, over
time, these fees will increase the cost of your investment and may cost you more
than paying other types of sales charges.
The Fund also has adopted service plans for the Retail A and B shares,
under which the Fund may pay service fees for shareowner services to Retail A
and B shareowners.
For their services with respect to the Retail A shares, shareowner
organizations may be entitled to receive fees from the Fund at an annual rate of
up to 0.25% of the average daily net asset value of the shares covered by their
agreement for distribution and/or shareowner support services. Under the
distribution and service plan for the Retail B shares, the Distributor is
entitled to receive fees at an annual rate of up to 0.75% of the average daily
net asset value of the Retail B shares for distribution services with respect to
the Retail B shares. For their services with respect to the Retail B shares,
shareowner organizations may be entitled to receive fees from the Fund at an
annual rate of up to 0.25%, and 0.25% of the average daily net asset value of
the shares covered by their agreement, respectively, for shareowner liaison
under the distribution and service plan and for other support services under the
service plan (as described below).
Under these Plans, the Fund may enter into agreements with shareowner
organizations, including affiliates of the Adviser (such as FIS). The
shareowner organizations are required to provide a schedule of any fees that
they may charge to their customers relating to the investment of their assets in
shares covered by the agreements. Investors should read this Prospectus in
light of such fee schedules and under the terms of their shareowner
organization's agreement with Firstar. In addition, investors should contact
their shareowner organizations with respect to the availability of shareowner
services and the particular shareowner organization's procedures for purchasing
and redeeming shares. It is the responsibility of shareowner organizations to
transmit purchase and redemption orders and record those orders in customers'
accounts on a timely basis in accordance with their agreements with customers.
The Fund makes no payments to its Distributor under the Plans for the
Retail A shares or under the service plan for the Retail B shares. The Fund
makes payments to its Distributor under the distribution and service plan for
distribution services with respect to the Retail B shares. Payments to
shareowner organizations, including affiliates of the Adviser, under the plans,
and to the Distributor under the distribution and service plan for the Retail B
shares are not tied directly to their own out-of-pocket expenses and therefore
may be used as they elect (for example, to defray their overhead expenses), and
may exceed their direct and indirect costs.
Shareowner organizations will provide support and/or, in the case of the
distribution and service plan for the Retail A shares, distribution services to
their customers who are the shareowners of the Fund. Under the Service
Agreements, shareowner support services may include:
- - assisting investors in processing purchase, exchange and redemption requests
- - processing dividend and distribution payments from the Fund
- - providing information periodically to customers showing their positions in
Fund shares
- - providing sub-accounting
- - forwarding sales literature and advertising
Shareowner liaison services may include responding to customers' inquires
and providing information on their investments, and other personal and account
maintenance services within NASD Rules.
The Glass-Steagall Act and other applicable laws, among other things,
prohibit banks from engaging in the business of underwriting securities.
Accordingly, banks will be engaged under agreements with Firstar only to perform
the administrative and investor servicing functions described above, and will
represent to Firstar that in no event will the services provided by them under
the agreements be primarily intended to result in the sale of Fund shares.
Conflict-of-interest restrictions may apply to the receipt of compensation
paid by Firstar to a shareowner organization in connection with the investment
of fiduciary funds in Fund shares. Institutions, including banks regulated by
the Comptroller of the Currency and investment advisers and other money managers
subject to the jurisdiction of the SEC, the Department of Labor or state
securities commissions, are urged to consult legal counsel before entering into
agreements with Firstar.
- -------------------------------------------------------------------------------
Custodian, Transfer and Dividend Disbursing Agent, and Accounting Services Agent
- -------------------------------------------------------------------------------
Firstar Mutual Fund Services, LLC, an affiliate of the Adviser, provides
transfer agency, dividend disbursing agency and accounting services for the
Fund and receives fees for these services. Inquiries to the transfer agent may
be sent to: Firstar Mutual Fund Services, LLC, P.O. Box 3011, Milwaukee,
Wisconsin 53201-3011. Firstar Bank, Milwaukee, N.A., an affiliate of the
Adviser, provides custodial services for the Fund and receives fees for those
services.
NET ASSET VALUE AND DAYS OF OPERATION
The price of the Retail A, Retail B and Institutional shares (each, a
"class") is based on net asset value per share. This amount is calculated
separately for each class of shares by dividing the value of all securities and
other assets attributable to the class, less the liabilities attributable to
that class, by the number of outstanding shares of that class. The price at
which a purchase or redemption is effected is based on the next calculation of
net asset value after the order is accepted.
Net asset value 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.
The Fund's investments are valued based on market quotations, except that
restricted securities and 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.
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. The Fund's foreign securities may trade on weekends or other days
when the Fund does not price its shares. Accordingly, the net asset value per
share of the Fund may change on days when shareowners will not be able to
purchase or redeem the Fund's shares.
The Fund's securities may be valued based on valuations provided by an
independent pricing service. The Adviser reviews these valuations. 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.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE FUND'S ADDITIONAL
STATEMENT 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 FUND OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR BY
ITS DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
"STANDARD & POOR'S/R", S&P/R", "S&P MIDCAP400 INDEX" AND "STANDARD & POOR'S
MIDCAP 400 INDEX" ARE TRADEMARKS OF THE MCGRAW HILL COMPANIES, INC. AND HAVE
BEEN LICENSED FOR USE BY FIRSTAR FUNDS. THE FUND IS NOT SPONSORED, ENDORSED,
SOLD OR PROMOTED BY STANDARD & POOR'S AND STANDARD & POOR'S MAKES NO
REPRESENTATION REGARDING THE ADVISABILITY OF INVESTING IN THE FUND.
FOR MORE INFORMATION
STATEMENT OF ADDITIONAL INFORMATION
Additional information about the Fund and its policies is also available in the
Funds' Statement of Additional Information ("Additional Statement"). The
Additional Statement is incorporated by reference into this Prospectus (and is
legally considered part of this Prospectus).
The Funds' Additional Statement is available free upon request by calling
Firstar Funds at 1-800-677-FUND or 1-414-287-3808.
To obtain other information and for shareowner inquiries:
By telephone - call 1-800-677-FUND or 1-414-287-3808
By mail - Firstar Funds, Inc.
615 East Michigan Street
P.O. Box 3011
Milwaukee, Wisconsin 53201-3011
By e-mail - [email protected]
------------------------
On the Internet - Text only version of the Funds' documents are located online
and may be downloaded from: SEC - http://www.sec.gov
------------------------
You may review and obtain copies of Fund documents by visiting the SEC's Public
Reference Room in Washington, D.C. You may also obtain copies of Fund documents
by sending your request and a duplicating fee to the SEC's Public Reference
Section, Washington, D.C. 20549-6009. Information on the operation of the
public reference room may be obtained by calling the SEC at 1-800-SEC-0330.
The Fund's Investment Company Act File Number is 811-5380
xxxxxxx
Subject to Completion
October 18, 1999
The information in this Statement of Additional Information is not complete and
may be changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
Statement of Additional Information is not a prospectuses; not an offer to sell
these securities; and is not soliciting an offer to buy these securities in any
state where the offer or sale is not permitted.
FIRSTAR FUNDS, INC.
Statement of Additional Information
November , 1999
Firstar MidCap Index Fund Firstar Core International Equity Fund
TABLE OF CONTENTS
------------------
Page
----
Firstar Funds, Inc................................................
Description of the Funds and their Investments and Risks..........
Investment Strategies and Risks...................................
Net Asset Value...................................................
Additional Purchase and Redemption Information....................
Description of Shares.............................................
Additional Information Concerning Taxes...........................
Management of the Company.........................................
Custodian, Transfer Agent and Accounting Services Agent...........
Expenses..........................................................
Independent Accountants ..........................................
Counsel...........................................................
Performance Calculations..........................................
Miscellaneous.....................................................
Appendix A........................................................ A-1
Appendix B........................................................ B-1
This Statement of Additional Information ("SAI"), which is not a
prospectus, supplements and should be read in conjunction with Firstar Funds,
Inc.' s prospectuses ("Prospectuses") dated November 1, 1999, for
Institutional, Retail A and Retail B Shares of the MidCap Index Fund and Core
International Equity Fund (collectively referred to as the "Funds") and is
incorporated by reference in its entirety into the Prospectuses. 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 1-800-677-FUND.
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 of the Funds is currently divided into three series, a Retail A, Retail B
and Institutional series. This SAI pertains to Retail A Shares, Retail B Shares
and Institutional Shares of two diversified portfolios, the MidCap Index Fund
and Core International Equity Fund (collectively the "Funds"). The Funds
commenced operations on November 1, 1999. The Company also offers other
investment portfolios which are described in a separate statements of additional
information. For information concerning these other portfolios, contact the
Firstar Mutual Fund Services, LLC at 1-800-677-FUND or write to 615 East
Michigan Street, P.O. Box 3011, Milwaukee, Wisconsin 53201-3011.
DESCRIPTION OF THE FUNDS AND THEIR INVESTMENTS AND RISKS
The Company is a diversified, open-end management investment company. 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 the MidCap Index Fund. Subject
to the general supervision of the Board of Directors, the Adviser is responsible
for the portfolio management of the Core International Equity Fund. Pursuant to
the terms of the Adviser's Advisory Agreement with the Fund, the Adviser has
employed The Glenmede Trust Company (the "Sub-Adviser" or "Glenmede"). 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 Core 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.
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.
The Advisory Agreement between the Company and the Adviser and with respect
to the Core International Equity Fund and the Sub-Advisory Agreement among the
Company, the Adviser and Sub-Adviser, provide 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 at 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.
INVESTMENT STRATEGIES AND RISKS
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. 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
Core International Equity Fund) to be of good standing and when, in the
Adviser's (and Sub-Adviser's in the case of the Core 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. The Funds may invest from time to time in "money
------------------------
market instruments," a term that includes, among other things, U.S. government
obligations, repurchase agreements, cash, bank obligations, commercial paper,
variable amount master demand notes and corporate bonds with remaining
maturities of thirteen months or less. These investments are used to help meet
anticipated redemption requests or if other suitable securities are unavailable.
The Core 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 Core 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 Core 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 Core 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. The Funds may invest in a variety of U.S.
---------------------------
Treasury obligations including bonds, notes and bills which mainly differ only
in their interest rates, maturities and time of issuance. The Funds may also
invest in other securities issued or guaranteed by the U.S. government, its
agencies and instrumentalities; such as 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.
No assurance can be given that the U.S. government will provide financial
support to U.S. government-sponsored agencies or instrumentalities if it is not
obligated to do so by law.
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. 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 Receipt") 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.
Restricted Securities. The Funds may invest up to 15% of net assets in
---------------------
securities that are illiquid at the time of purchase. While these holdings may
offer more potential for growth, they may present a higher degree of business
and financial risk, which can result in substantial losses. The Funds may have
difficulty valuing these holdings and may be unable to sell these holdings at
the time or price desired. Restricted securities may include Rule 144
Securities. These securities are restricted securities that are eligible for
resale pursuant to Rule 144A under the Securities Act of 1933. A Fund may treat
a Rule 144A security as liquid if determined to be so under procedures adopted
by the Board.
Borrowings and Reverse Repurchase Agreements. Each Fund may borrow money
--------------------------------------------
to the extent allowed (as described under "Additional Investment Limitations"
below) to meet shareowner redemptions from banks or through reverse repurchase
agreements. 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.
Preferred Stocks. The Core International Equity Fund may invest in
----------------
preferred stocks. Preferred stocks are securities that represent an ownership
interest providing the holder with claims on the issuer's earnings and assets
before common stock but after bond owners. Unlike debt securities, the
obligations of an issuer of preferred stock, including dividend and other
payment obligations, may not typically be accelerated by the holders of such
preferred stock on the occurrence of an event of default (such as a covenant
default or filing of a bankruptcy petition) or other non-compliance by the
issuer with the terms of the preferred stock. Often, however, on the occurrence
of any such event of default or non-compliance by the issuer, preferred
stockholders will be entitled to gain representation on the issuer's board of
directors or increase their existing board representation. In addition,
preferred stockholders may be granted voting rights with respect to certain
issues on the occurrence of any event of default.
Derivatives risk. The Core International Equity Fund may invest in
----------------
derivatives. The term derivative covers a wide number of investments, but in
general it refers to any financial instrument whose value is derived, at least
in part, from the price of another security or a specified index, asset or
rate. Some derivatives may be more sensitive to or otherwise not react in
tandem with interest rate changes or market moves, and some may be susceptible
to changes in yields or values due to their structure or contract terms. Loss
may result from the Fund's investments in options, futures, swaps, structured
securities and other derivative instruments which may be leveraged. The Fund
may use derivatives to: increase yield; hedge against a decline in principal
value; invest with greater efficiency and lower cost than is possible through
direct investment; adjust the Fund's duration; or provide daily liquidity.
Hedging is the use of one investment to offset the effects of another
investment. To the extent that a derivative is used as a hedge against an
opposite position that the Fund also holds, a loss generated by the derivative
should be substantially offset by gains on the hedged investment, and vice
versa. While hedging can reduce or eliminate losses, it can also reduce or
eliminate gains. Hedging also involves correlation risk - the risk that changes
in the value of a hedging instrument may not match those of the asset being
hedged.
To the extent that a derivative is not used as a hedge, the Fund is directly
exposed to the risks of that derivative. Gains or losses from speculative
positions in a derivative may be substantially greater than the derivative's
original cost.
When-Issued Purchases, Delayed Delivery and Forward Commitments. These
---------------------------------------------------------------
Funds may purchase or sell particular securities with payment and delivery
taking place at a later date. The price or yield obtained in a transaction may
be less favorable than the price or yield available in the market when the
securities delivery takes place. Each Fund's forward commitments and when-issued
purchases are not expected to exceed 25% of the value of its total assets absent
unusual market conditions. 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 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 than 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 - Core International Equity Fund
- ---------------------------------------------------------------
The Core International Equity 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 Fund's investment in equity securities may include limited partnership
interests.
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 a Fund. Under normal market conditions at least 65% of the value
of the Fund's total assets will be invested in equity securities. The Fund does
not attempt to "time" the securities market.
Foreign Equities. The Core International Equity 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. 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. The
Fund and its 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 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 Fund is expected to be volatile.
The Core International Equity Fund may invest in emerging market
countries. Developing countries may impose restrictions on a Fund's ability to
repatriate investment income or capital. Even where there is no outright
restriction on repatriation of investment income or capital, the mechanics of
repatriation may affect certain aspects of the operations of the Fund. For
example, funds may be withdrawn from the People's Republic of China only in U.S.
or Hong Kong dollars and only at an exchange rate established by the government
once each week.
Some of the currencies in emerging markets have experienced devaluations
relative to the U.S. dollar, and major adjustments have been made periodically
in certain of such currencies. Certain developing countries face serious
exchange constraints.
Lastly, governments of some developing countries exercise substantial
influence over many aspects of the private sector. In some countries, the
government owns or controls many companies, including the largest in the
country. As such, government actions in the future could have a significant
effect on economic conditions in developing countries in these regions, which
could affect private sector companies, a Portfolio and the value of its
securities. Furthermore, certain developing countries are among the largest
debtors to commercial banks and foreign governments. Trading in debt obligations
issued or guaranteed by such governments or their agencies and instrumentalities
involves a high degree of risk.
Reverse Repurchase Agreements. The Core 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 Core 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 Core 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 Core 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 Core 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 Core 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 Core 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.
Except where segregated accounts are not required under the 1940 Act, when
this Fund enters into a forward contract 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.
Other Investment Considerations - MidCap Index Fund
- ----------------------------------------------------
MidCap Index Fund Management Techniques. When purchasing securities for
the MidCap Index Fund's portfolio, the Adviser will consider initially the
relative market capitalization weightings of the stocks included in the S&P
MidCap 400 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 MidCap 400 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 MidCap 400 Index. This comparison is made because the
Adviser believes, unless the Fund holds all stocks included in the S&P MidCap
400 Index which it currently does not, 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 MidCap 400 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 MidCap 400 Index. Conversely, if smaller companies were not purchased by
the Fund, industries included in the S&P MidCap 400 Index that are dominated by
smaller market-capitalized companies would be underrepresented (as compared to
the S&P MidCap 400 Index).
If an issuer drops in ranking, or is eliminated entirely from the S&P
MidCap 400 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 MidCap 400 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 MidCap 400 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.
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 MidCap 400 Index.
This process continues until the portfolio is fully invested (except for cash
holdings).
The Fund may occasionally receive securities that are outside of the S&P
MidCap 400 Index due to corporate reorganizations or spin-offs. The Fund will
dispose of those securities in due course consistent with the Fund's investment
objective.
Other Portfolio Information
- ---------------------------
Options Trading. As stated in the Prospectus, the MidCap Index Fund may
---------------
purchase put and call options. Option purchases will not exceed 5% of the MidCap
Index Fund's net assets. Such options will relate only to stock indices and may
or may not be listed on a national securities exchange and issued by the Options
Clearing Corporation. This is a highly specialized activity which entails
greater than ordinary investment risks, including the complete loss of the
amount paid as premiums to the writer of the option. 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.
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.
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.
The MidCap Index 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 MidCap Index Fund may sell
covered call options listed on a national securities exchange. 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. The aggregate value of the Fund's assets
subject to covered options written by the MidCap Index Fund will not exceed 5%
of the value of its net assets during the current year.
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.
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. 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.
As noted previously, there are several risks associated with transactions
in options on securities and indices. These risks include (i) an 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. 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 best 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 a Fund, 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.
MidCap Index Fund will purchase and sell futures and related options (based only
on the S&P MidCap 400 Index) to maintain cash reserves while simulating full
investment in the stocks underlying the S&P MidCap 400 Index to keep
substantially all of its assets exposed to the market (as represented by the S&P
MidCap 400 Index) and 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 MidCap
Index Fund may purchase and sell futures and related options (based only on the
S&P MidCap 400 Index) to maintain cash reserves while simulating full investment
in the stocks underlying the S&P MidCap 400 Index, to keep substantially all of
its assets exposed to the market (as represented by the S&P MidCap 400 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 Investment
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.
A Fund's commodities transactions must constitute bona fide hedging or
other permissible transactions pursuant to regulations promulgated by the
Commodities and Futures Trading Commissions ("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. 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 to the
entire amount at risk (less margin deposits) on a continuous basis. The Company
intends to comply with the regulations of the CFTC exempting the Fund from
registrations as a "commodity pool operator".
The MidCap Index Fund intends to limit its transactions in futures
contracts so that not more than 10% of the Fund's 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.
Foreign Securities and American Depository Receipts ("ADRs"). The Core
------------------------------------------------------------
International Equity Fund may invest in sponsored and 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.
The Core 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. GDRs are receipts structured similarly to EDRs
and are issued and traded in several international financial markets. The
underlying security may be subject to foreign government taxes, which would
reduce the yield on such securities.
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.
Small Companies and Unseasoned Issuers. 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 a greater degree of change in
their earnings and prospects.
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 Core International Equity Fund when the Sub-Advisor believes such
investments offer possibilities of attractive capital appreciation.
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 short-term capital gains are
realized, distributions relating from such gains will be ordinary income for
federal income tax purposes.
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 Core 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 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.
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.
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 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 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 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. A Fund will not 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 the Fund's investment practices described in this SAI or in the
Prospectuses 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 limit stated above, the Funds will
promptly reduce such amount. Except as otherwise provided in Investment
Restriction No. 10 above, for the purpose of such restriction, in determining
industry classification with respect to the Core International Equity Fund, the
Company intends to use the Morgan Stanley Capital International classification
titles.
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 Shares, Retail A Shares and Retail B Shares 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 Plans and
Shareowner Servicing Plans applicable only to Retail A Shares and Retail B
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.
Shares 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.
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. Exchange- traded securities for which there
were no transactions are valued on the average of the current bid and asked
prices for the Core International Equity Fund and at the current bid prices for
the other Funds. Securities traded on only over-the-counter markets are valued
on the basis of closing over-the-counter bid prices. 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 Core International Equity Fund, is not
calculated. The calculation of the net asset value of a Fund, including the
Core 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 A Shares based on the
value of each such Fund's net assets and number of outstanding securities at
November 1, 1999, follows:
MidCap Core International
Index Equity
Fund Fund
Net Asset Value
Per Share $10.00 $10.00
------ -------
Sales Charge, 4.50%
of offering price
(4.71% of net asset
value per share) 0.47 0.47
------ -------
Public Offering Price $10.47 $10.47
------ -------
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.
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 has filed an election pursuant to Rule 18f-1 under the 1940 Act
which provides that each portfolio of the Company is obligated to redeem shares
solely in cash up to $250,000 or 1% of such portfolio's net asset value,
whichever is less, for any one shareholder within a 90-day period. Any
redemption beyond this amount may be made in proceeds other than cash.
In addition to the situations described in the Funds' Prospectus 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.
Reducing Your Sales Charge on Retail A Shares.
- ---------------------------------------------
A. Rights of Accumulation
As stated in the Prospectuses, a reduced sales charge applies to any
purchase of Retail A Shares of any Firstar Fund that is sold with a sales charge
(an "Eligible Fund") where an investor's then current aggregate investment is
$100,000 or more. "Aggregate investment" means the total of (a) the dollar
amount of the then current purchase of shares of an Eligible Fund, and (b) the
value (based on current net asset value) of previously purchased and
beneficially owned shares of any Eligible Fund on which a sales charge has been
paid. If, for example, an investor beneficially owns shares of one or more
Eligible Fund, with an aggregate current value of $99,000 on which a sales
charge has been paid and subsequently purchases shares of an Eligible Fund which
is an Equity Fund having a current value of $1000, the sales charge applicable
to the subsequent purchase would be reduced to 3.75% of the offering price.
Similarly, each subsequent investment in Eligible Fund shares may be added to an
investor's aggregate investment at the time of purchase to determine the
applicable sales charge.
B. Letter of Intent
As discussed in the Prospectuses, Retail A Shares of the Company purchased
over a 13-month period through a Letter of Intent qualify for the same reduced
sales charge as if all purchased at once. During the term of the Letter of
Intent, the transfer agent will hold in escrow shares equal to 5% of the amount
indicated in the Letter of Intent for payment of a higher sales charge if an
investor does not purchase the full amount indicated in the Letter of Intent.
The escrow will be released when an investor fulfills the terms of the Letter of
Intent by purchasing the specified amount. Any redemptions made during the 13-
month period will be subtracted from the amount of purchases in determining
whether the Letter of Intent has been completed. If total purchases qualify for
a further sales charge reduction, the sales charge will be adjusted to reflect
an investor's total purchases. If total purchases are less than the amount
specified in the Letter of Intent, an investor will be requested to remit an
amount equal to the difference between the sales charge actually paid and the
sales charge applicable to the total purchases. If such remittance is not
received within 20 days, the transfer agent, as attorney-in-fact pursuant to the
terms of the Letter of Intent and at the Distributor's direction, will redeem an
appropriate number of shares held in escrow to realize the difference. Signing
a Letter of Intent does not bind an investor to purchase the full amount
indicated as the sales charge in effect at the time of signing, but an investor
must complete the intended purchase in accordance with the terms of the Letter
of Intent to obtain the reduced sales charge. To apply, an investor must
indicate his or her intention to do so under a Letter of Intent at the time of
purchase of Shares.
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, C, D, E and F below
will be made on the basis of the relative net asset values per share of the
Funds included in the transaction.
A. Retail A Shares of any Fund 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 other Retail A Shares
of any other Fund offered by the Company.
B. Retail A Shares of any Fund offered by the Company or Money Market Fund
Shares ("MMF Shares") acquired by a previous exchange transaction involving
Retail A 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 A 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 A Shares and their account
number.
C. Retail B Shares acquired pursuant to an exchange transaction will
continue to be subject to a contingent deferred sales charge. However, Retail B
Shares that have been acquired through an exchange of Retail B Shares may be
exchanged for other Retail B Shares without the payment of a contingent deferred
sales charge at the time of exchange. In determining the holding period for
calculating the contingent deferred sales charge payable on redemption of Retail
B Shares, the holding period of the shares originally held will be added to the
holding period of the shares acquired through exchange.
D. Retail B Shares may be exchanged for MMF Shares (but not for
Institutional Money Market Fund Shares) without paying a contingent deferred
sales charge. In determining the holding period for calculating the contingent
deferred sales charge payable on redemption of Retail B Shares, the holding
period of the shares originally held will be added to the holding period of the
shares acquired through exchange. If the shareowner subsequently exchanges the
shares back into Retail B Shares of a Fund, the holding period accumulation on
the shares will continue to accumulate. In the event that a shareholder wishes
to redeem MMF Shares acquired by exchange for Retail B Shares of a Fund, the
contingent deferred sales charge applicable to the accumulated Retail B Shares
and Money Market Fund Shares will be charged.
E. Retail A Shares of any Fund may be exchanged without a sales load for
Retail A Shares in any other Fund for shares of any other Fund that are offered
without a sales load.
F. Institutional Shares of any Fund may be exchanged for Institutional
Shares of any other Fund.
Except as stated above, a sales load will be imposed when shares of any
Fund that were purchased or otherwise acquired without a sales load are
exchanged for Retail A Shares of another Fund which are sold with a sales load.
Retail A Shares of any Fund will be exchanged for Institutional Shares if
the shares are registered in the name of an employer-sponsored qualified
retirement plan administered by Firstar and assets equal or exceed $1 million at
the preceding month-end. The date of the exchange will be 15 business days
following the month-end in which the plan assets equal or exceed $1 million.
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.
Exemptions from CDSC. Certain types of redemptions may also qualify for an
--------------------
exemption from the contingent deferred sales charge. To receive exemptions (vi)
or (viii) below, a shareowner must explain the status of his or her redemption.
If you think you may be eligible for a contingent deferred sales charge waiver
listed below, be sure to notify your Shareowner Organization or the Distributor
at the time Retail B Shares are redeemed. The following is a more detailed
description of certain of the instances described in the Prospectus in which the
contingent deferred sales charge with respect to the B Shares is assessed:
(i) redemptions in connection with required (or, in some cases, discretionary)
distributions to participants or beneficiaries of an employee pension, profit
sharing or other trust or qualified retirement or Keogh plan, individual
retirement account or custodial account maintained pursuant to Section 403(b)(7)
of the Internal Revenue Code of 1986, as amended (the "Code");
(ii) redemptions in connection with required (or, in some cases, discretionary)
distributions to participants in qualified retirement or Keogh plans, individual
retirement accounts or custodial account maintained pursuant to Section
403(b)(7) of the Code due to death, disability or the attainment of a specified
age;
(iii) redemptions in connection with the death or disability of a shareowner; or
(iv) redemptions resulting from certain tax-free returns of excess contributions
pursuant to section 408(d)(4) or (5) of the Code.
Additional Information Regarding Shareowner Services for Retail Shares
----------------------------------------------------------------------
The Retail A and Retail B 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 A and Retail B 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 A or Retail B 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 A
or Retail B Shares to be purchased during periods of lower Retail A or Retail B
Share prices and fewer Retail A or Retail B Shares to be purchased during
periods of higher Retail A or Retail B 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 A or Retail B 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 A or Retail
B 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 A and Retail B Shares of the Funds permit shareowners to effect
ConvertiFund/R transactions, an automated method by which a Retail shareowner
may invest proceeds from one account to another account of the Retail A or
Retail B Shares of the Firstar family of funds, as the case may be. Such
proceeds include dividend distribution, capital gain distributions and
systematic withdrawals. ConvertiFund/R 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 A and Retail B 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 800-677-FUND. 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 three series designated as
Institutional Shares, Retail A Shares and Retail B Shares (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
- ----------------- -------------------- ---------------------
19-Institutional MidCap Index 100 Million
19-A 100 Million
19-B 100 Million
20-Institutional Core International 100 Million
20-A 100 Million
20-B 100 Million
- -------------
The Board of Directors has also authorized the issuance of classes 1
through 18 common stock representing interests in eighteen other separate
investment portfolios which are described in separate statements of additional
information. The remaining authorized shares are classified into ten 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 each class of the Funds are entitled to one vote for each
full share held and proportionate fractional votes for fractional shares held.
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 a Distribution and Service Plan
applicable to Retail A or B Shares) but not the other series of the same Fund,
only the affected series will be entitled to vote. Each Retail Share of a Fund
represents an equal proportionate interest with other Retail Shares 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.
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 intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code, and to distribute out its income to
shareholders each year, so that the Fund itself generally will be relieved of
federal income and excise taxes. If a Fund were to fail to so qualify: (1) the
Fund would be taxed at regular corporate rates without any deduction for
distributions to shareholders; and (2) shareholders would be taxed as if they
received ordinary dividends, although corporate shareholders could be eligible
for the dividends received deduction.
MANAGEMENT OF THE COMPANY
The business and affairs of the Funds are managed under the direction of
the Board of Directors of the Company. The Board is responsible for acting on
behalf of the shareowners.
The Board does not normally hold shareholder meetings except when required
by the 1940 Act or other applicable law. The Board will call a shareholders'
meeting for the purpose of voting on the question of removal of a Director when
requested to do so in writing by the record holders of not less than 10% of the
outstanding shares of the Company that are entitled to vote.
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(S) HELD PRINCIPAL OCCUPATIONS DURING PAST
NAME, ADDRESS & AGE WITH THE COMPANY 5 YEARS AND OTHER AFFILIATIONS
James M. Wade Chairman of the Vice President and Chief Financial
2802 Wind Bluff Board Officer, Johnson Controls, Inc.
Circle (a controls manufacturing company)
Wilmington, NC 28409 January 1987-May 1991.
Age: 55
Glen R. Bomberger Director Executive Vice President, Chief
One Park Plaza Financial Officer and Director, A.O.
11270 West Park Place Smith Corporation (a diversified
Milwaukee, WI manufacturing company) since January
53224-3690 1987; Director of companies
Age: 61 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 Chief
16650A Lake Circle Financial Officer of Wisconsin
Brookfield, WI 53005 Energy Corporation 1994-1996;
Age: 67 Treasurer of 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. Riederer Director President and Chief Executive
400 Three Springs Drive Officer of Weirton Steel since 1995;
Weirton, WV 26062-4989 Director of Weirton Steel since
Age: 54 1993; Executive Vice President and
Chief Financial Officer, Weirton
Steel January 1994 - 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, Chief
14245 Heatherwood Court Financial Officer and Secretary,
Elm Grove, WI 53122 Rexnord Corporation (an equipment
Age: 68 manufacturing company), 1988 - 1992;
Vice President - Finance and
Administration, Rexnord Inc., 1982 -
1988; Officer and Director of
several Rexnord subsidiaries until
1992.
Mary Ellen Stanek<F1> Director, President of FIRMCO since 1994 and
777 E. Wisconsin Avenue, President Chief Executive Officer, FIRMCO
Suite 800 and since 1998; Director of FIRMCO since
Milwaukee, WI 53202 Treasurer 1992 and Director Fixed Income
Age: 42 Securities of FIRMCO since 1990.
W. Bruce McConnell, III Secretary Partner of the law firm of Drinker
One Logan Square Biddle & Reath LLP.
18th & Cherry Streets
Philadelphia, PA 19103
Age: 55
Laura J. Rauman Vice Vice President of Operations, FIRMCO
777 E. Wisconsin Avenue, President since 1995; Senior Auditor, Price
Suite 800 Waterhouse, LLP, prior thereto.
Milwaukee, WI 53202
Age: 30
POSITION(S) HELD PRINCIPAL OCCUPATIONS DURING PAST
NAME, ADDRESS & AGE WITH THE COMPANY 5 YEARS AND OTHER AFFILIATIONS
Joseph C. Neuberger Assistant Vice President, Firstar Mutual Fund
615 E. Michigan Street Treasurer Services, LLC since 1994; Manager,
Milwaukee, WI 53202 Arthur Andersen LLP, prior thereto.
Age: 37
Bronson J. Haase<F1> Director President and CEO of Wisconsin Gas
626 E. Wisconsin Avenue Company, WICOR Energy, FieldTech and
Milwaukee, WI 53202 Vice President of WICOR, Inc. since
Age: 54 1998; President and CEO of
Ameritech - Wisconsin (formerly
Wisconsin Bell Communications) 1993-
1997; Trustee of Roundy Foods.
<F1> Mr. Haase and Ms. Stanek 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, 1998 of the Company's Directors.
TOTAL
COMPENSATION
PENSION OR ESTIMATED FROM
AGGREGATE RETIREMENT ANNUAL COMPANY
COMPENSATION ACCRUED AS BENEFITS AND FUND
NAME OF FROM THE PART OF FUND UPON COMPLEX<F1> PAID
PERSON/POSITION COMPANY EXPENSES RETIREMENT TO DIRECTORS
- --------------- ------------ ------------ ---------- ----------------
James M. Wade $18,500 $0 $0 $18,500
Chairman of the
Board
Glen R. $15,000<F2> $0 $0 $15,000
Bomberger
Director
Jerry G. Remmel $15,000 $0 $0 $15,000
Director
Richard K. $15,000 $0 $0 $15,000
Riederer
Director
Charles R. Roy $15,000 $0 $0 $15,000
Director
Bronson J. $3,500 $0 $0 $3,500
Haase
Director
<F1>The "Fund Complex" includes only the Company. The Company is comprised
of 20 separate portfolios.
<F2>Includes $15,000 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, 1998, the
Directors and Officers received aggregate fees and reimbursed expenses of
$82,754. Ms. Stanek, Ms. Rauman and Mr. Neuberger receive no fees from the
Company for their services as President and Treasurer, Vice President and
Assistant Treasurer respectively, although FIRMCO, of which Ms. Stanek and Ms.
Rauman are President and Vice President of Operations, respectively, receives
fees from the Company for advisory services and Firstar Mutual Fund Services,
LLC of which Mr. Neuberger is Vice President, receives fees from the Company for
administration, transfer agency and accounting services. FIRMCO is a wholly
owned subsidiary of Firstar Corporation. 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.
Directors, employees, retirees and their families of Firstar Corporation
or its affiliates are exempt and do not have to pay front-end sales charges
(provided the status of the investment is explained at the time of investment)
on purchases of Retail A Shares. 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.
Advisory Services
- -----------------
FIRMCO is the investment adviser to 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 advisory fees
otherwise payable by the Funds.
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 com-
pensation 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 Core International Equity Fund, under the Investment
Advisory Agreement, the Adviser is authorized to employ or associate itself with
a subadviser. The Adviser has employed The Glenmede Trust Company ("Glenmede")
as Sub-Adviser to the Core 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 Core International Equity Fund receives sub-advisory
-----------
services from Glenmede (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 Core International
Equity Fund with respect to its investments. The Sub-Adviser is responsible for
decisions to buy and sell the Core 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
Core 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 Core International Equity Fund or the Company, or to any shareowner of the
Core 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.
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 Services
("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 Bank, N.A. 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 Mutual Fund Services, LLC and B. C. Ziegler and Company ("Ziegler")
are Co-Administrator to the Funds. 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 Mutual Fund Services, LLC or counsel to the Company,
as requested by Firstar Mutual Fund Services, LLC; review and comment upon sales
literature and advertising relating to the Company, as requested by Firstar
Mutual Fund Services, LLC; 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 Mutual Fund Services, LLC: 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 to the SEC and current
Shareowners; 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.
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 the Company's first $2 billion of average aggregate daily net
assets, plus 0.10% of the Company'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.
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.
Shareowner Organizations
- ------------------------
Retail A Shares
As stated in the Funds' Prospectuses 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 A 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 A 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 applicable to Retail A Shares, may provide
assistance (such as the forwarding of sales literature and advertising to their
customers) in connection with the distribution of Retail A Shares. All fees
paid under these agreements are borne exclusively by the Funds' Retail A Shares.
The Funds' arrangements with Shareowner Organizations under the agreements
are governed by two Plans (a Service Plan and a Distribution and Service Plan)
for the Retail A Shares, which have been adopted by the Board of Directors.
Retail B Shares
The Company has also adopted a Distribution and Service Plan pursuant to
Rule 12b-1 and a Service Plan with respect to the Retail B Shares of the Funds.
Under the Distribution and Service Plan, payments by the Company (i) for
distribution expenses may not exceed 0.75% (annualized) of the average daily
net assets attributable to a Fund's outstanding Retail B Shares; and (ii) for
shareholder liaison services may not exceed 0.25% (annualized), respectively, of
the average daily net assets attributable to each Fund's outstanding Retail B
Shares. Under the separate Service Plan for the Retail B Shares, payments by
the Company for shareholder administrative support services may not exceed 0.25%
(annualized) of the average daily net assets attributable to each Fund's
outstanding Retail B Shares.
Because the Distribution and Service Plans contemplate the provision of
services related to the distribution of Retail A and Retail B Shares (in
addition to support services), those Plans have 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 under the Plans and the purposes for
which the expenditures were made. In addition, the arrangements 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 A or Retail B 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
A or Retail B Shares. Any material amendment to the arrangements with
Shareowner Organizations under other 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 A or Retail B 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.
Under the terms of their agreement with Firstar, Shareowner Organizations
are required to provide a schedule of any fees that they may charge to their
customers relating to the investment of their assets in shares covered by the
agreements. In addition, investors should contact their Shareowner
Organizations with respect to the availability of shareowner services and the
particular Shareowner Organization's procedures for purchasing and redeeming
shares. It is the responsibility of Shareowner Organizations to transmit
purchase and redemption orders and record those orders in customers' accounts on
a timely basis in accordance with their agreements with customers. At the
request of a Shareowner Organization, the transfer agent's charge of $12.00 for
each payment made by wire of redemption proceeds may be billed directly to the
Shareowner Organization.
CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES AGENT
Firstar Bank Milwaukee, N.A. serves as custodian of all the Funds' assets.
Under the Custody Agreement, Firstar Bank Milwaukee, N.A. 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 Bank Milwaukee, N.A. 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 Bank Milwaukee, N.A.
shall remain liable for the performance of all of its duties under the Custody
Agreement notwithstanding any delegation. For its services as custodian,
Firstar Bank Milwaukee, N.A. 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 next $1 billion and 0.005% on the balance. In addition,
Firstar Bank Milwaukee, N.A., 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 Core International
Equity Fund.
Firstar Mutual Fund Services, LLC, 615 East Michigan Street, Milwaukee,
Wisconsin 53202, serves as transfer agent and dividend disbursing agent for each
Fund under a Shareowner Servicing Agent Agreement. As transfer and dividend
disbursing agent, Firstar Mutual Fund Services, LLC 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 Mutual Fund Services, LLC 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 Mutual Fund Services, LLC pursuant to which Firstar
Mutual Fund Services, LLC 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 Mutual
Fund Services, LLC is entitled to receive fees, payable monthly, at the
following annual rates of the market value of each Fund's assets; MidCap Index
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 Core 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 A and
Retail B 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 AND FINANCIAL STATEMENTS
PricewaterhouseCoopers 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), One Logan Square, 18th and Cherry Streets, Philadelphia,
Pennsylvania 19103, serves 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 A Shares, Retail B Shares
and Institutional Shares of each 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-
677-FUND.
Total Return Calculations.
- -------------------------
Each Fund computes "average annual total return" separately for its Retail
A, Retail B 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:
n
P(1 + T) = ERV
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 A, Retail B 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
4.50% maximum front-end sales charge in connection with the purchase of Retail A
Shares and the maximum sales load charged in connection with redemptions of
Retail B Shares (5.00%). 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 in
publications to those of other mutual funds with similar investment objectives
and to stock and other relevant indices, to rankings, or other information
prepared by independent services or other financial or industry publications
that monitor the performance of mutual funds or to investments for which
reliable performance data is available. 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. 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 Dow Jones Industrial Average, a recognized unmanaged index of common stocks
of 30 industrial companies listed on the New York Stock Exchange, 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 Wilshire Top 750 Index, an index of all domestic equity issues
which are traded over the national exchanges; the Russell MidCap; the Wilshire
Next 1750 Index; the Wilshire MidCap 750 Index; and the Consumer Price Index
and the Consumer Price Index. In addition, the total return of a series of
shares of the Core International Equity Fund will be compared to the MSCI EAFE/R
Index and may be compared to the Salomon-Russell Indices, Russell Universe
Indices, Lipper International Indices, and the domestic indices listed above.
Total return 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 total return
and will reduce total return received by the accounts.
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, 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 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 July 31, 1999, 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 Services, 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: 1.0%; Institutional Money Market Fund: 76%; Tax-
Exempt Money Market Fund: 66%; U.S. Treasury Money Market Fund: 46%; U.S.
Government Money Market Fund: 77%; Growth and Income Fund: 68%; Short-Term Bond
Market Fund: 61%; Special Growth Fund: 75%; Bond IMMDEX/TM Fund: 68%; Equity
Index Fund: 75%; Balanced Income Fund: 73%; Balanced Growth Fund: 74%;
Intermediate Bond Market Fund: 81%; Growth Fund: 81%; Tax-Exempt Intermediate
Bond Fund: 66%; International Equity Fund: 86%; MicroCap Fund: 82%, and Emerging
Growth Fund: 89%. 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.
The MidCap Index Fund is not sponsored, endorsed, sold or promoted by
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"). S&P
makes no representation or warranty, express or implied, to the shareholders of
the MidCap Index Fund or any member of the public regarding the advisability of
investing in securities generally or in the MidCap Index Fund particularly or
the ability of the S&P MidCap 400 Index to track general stock market
performance. S&P's only relationship to the Company is the licensing of certain
trademarks and trade names of S&P and of the S&P MidCap 400 Index which is
determined, composed and calculated by S&P without regard to the Company or the
MidCap Index Fund. S&P has no obligation to take the needs of the Company or
shareholders of the MidCap Index Fund into consideration in determining,
composing or calculating the S&P MidCap 400 Index. S&P is not responsible for
and has not participated in the determination of the prices and amount of the
MidCap Index Fund or the timing of the issuance or sale of the MidCap Index Fund
or in the determination or calculation of the equation by which the MidCap Index
Fund is to be converted into cash. S&P has no obligation or liability in
connection with the administration, marketing or trading of the MidCap Index
Fund.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P
MidCap 400 INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY
FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY,
EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE
PRODUCT, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P MidCap 400 INDEX
OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND
EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P MidCap 400 INDEX OR ANY DATA
INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P
HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES
(INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
APPENDIX A
-----------
COMMERCIAL PAPER RATINGS
- ------------------------
A Standard & Poor's commercial paper rating is a current opinion of
the creditworthiness of an obligor with respect to financial obligations having
an original maturity of no more than 365 days. The following summarizes the
rating categories used by Standard and Poor's for commercial paper:
"A-1" - Obligations are rated in the highest category indicating that
the obligor's capacity to meet its financial commitment on the obligation is
strong. Within this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rating categories. However, the obligor's capacity to meet its financial
commitment on the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
"B" - Obligations are regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and are
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
"D" - Obligations are in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The "D" rating will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually senior debt obligations not having an original
maturity in excess of one year, unless explicitly noted. The following
summarizes the rating categories used by Moody's for commercial paper:
"Prime-1" - Issuers (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
"Prime-2" - Issuers (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
"Prime-3" - Issuers (or supporting institutions) have an acceptable
ability for repayment of senior short-term debt obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
"Not Prime" - Issuers do not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses the highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity and other protection
factors qualify issues as to 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 have time
horizons of less than 12 months for most obligations, or up to three years for
U.S. public finance securities. The following summarizes the rating categories
used by Fitch IBCA for short-term obligations:
"F1" - Securities possess the highest credit quality. This
designation indicates the best capacity for timely payment of financial
commitments and may have an added "+"to denote any exceptionally strong credit
feature.
"F2" - Securities possess good credit quality. This designation
indicates a satisfactory capacity for timely payment of financial commitments,
but the margin of safety is not as great as in the case of the higher ratings.
"F3" - Securities possess fair credit quality. This designation
indicates that the capacity for timely payment of financial commitments is
adequate; however, near-term adverse changes could result in a reduction to non-
investment grade.
"B" - Securities possess speculative credit quality. This designation
indicates minimal capacity for timely payment of financial commitments, plus
vulnerability to near-term adverse changes in financial and economic conditions.
"C" - Securities possess high default risk. This designation
indicates that default is a real possibility and that the 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.
Thomson Financial BankWatch short-term ratings assess the likelihood
of an untimely payment of principal and interest of debt instruments with
original maturities of one year or less. The following summarizes the ratings
used by Thomson Financial BankWatch:
"TBW-1" - This designation represents Thomson Financial BankWatch's
highest category and indicates a very high likelihood that principal and
interest will be paid on a timely basis.
"TBW-2" - This designation represents Thomson Financial BankWatch's
second-highest category and indicates that while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents Thomson Financial BankWatch's
lowest investment-grade category and indicates that while the obligation is more
susceptible to adverse developments (both internal and external) than those with
higher ratings, the capacity to service principal and interest in a timely
fashion is considered adequate.
"TBW-4" - This designation represents Thomson Financial BankWatch's
lowest rating category and indicates that the obligation 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" - An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher-rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated "BB," "B," "CCC," "CC" and "C" are regarded as
having significant speculative characteristics. "BB" indicates the least degree
of speculation and "C" the highest. While such obligations will likely have
some quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
"BB" - An obligation rated "BB" is less vulnerable to nonpayment than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to the obligor's inadequate capacity to meet its financial commitment on the
obligation.
"B" - An obligation rated "B" is more vulnerable to nonpayment than
obligations rated "BB," but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
"CCC" - An obligation rated "CCC" is currently vulnerable to
nonpayment, and is dependent upon favorable business, financial and economic
conditions for the obligor to meet its financial commitment on the obligation.
In the event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable to
nonpayment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action taken, but payments on this
obligation are being continued.
"D" - An obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The "D"
rating also will be used upon the filing of a bankruptcy petition or the taking
of a similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples
include: obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk - such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
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 risk appear somewhat larger than the "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds are considered as medium-grade obligations, (i.e., they
are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" indicates 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 operating experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic
rating classification from "Aa" through "Caa." The modifier 1 indicates that
the obligation ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking
in 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 to be of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable in periods of greater
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 ratings used by Fitch IBCA for corporate
and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. These ratings denote the lowest expectation of credit risk and
are assigned only in case of exceptionally strong capacity for timely payment of
financial commitments. This capacity is highly unlikely to be adversely
affected by foreseeable events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. These ratings denote a very low expectation of credit risk and
indicate very strong capacity for timely payment of financial commitments. This
capacity is not significantly vulnerable to foreseeable events.
"A" - Bonds considered to be investment grade and of high credit
quality. These ratings denote a low expectation of credit risk and indicate
strong capacity for timely payment of financial commitments. This capacity may,
nevertheless, be more vulnerable to changes in circumstances or in economic
conditions than is the case for higher ratings.
"BBB" - Bonds considered to be investment grade and of good credit
quality. These ratings denote that there is currently a low expectation of
credit risk. The capacity for timely payment of financial commitments is
considered adequate, but adverse changes in circumstances and in economic
conditions are more likely to impair this capacity.
"BB" - Bonds considered to be speculative. These ratings indicate
that there is a possibility of credit risk developing, particularly as the
result of adverse economic change over time; however, business or financial
alternatives may be available to allow financial commitments to be met.
Securities rated in this category are not investment grade.
"B" - Bonds are considered highly speculative. These ratings indicate
that significant credit risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
"CCC," "CC," "C" - Bonds have high default risk. Default is a real
possibility, and capacity for meeting financial commitments is solely reliant
upon sustained, favorable business or economic developments. "CC" ratings
indicate that default of some kind appears probable, and "C" ratings signal
imminent default.
"DDD," "DD," and "D" - Bonds are in default. The ratings of
obligations in this category are based on their prospects for achieving partial
or full recovery in a reorganization or liquidation of the obligor. While
expected recovery values are highly speculative and cannot be estimated with any
precision, the following serve as general guidelines. "DDD" obligations have the
highest potential for recovery, around 90%-100% of outstanding amounts and
accrued interest. "DD" indicates potential recoveries in the range of 50%-90%,
and "D" the lowest recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all of their
obligations. Entities rated "DDD" have the highest prospect for resumption of
performance or continued operation with or without a formal reorganization
process. Entities rated "DD" and "D" are generally undergoing a formal
reorganization or liquidation process; those rated "DD" are likely to satisfy a
higher portion of their outstanding obligations, while entities rated "D" have a
poor prospect for repaying all obligations.
To provide more detailed indications of credit quality, the Fitch IBCA
ratings from and including "AA" to "CCC" may be modified by the addition of a
plus (+) or minus (-) sign to denote relative standing within these major rating
categories.
Thomson Financial 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 indicates that the ability to repay principal
and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis, with limited incremental risk compared
to issues rated in the highest category.
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents the lowest investment-grade
category and indicates an acceptable capacity to repay principal and interest.
Issues rated "BBB" are 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 Financial BankWatch to non-investment grade long-term debt. Such issues
are regarded as having speculative characteristics regarding the likelihood of
timely repayment 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 note rating reflects the liquidity factors and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's for municipal notes:
"SP-1" - The issuers of these municipal notes exhibit a strong
capacity to pay principal and interest. Those issues determined to possess a
very strong capacity to pay debt service are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest, with some vulnerability to adverse
financial and economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - This designation denotes best quality. There is
present strong protection by established cash flows, superior liquidity support
or demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality, with
all security elements accounted for but lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - This designation denotes adequate quality.
Protection commonly regarded as required of an investment security is present
and although not distinctly or predominantly speculative, there is specific
risk.
"SG" - This designation denotes speculative quality. Debt instruments
in this category lack margins of protection.
Fitch IBCA and Duff & Phelps 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
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 Core International Equity
Fund to hedge against exposure to fluctuations 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.
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Accounting for futures contracts and options will be in accordance with
generally accepted accounting principles.
The tax principles applicable to futures contracts and options are complex
and, in some cases, uncertain. Such investments may cause a Fund to recognize
taxable income prior to the receipt of cash, thereby requiring the Fund to
liquidate other positions, or to borrow money, so as to make sufficient
distributions to shareholders to avoid corporate-level tax. Moreover, some or
all of the taxable income recognized may be ordinary income or short-term
capital gain, so that the distributions may be taxable to shareholders as
ordinary income.
