--------------------
BALANCED INCOME FUND
--------------------
BALANCED INCOME FUND
ANNUAL REPORT
OCTOBER 31, 1998
(LOGO) FIRSTAR FUNDS
<PAGE>
----------------------------------------
NOTICE TO INVESTORS
- Shares of Firstar Funds:
- ARE NOT INSURED BY THE
FDIC, the US Government or any
other governmental agency;
- are not bank deposits or
obligations
of or guaranteed by Firstar Bank,
its parent company or its
affiliates;
- are subject to investment risks,
including possible loss of
principal; and
- are offered by B.C. Ziegler and
Company, member NASD, SIPC, and
an independent third-party
distributor.
- Firstar Bank affiliates serve as
investment adviser, custodian,
transfer agent, administrator, and
accounting services agent and receive
compensation for such services as
disclosed in the current prospectus.
----------------------------------------
TABLE OF CONTENTS
Page(s)
SHAREOWNER LETTER........................................................1-3
FIRSTAR BALANCED INCOME FUND.............................................4-5
STATEMENT OF ASSETS AND LIABILITIES.......................................6
STATEMENT OF OPERATIONS...................................................6
STATEMENT OF CHANGES IN NET ASSETS........................................7
FINANCIAL HIGHLIGHTS......................................................8
SCHEDULE OF INVESTMENTS..................................................9-11
NOTES TO THE FINANCIAL STATEMENTS.......................................12-13
REPORT OF INDEPENDENT ACCOUNTANTS.........................................14
<PAGE>
(LOGO) FIRSTAR FUNDS
DEAR SHAREOWNER: December 1998
INVESTMENT REVIEW
U.S. financial markets gave investors a roller coaster ride in the second half
of Firstar Funds' October fiscal year. Russia's devaluation of the ruble and
subsequent default on its debt set off a wave of selling in August that
culminated in a stunning 513 point decline in the Dow Jones Industrial Average
on August 31st. After rebounding somewhat in September, major market indexes
like the Dow and the Standard & Poor's 500 again flirted with bear market
territory in early October, declining nearly 20% from their July peak. Hardest
hit was the small company sector of the market, which as of the October 8th low,
was off nearly 38% from its April high as measured by the Russell 2000 Index.
Since that time, U.S. stock markets have staged a breathtaking rally, aided in
large part by the Federal Reserve's three successive quarter point interest rate
cuts on September 29th, October 15th and November 17th.
The shift in Federal Reserve policy to a lower interest rate, rapid money growth
posture is aimed at improving market liquidity and heading off a "credit
crunch." Following the near collapse of hedge fund company Long-Term Capital
Management, Inc., credit spreads (the difference in yield between a corporate
bond and a U.S. Treasury bond of equal maturity) widened dramatically and the
corporate bond market seized-up. Since the Fed began lowering interest rates,
credit spreads have narrowed and the market has absorbed new corporate bond
offerings from issuers who would have met a very chilly reception several weeks
ago. The direction of short-term interest rates reflects the Fed's actions,
with three-month Treasury bill yields declining from 5.0% to 4.3% between April
30th and October 31st. Long-term interest rates also declined during this
period, but were much more volatile than short-term rates. The yield on the
thirty-year U.S. Treasury bond declined from 6.0% to a low of 4.7% in September
before settling back at 5.2% at the end of October.
During volatile times like these, a consistent investment approach is the key to
success. Instead of trying to time the market and running the risk of zigging
when you should zag, we believe investors should stick to their long-term asset
allocation strategy. A consistent approach to asset allocation improves the
chances of turning investment returns into investor returns. Equally important
to long-term success, we believe, is following a consistent investment
philosophy or style. Although Firstar Funds offers actively managed stock
portfolios across the market capitalization spectrum and bond portfolios across
the maturity range, our investment philosophy is focused. We follow a high-
quality, structured approach in the management of our fixed-income portfolios
and a growth-at-a-reasonable-price approach in the management of our equity
portfolios. By staying focused on these twin investment disciplines, we believe
we increase our chances of winning the investment "marathon." We are pleased
with the long-term investment results our approach has achieved and remain
confident in our ability to deliver competitive returns in the future.
On the technology front, we continue to enhance our web site at
www.firstarfunds.com. Most recently, we added transactional capabilities. Now
you can purchase and redeem shares on-line, as well as exchange or transfer
assets between your existing Firstar Fund accounts. You now have the freedom to
access your accounts when it best suits your schedule - seven days a week, 24
hours a day.
In other news, we reopened Firstar MicroCap Fund for new investments on November
2nd. Once the Fund receives an additional $50 million in contributions, it will
once again close. We reopen the Fund when we feel there is sufficient capacity
to absorb new assets. We are enthusiastic about the outlook for microcap
investing given the tremendous relative values we believe are available among
the market's smallest company stocks.
For more information about on-line transactions or if you have questions
regarding the reopening of Firstar MicroCap Fund, please call the Firstar Funds
Center at 1-800-982-8909.
Finally, we're very pleased at the appointment of Marian Zentmyer, CFA, as chief
equity investment officer. She replaced Scott Harkness, who left the firm in
November. Marian has 17 years of investment management experience with Firstar
and has received national publicity for her outstanding portfolio management
skills.
<PAGE>
(LOGO) FIRSTAR FUNDS
MARKET OUTLOOK
Looking ahead, our market forecast is predicated on the following trends:
- -Representing 45% of global economic activity, the U.S. and Europe will combine
to offset the collapse suffered by many emerging economies, producing a net
gain in worldwide economic growth.
- -Despite Japan's efforts to reform its banking industry and implement new
measures to stimulate demand, such as lower tax rates and deficit spending by
the government, the Japanese economy remains mired in recession.
- -Economic policies prescribed by the International Monetary Fund (IMF), which
include tax increases, government spending cuts and devalued currencies, will
delay economic recovery in those countries infected by the "Asian Contagion."
- -Deterioration in foreign trade will continue to have a negative impact on U.S.
economic growth due to weakened international demand for U.S. exports and
higher imports from countries with devalued currencies.
- -The lowest mortgage rates in a generation, moderate job creation and the best
inflation-adjusted personal income growth in twenty-five years will sustain
today's high level of consumer spending gains and extend America's consumer-
led economic expansion.
- -Unable to raise prices due to fierce global competition, companies will
continue to "buy" revenue growth by acquiring their competitors (the urge to
merge).
- -Under pressure from rising wages and slowing sales growth, companies will
continue to restructure, improve productivity through technology and pare
payrolls (the urge to purge) to maintain profits.
- -Global overcapacity in manufacturing and commodity production (e.g. autos and
oil) should continue to exert downward pressure on commodity prices.
- -Inflation rates should continue to decline with a period of mild deflation in
1999 a strong possibility.
- -The yield curve, which plots interest rates from short-term to long-term, will
become more positively sloped (via lower short-term rates), prompting a swift
reduction in money market yields.
- -With earnings growth more difficult to achieve, the key to future stock market
returns will continue to be expanding price-to-earnings ratios (P/E's).
- -P/E's should expand in a disinflationary/deflationary environment because
stock prices are expressed in current dollars while earnings are expressed in
future dollars that are appreciating in terms of purchasing power.
<PAGE>
(LOGO) FIRSTAR FUNDS
IN SUMMARY
We believe the global economy will muddle through this turbulent period with the
U.S. functioning as the "importer of last resort" and U.S. consumers providing
the engine for continued economic growth. A withering corporate profit outlook
makes stock selection critical and favors our active, growth-at-a-reasonable
price equity management strategy. Lower levels of inflation or modest deflation
increase the likelihood of further interest rate declines, creating a favorable
environment for fixed income investing. We remain optimistic for continued
positive returns for both our equity and fixed-income funds going into 1999.
Although volatility will remain high, we appreciate your confidence in the
Firstar Funds and encourage you to read the portfolio review that follows.
(PHOTO) (PHOTO)
MARY ELLEN STANEK, CFA MARIAN ZENTMYER, CFA
President and Chief Equity Investment Officer
Chief Executive Officer
Firstar Investment Research & Management Company, LLC (FIRMCO)
<PAGE>
(LOGO) FIRSTAR FUNDS
- --------------------------------------------------------------------------------
BALANCED INCOME FUND
- --------------------------------------------------------------------------------
On November 30, 1998 the Balanced Income Fund completed its first full year as a
publicly traded mutual fund and nearly ten years as a managed portfolio. Since
the Fund's inception on December 1, 1997, it has steered its way through
volatility in both the equity and fixed-income markets to provide a return
through October 31, 1998 of +12.70% (12.46% Retail no-load). This compares to
8.54% for the average balanced fund as measured by Lipper Analytical Services.
As of October 31, 1998 equities represented 44% of the overall portfolio. The
companies selected for the portfolio are identical to those of the Growth and
Income Fund (see page 9). Like the Growth and Income Fund, the portfolio's
focus over the fiscal year was on dividend-paying companies with attractive
long-term records of enhanced returns. While the return of larger stocks
represented by the S&P 500 advanced +21.99%, smaller stocks as measured by the
S&P 600 were not able to keep pace with prices declining -11.06%. Most of
Firstar Balanced Income Fund's portfolio was weighted in the larger
capitalization area during the fiscal year.
The objective of the fixed-income component of Firstar Balanced Income Fund is
to provide an annual rate of total return comparable to the return of the Lehman
Brothers Intermediate Government/Corporate Bond Index. More than half (54%) of
the fixed-income portion of the Fund is invested in U.S. Treasury obligations
which was the strongest performing sector of the bond market over the last
twelve months. Our careful, research-intensive process of selecting investment-
grade corporate issues and asset-backed securities gives the Fund a high-quality
focus. Over three-quarters (80%) of the fixed-income portion of the Fund is
invested in obligations rated Aaa/AAA or higher. Among corporate bonds, we have
a preference for finance, banking and brokerage issues along with dollar-
denominated international ("Yankee") securities. We think these sectors
represent exceptional value in the current environment. The hallmark of our
fixed-income approach has been our consistent, risk-controlled approach in all
market climates. This same disciplined management approach is employed in the
management of this fund as well.
During the last couple of months of the fiscal year, we have seen a temporary
"de-coupling" of our longer term thesis "what is good for bonds will be better
for stocks." The third quarter calendar 1998 brought fears of a decelerating
economy which overwhelmed the decline in interest rates. The Federal Reserve's
decision to cut interest rates on October 15 provided a psychological boost to
the market and renewed the relationship of lower interest rates translating to
higher share prices.
We remain constructive on the outlook for both bonds and stocks and appreciate
your confidence in Firstar Balanced Income Fund.
PORTFOLIO MANAGER PROFILE
- --------------------------------------------------------------------------------
(PHOTO) (PHOTO)
MARIAN E. ZENTMYER, WARREN D. PIERSON, CFA
CFA, CFP
MARIAN E. ZENTMYER, CFA, CFP, Chief Equity Investment Officer of Firstar
Investment Research & Management Company, LLC (FIRMCO) and WARREN D. PIERSON,
CFA, Vice President and Senior Portfolio Manager co-manage the Fund, Marian
since its inception on January 1, 1989 and Warren since July 1, 1995. Marian has
been with Firstar since 1982 and has 20 years of investment managment
experience. She received her BA from Stanford University in 1978. Warren has
been with Firstar since 1985 and has 13 years of investment management
experience. Warren received his BA from Lawrence University in 1984. Marian
is a Chartered Financial Analyst and a Certified Financial Planner. Warren
is a Chartered Financial Analyst.
<PAGE>
(LOGO) FIRSTAR FUNDS
12/1/97 10/98
------- -------
FIRSTAR BALANCED INCOME FUND - INSTITIUTIONAL $10,000 $11,270
FIRSTAR BALANCED INCOME FUND - A - NO LOAD $10,000 $11,246
FIRSTAR BALANCED INCOME FUND - A - LOAD $9,600 $10,792
LIPPER BALANCED FUND INDEX $10,000 $10,854
S&P 500 STOCK INDEX $10,000 $11,659
This chart assumes an initial investment of $10,000 made on 12/1/97 (inception).
Performance reflects fee waivers in effect. In the absence of fee waivers, total
return would be reduced. Returns shown include the reinvestment of all dividends
and other distributions. Past performance is not predictive of future
performance. Investment return and principal value will fluctuate, so that your
shares, when redeemed, may be worth more or less than their original cost.
- --------------------------------------------------------------------------------
CUMULATIVE RATE OF RETURN (%)
FOR PERIOD ENDED OCTOBER 31, 1998
- --------------------------------------------------------------------------------
Since Inception
12/1/97
- --------------------------------------------------------------------------------
FIRSTAR BALANCED INCOME FUND - INSTITUTIONAL 12.7%
FIRSTAR BALANCED INCOME FUND - A - NO LOAD 12.5%
FIRSTAR BALANCED INCOME FUND - A - LOAD<F1> 7.9%
LIPPER BALANCED FUND INDEX<F2> 8.5%
S&P 500 STOCK INDEX<F3> 16.6%
- --------------------------------------------------------------------------------
A = Series A (Retail shares)
<F1> Reflects maximum sales charge of 4.00%. Effective January 1, 1999 the
maximum sales charge will be 4.50%.
<F2> The Lipper Balanced Fund Index is composed of the 30 largest mutual funds
whose primary objective is to conserve principal by maintaining a balanced
portfolio of stocks and bonds.
<F3> The S&P 500 Stock Index is an index of an unmanaged group of 500 selected
common stocks, most of which are listed on the New York Stock Exchange. The
Index is heavily weighted toward stocks with large market capitalizations
and represents approximately two-thirds of the total market value of all
domestic common stocks.
An investment cannot be made directly in an index.
Series A shares, unlike the Series Institutional shares, have a 4% maximum sales
load and are subject to an annual 0.25% service organization fee. Performance
reflects fee waivers in effect. In the absence of fee waivers, total return
would be reduced.
TOP 5 EQUITY HOLDINGS 10/31/98
- --------------------------------------------
TYCO INTERNATIONAL, LTD. 2.1%
- --------------------------------------------
BANK OF NEW YORK, INC. 1.4%
- --------------------------------------------
MCKESSON CORPORATION 1.3%
- --------------------------------------------
NORWEST CORPORATION 1.2%
- --------------------------------------------
INTERPUBLIC GROUP OF COMPANIES, INC. 1.2%
- --------------------------------------------
Portfolio holdings are subject to change and are not a representation of the
Fund's entire portfolio holdings.
TOTAL FUND NET ASSETS 10/31/98
- --------------------------------------------
$44,650,163
- --------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
(LOGO) FIRSTAR FUNDS
BALANCED INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
OCTOBER 31, 1998
ASSETS:
Investments, at value (Cost $40,199) $42,963
Income receivable 344
Capital shares sold 2,058
Receivable for securities sold 402
Other assets 64
--------
Total Assets 45,831
--------
LIABILITIES:
Payable for securities purchased 1,075
Capital shares redeemed 18
Payable to affiliates 30
Accrued expenses and other liabilities 58
--------
Total Liabilities 1,181
--------
NET ASSETS $44,650
========
NET ASSETS CONSIST OF:
Capital stock $39,978
Undistributed net investment income 122
Undistributed accumulated net realized gains 1,786
Unrealized net appreciation on investments 2,764
--------
Total Net Assets $44,650
========
SERIES A:
Net assets $ 10,614
Shares authorized ($.0001 par value) 500,000
Shares issued and outstanding 965
Net asset value and redemption price per share <F1> $11.00
========
Maximum offering price per share <F1> $11.46
========
SERIES INSTITUTIONAL:
Net assets $34,036
Shares authorized ($.0001 par value) 500,000
Shares issued and outstanding 3,091
Net asset value, redemption price
and offering price per share <F1> $11.01
========
<F1> Amounts may not recalculate due to rounding.
STATEMENT OF OPERATIONS
(AMOUNTS IN THOUSANDS)
DECEMBER 1, 1997<F2> THROUGH OCTOBER 31, 1998
INVESTMENT INCOME:
Dividend income $ 238
Interest income 972
--------
1,210
--------
EXPENSES:
Investment advisory fees 237
Administration fees 35
Shareowner servicing and accounting costs 58
Service organization fees _ Series A 11
Custody fees 14
Federal and state registration fees 23
Professional fees 26
Reports to shareowners 26
Amortization of organization costs 8
Directors' fees and expenses 7
Other 2
--------
Total expenses before waiver 447
Less: Waiver of expenses (199)
--------
Net Expenses 248
--------
NET INVESTMENT INCOME 962
--------
REALIZED ANDUNREALIZEDGAIN (LOSS):
Net realized (loss) on investments (227)
Net change in unrealized appreciation on investments 2,764
--------
Net gain on investments 2,537
--------
NETINCREASEINNET ASSETS
RESULTINGFROMOPERATIONS $3,499
========
<F2> Commencement of operations.
See notes to the financial statements.
<PAGE>
(LOGO) FIRSTAR FUNDS
BALANCED INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
(AMOUNTS IN THOUSANDS)
December 1, 1997<F1>
through
October 31, 1998
--------------------
OPERATIONS:
Net investment income $ 962
Net realized (loss) on investments (227)
Net change in unrealized appreciation
on investments 2,764
--------
Net increase in net assets resulting
from operations 3,499
--------
CAPITAL SHARE TRANSACTIONS:
Shares sold 47,732
Shares issued to owners in
reinvestment of dividends 194
Shares redeemed (5,929)
--------
Net increase in net assets as a result
of capital share transactions 41,997
--------
DISTRIBUTIONS TO
SERIES A SHAREOWNERS:
From net investment income (128)
From net realized gains -
--------
(128)
--------
DISTRIBUTIONS TO
SERIES INSTITUTIONAL SHAREOWNERS:
From net investment income (718)
From net realized gains -
--------
(718)
--------
TOTAL INCREASE IN NET ASSETS 44,650
NET ASSETS:
Beginning of period -
--------
End of period (including undistributed
net investment income of $122) $44,650
========
<F1> Commencement of operations.
See notes to the financial statements.
<PAGE>
(LOGO) FIRSTAR FUNDS
BALANCED INCOME FUND
FINANCIAL HIGHLIGHTS
December 1, 1997<F1>
through
October 31, 1998
-------------------------
Series
Series A Institutional
-------- -------------
Per Share Data:
Net asset value,
beginning of period $10.00 $10.00
Income from investment operations:
Net investment income 0.28<F6> 0.30<F6>
Net realized and unrealized
gains on securities 0.96 0.96
-------- --------
Total from investment operations 1.24 1.26
-------- --------
Less distributions:
Dividends from net investment income (0.24) (0.25)
Distributions from capital gains - -
-------- --------
Total distributions (0.24) (0.25)
-------- --------
Net asset value, end of period $11.00 $11.01
======== ========
Total return <F2> <F3> 12.46% 12.70%
Supplemental data and ratios:
Net assets, in thousands, end of period $10,614 $34,036
Ratio of net expenses to average
net assets <F4> <F7> 1.00% 0.75%
Ratio of net investment income
to average net assets <F4> <F8> 2.82% 3.07%
Portfolio turnover rate <F2> <F5> 58.33% 58.33%
<F1> Commencement of operations.
<F2> Not annualized.
<F3> The total return calculation does not reflect the 4% front-end sales charge
for Series A.
<F4> Annualized.
<F5> Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
<F6> Net investment income per share represents net investment income divided by
the average shares outstanding throughout the period.
<F7> Without fees waived, ratio of net expenses to average net assets for the
period ended October 31, 1998, would have been 1.63% and 1.38%.
<F8> Without fees waived, ratio of net investment income to average net assets
for the period ended October 31, 1998, would have been 2.19% and 2.44%.
See notes to the financial statements.
<PAGE>
(LOGO) FIRSTAR FUNDS
BALANCED INCOME FUND
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1998
Number Market
of Value
Shares (in thousands)
-------- --------------
COMMON STOCKS 43.4%
APPLIANCES 0.8%
6,975 Maytag Corporation $ 345
--------
BANKING 4.0%
19,800 Bank of New York Company, Inc. 625
3,800 Mellon Bank Corporation 228
5,000 Northern Trust Corporation 369
14,700 Norwest Corporation 547
--------
1,769
--------
BUILDING MATERIALS 0.5%
5,000 Martin Marietta Materials, Inc. 245
--------
BUSINESS MACHINES & SOFTWARE 1.2%
3,625 Diebold, Inc. 113
4,270 Xerox Corporation 414
--------
527
--------
BUSINESS SERVICES 3.1%
3,000 Automatic Data Processing, Inc. 233
5,800 H & R Block, Inc. 260
9,100 Equifax Inc. 352
10,800 Service Corporation International 385
7,050 The ServiceMaster Company 149
--------
1,379
--------
CHEMICALS 1.0%
7,200 Ecolab, Inc. 215
3,200 Praxair, Inc. 129
3,200 Valspar Corporation 90
--------
434
--------
COMMUNICATIONS & MEDIA 2.1%
9,300 Interpublic Group of Companies, Inc. 544
14,000 New York Times Company - Class A 395
--------
939
--------
CONSUMER PRODUCTS 1.9%
4,850 Avery Dennison Corporation 201
1,800 The Clorox Company 197
2,100 Masco Corporation 59
9,300 Newell Company 409
--------
866
--------
CONTAINERS 0.4%
4,900 Bemis Company, Inc. 182
--------
COSMETICS & SOAP 2.4%
7,600 Avon Products, Inc. 302
4,600 Estee Lauder Companies - Class A 302
1,800 Gillette Company 81
4,500 Procter & Gamble Company 400
--------
1,085
--------
Number Market
of Value
Shares (in thousands)
-------- --------------
DRUGS/MEDICAL SUPPLIES 6.8%
6,200 American Home Products Corporation $ 302
5,000 Baxter International, Inc. 300
8,400 Becton, Dickinson & Company 354
4,300 Bristol-Myers Squibb Company 475
3,500 Johnson & Johnson 285
7,560 McKesson Corporation 582
4,200 Medtronic, Inc. 273
4,300 Pfizer, Inc. 461
--------
3,032
--------
ELECTRIC UTILITIES 0.7%
10,100 NIPSO Industries, Inc. 302
--------
FINANCE 0.3%
4,300 Household International, Inc. 157
--------
FINANCIAL SERVICES 3.5%
12,200 Alliance Capital Management L.P. 303
2,500 American Express Company 221
3,300 Citigroup Inc. 155
4,500 Federal National Mortgage Association 319
3,400 Marsh & McLennan Companies, Inc. 188
6,100 MBIA, Inc. 373
--------
1,559
--------
FOOD, BEVERAGES & TOBACCO 0.4%
100 McCormick & Company, Incorporated 3
5,500 PepsiCo, Inc. 186
--------
189
--------
HEALTH CARE SERVICES & SUPPLIES 0.9%
5,000 Warner-Lambert Company 392
--------
INSURANCE 1.0%
10,500 ReliaStar Financial Corporation 460
--------
MULTI-INDUSTRY 2.6%
1,600 Illinois Tool Works Inc. 103
2,500 Pentair, Inc. 94
700 Teleflex Incorporated 27
14,900 Tyco International, Ltd. 923
--------
1,147
--------
NATURAL GAS 0.6%
5,100 Enron Corporation 269
--------
OIL - DOMESTIC 0.4%
4,400 Phillips Petroleum Company 190
--------
OIL - INTERNATIONAL 0.8%
4,500 Mobil Corporation 341
--------
See notes to the financial statements.
<PAGE>
(LOGO) FIRSTAR FUNDS
BALANCED INCOME FUND
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1998
Number Market
of Value
Shares (in thousands)
-------- --------------
PAPER & FOREST PRODUCTS 0.3%
2,700 Kimberly-Clark Corporation $ 130
--------
PRINTING & PUBLISHING 1.6%
6,700 Houghton Mifflin Company 261
5,000 McGraw-Hill, Inc. 450
--------
711
--------
PRODUCTION 0.4%
5,200 Dover Corporation 165
--------
REAL ESTATE INVESTMENT TRUSTS (REIT'S) 1.4%
3,800 Boston Properties, Inc. 108
7,900 CCA Prison Realty Trust 186
5,300 Post Properties, Inc. 205
5,183 ProLogis Trust 113
--------
612
--------
RETAIL 2.2%
2,300 Albertson's, Inc. 128
6,505 Gap, Inc. 391
7,300 Hannaford Brothers Company 320
3,250 Longs Drug Stores Corporation 127
--------
966
--------
TELECOMMUNICATIONS 1.0%
4,900 ALLTEL Corporation 229
2,950 Lucent Technologies, Inc. 237
--------
466
--------
TEXTILES & APPAREL 1.1%
11,100 CVS Corporation 507
--------
Total Common Stock (Cost $17,137) 19,366
--------
PREFERRED STOCK 0.2%
FINANCIAL SERVICES 0.2%
1,600 PLC Capital Trust II
(convertible to Protective Life Corporation
common stock) 100
--------
Total Preferred Stock (Cost $83) 100
--------
Number
of Shares
(in thousands)
- --------------
LONG-TERM INVESTMENTS 45.3%
CORPORATE CONVERTIBLE BONDS 0.3%
108 Imax Corporation,
5.75%, 4/01/03 (convertible to Imax Corporation
common stock) 136
--------
Principal Market
Amount Value
(in thousands) (in thousands)
- ------------- --------------
ASSET-BACKED SECURITIES 8.4%
AUTO LOAN RECEIVABLES 1.1%
Banc One Auto Grantor Trust,
$ 162 Series 1997-A, Class A, 6.27%, 11/20/03 $ 164
Chase Manhattan Auto Owner Trust,
300 Series 1997-B, Class A5, 6.60%, 3/15/02 310
--------
474
--------
CREDIT CARD RECEIVABLES 6.6%
Advanta Credit Card Master Trust,
650 Series 1995-F, Class A1, 6.05%, 8/01/03 665
Chemical Master Credit Card Trust I,
250 Series 1995-2, Class A, 6.23%, 6/15/03 256
Citibank Credit Card Master Trust I, Principal Only:
300 Series 1996-1, Class A, 0.00%, 2/07/03 268
800 Series 1997-6, Class A, 0.00%, 8/15/06 575
Discover Card Master Trust I,
500 Series 1995-2, Class A, 6.55%, 2/18/03 514
First Chicago Master Trust II,
250 Series 1994-L, Class A, 7.15%, 2/15/00 254
Sears Credit Account Master Trust,
400 Series 1995-2, Class A, 8.10%, 6/15/04 414
--------
2,946
--------
HOME EQUITY LOAN RECEIVABLES 0.7%
Green Tree Financial Corporation,
178 Series 1996-9, Class A3, 6.41%, 1/15/28 178
Security Pacific Home Equity Loan Subordinated Notes,
105 9.75%, 5/15/99 107
--------
285
--------
CORPORATE BONDS 8.9%
Associates Corporation of North America Senior Notes,
150 7.50%, 4/15/02 159
Bank of New York Subordinated Notes,
150 7.875%, 11/15/02 164
BankAmerica Corporation Subordinated Notes,
185 9.20%, 5/15/03 211
Bankers Trust - NY, Debentures,
200 9.50%, 6/14/00 210
Barclays American Corp. Debentures,
300 9.75%, 5/15/21 343
Bear Stearns Company Notes,
100 6.50%, 6/15/00 101
Chase Manhattan Corporation Subordinated Notes,
282 9.75%, 11/01/01 316
Chrysler Financial Corporation Debentures,
100 12.75%, 11/01/99 107
Citicorp Subordinated Notes,
100 9.50%, 2/01/02 109
Continental Cablevision, Inc. Debentures,
100 9.50%, 8/01/13 119
Jack Eckerd Corporation Senior Subordinated Notes,
151 9.25%, 2/15/04 158
See notes to the financial statements.
<PAGE>
(LOGO) FIRSTAR FUNDS
BALANCED INCOME FUND
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1998
Principal Market
Amount Value
(in thousands) (in thousands)
- -------------- --------------
CORPORATE BONDS 8.9% (CONT.)
Federal Express Corporation Notes,
$ 180 9.65%, 6/15/12 $ 240
Lehman Brothers, Inc. Senior Subordinated Notes,
300 9.875%, 10/15/00 309
Midlantic Corporation Subordinated Notes,
240 9.20%, 8/01/01 264
Morgan Stanley Group Debentures,
300 8.875%, 10/15/01 329
National Westminster Bank PLC Debentures,
300 9.375%, 11/15/03 346
Paine Webber Group, Inc. Subordinated Notes,
200 7.75%, 9/01/02 210
Salomon, Inc. Notes,
277 7.00%, 6/15/03 289
--------
3,984
--------
INTERNATIONAL/YANKEE (U.S. $ DENOMINATED) 1.4%
Ford Capital BV Debentures:
200 9.375%, 5/15/01 219
150 9.50%, 6/01/10 189
Korea Development Bank Bonds,
65 7.125%, 9/17/01 58
Norsk Hydro A/S Debentures,
50 9.00%, 4/15/12 64
Quebec (Province of) Local Government Guarantee,
50 11.00%, 6/15/15 56
Wharf Capital International Ltd. Company Guarantee,
50 7.625%, 3/13/07 35
--------
621
--------
U.S. GOVERNMENT AGENCY-BACKED MORTGAGE ISSUES 1.9%
Federal Home Loan Mortgage Corporation (FHLMC)
Real Estate Mortgage Investment Conduit (REMIC),
111 Series 1201, Class E, 7.40%, 12/15/21 113
Federal National Mortgage Association (FNMA)
Real Estate Mortgage Investment Conduit (REMIC):
200 Series 1993-37, Class B, 7.00%, 7/25/02 205
70 Series 1989-2, Class D, 8.80%, 1/25/19 73
100 Series 1990-89, Class K, 6.50%, 7/25/20 101
256 Series 1991-147, Class K, 7.00%, 1/25/21 258
Government National Mortgage Association (GNMA)
Real Estate Mortgage Investment Conduit (REMIC),
117 Series 3, Class F, 6.50%, 6/17/20 118
--------
868
--------
U.S. TREASURY OBLIGATIONS 24.4%
U.S. Treasury Bonds;
5,000 10.75%, 8/15/05 6,758
U.S. Treasury Strips, Principal Only;
500 0.00%, 11/15/04 381
1,200 0.00%, 11/15/04 909
Principal Market
Amount Value
(in thousands) (in thousands)
- -------------- --------------
U.S. TREASURY OBLIGATIONS 24.4% (CONT.)
U.S. Treasury Notes,
$ 2,700 6.625%, 7/31/01 $ 2,858
--------
10,906
--------
Total Long-Term Investments (Cost $19,702) 20,220
--------
Number
of Shares
(in thousands)
- --------------
SHORT-TERM INVESTMENTS 7.3%
INVESTMENT COMPANIES 7.3%
1,548 Financial Square Prime Obligation Fund 1,548
1,729 Short-Term Investments Co. Liquid Assets Portfoli 1,729
--------
Total Short-Term Investments (Cost $3,277) 3,277
--------
Total Investments (Cost $40,199) 96.2% 42,963
--------
Other Assets, less Liabilities 3.8% 1,687
--------
TOTAL NET ASSETS 100.0% $ 44,650
========
See notes to the financial statements.
<PAGE>
(LOGO) FIRSTAR FUNDS
BALANCED INCOME FUND
NOTES TO THE FINANCIAL STATEMENTS
1. ORGANIZATION
Firstar Funds, Inc. (the "Company") was incorporated on February
15, 1988, as a Wisconsin Corporation and is registered as an open-end management
investment company under the Investment Company Act
of 1940, as amended. The Balanced Income Fund (the "Fund") is a separate,
diversified investment portfolio of the Company. The Fund commenced operations
on December 1, 1997. The objective of the Balanced Income Fund is to seek
current income and the preservation of capital through investment in a balanced
portfolio of dividend paying equity and fixed income securities.
The costs, in thousands, incurred in connection with the organization,
initial registration and public offering of shares, aggregating $47, have been
paid by the Fund. These costs are being amortized over the period of benefit,
but not to exceed sixty months from the Fund's commencement of operations.
The Company has issued two classes of Fund shares:Series A and Series
Institutional. The Series A shares are subject to a 0.25% service organization
fee and an initial sales charge imposed at the time of purchase, in accordance
with the Fund's prospectus. The maximum sales charge is 4% of the offering price
or 4.16% of the net asset value. Effective January 1, 1999, the maximum sales
charge will be 4.50% of the offering price or 4.71% of the net asset value. Each
class of shares has identical rights and privileges except with respect to
service organization fees paid by Series A shares, voting rights on matters
affecting a single class of shares and the exchange privileges of each class of
shares.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
a) Investment Valuation - Securities which are traded on a recognized 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 a national
securities exchange. Exchange-traded securities for which there were no
transactions are valued at the current bid prices. Securities traded on only
over-the-counter markets are valued on the basis of closing over-the-counter bid
prices. Instruments with a remaining maturity of 60 days or less are valued on
an amortized cost basis. Investment companies are valued at net asset value,
which approximates market value. Securities for which market quotations are not
readily available, and other assets are valued at fair value as determined by
the investment adviser under the supervision of the Board of Directors.
b) Federal Income Taxes - It is the Fund's policy to meet the requirements of
the Internal Revenue Code applicable to regulated investment companies and it
intends to distribute investment company net taxable income and net capital
gains to shareholders. Therefore, no federal income tax provision is required.
c) Income and Expenses - The Fund is charged for those expenses that are
directly attributable to it, such as advisory, administration and certain
shareowner service fees. Expenses that are not directly attributable to a
portfolio are typically allocated among the Company's portfolios in proportion
to their respective net assets, number of shareowner accounts or net sales,
where applicable. Net investment income other than class specific expenses, and
realized and unrealized gains and losses are allocated daily to each class of
shares based upon the relative net asset value of outstanding shares of each
class of shares at the beginning of the day (after adjusting for the current
day's capital share activity of the respective class).
d) Distributions to Shareowners - Dividends from net investment income are
declared and paid quarterly. Distributions of net realized capital gains, if
any, will be declared at least annually.
e) When-Issued Securities _ The Fund may purchase securities on a when-issued or
delayed delivery basis. Although the payment and interest terms of these
securities are established at the time the purchaser enters into the agreement,
these securities may be delivered and paid for at a future date, generally
within 45 days. The Fund records purchases of when-issued securities and
reflects the values of such securities in determining net asset value in the
same manner as other portfolio securities. The Fund identifies and maintains at
all times cash, cash equivalents, or other high-quality liquid securities in an
amount at least equal to the amount of outstanding commitments for when-issued
securities.
f) Use of Estimates _ The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
g) Other _ Investment and shareowner transactions are recorded on the trade
date. The Fund determines the gain or loss realized from investment transactions
by comparing the original cost of the security lot sold with the net sale
proceeds. Dividend income is recognized on the ex-dividend date or as soon as
information is available to the Fund and interest income is recognized on an
accrual basis. Generally accepted accounting principles require that permanent
reporting and tax differences be reclassified in the capital accounts.
<PAGE>
(LOGO) FIRSTAR FUNDS
3. CAPITAL SHARE TRANSACTIONS
Transactions in capital shares for the Fund, in thousands, were as follows:
December 1, 1997 through October 31, 1998:
Series A Series Institutional
--------------------- ---------------------
Amount Shares Amount Shares
------ ------ ------ ------
Shares sold $11,352 1,046 $36,380 3,540
Shares issued to
owners in
reinvestment
of dividends 123 11 71 7
Shares redeemed (993) (92) (4,936) (456)
-------- -------- -------- --------
Net increase $10,482 965 $31,515 3,091
======== ======== ======== ========
4. INVESTMENT TRANSACTIONS
Purchases and sales of securities for the period December 1, 1997 through
October 31, 1998 (excluding short-term investments), in thousands, were as
follows:
Purchase:
U.S. Government $ 17,367
Other 38,248
Sales:
U.S. Government 6,824
Other 10,406
The initial investments of the Fund were contributed on a tax-free basis upon
conversion of a bank common trust fund. Tax basis unrealized net appreciation as
of December 1, 1997 (date of conversion) was $5,641, in thousands. For the
period ended October 31, 1998, $2,013, in thousands, of tax basis net gains
related to the conversion were realized. Tax basis unrealized appreciation
related to the conversion was $3,628, in thousands, at October 31, 1998.
At October 31, 1998, gross unrealized appreciation and depreciation of
investments for federal tax purposes, in thousands, were as follows:
Appreciation $6,570
(Depreciation) (188)
--------
Net unrealized appreciation on investments $6,382
========
At October 31, 1998, the cost of investments, in thousands, for federal income
tax purposes was $36,581.
For the period ended October 31, 1998, the percent of ordinary income dividends
that qualifies for the dividends received deduction available to corporate
stockholders was 24% (unaudited).
5. INVESTMENT ADVISORY AND OTHER AGREEMENTS
The Fund has entered into an Investment Advisory Agreement with Firstar
Investment Research & Management Company, LLC ("FIRMCO"). FIRMCO is a subsidiary
of Firstar Corporation, a publicly held bank holding company. Pursuant to its
Advisory Agreement with the Fund, the Adviser is entitled to receive a fee,
calculated daily and payable monthly, at the annual rate of 0.75% as applied to
the Fund's daily net assets. For the period ended October 31, 1998, $177 in
advisory fees, in thousands, were voluntarily waived for the Fund.
Firstar Bank Milwaukee, N.A. serves as custodian and Firstar Mutual Fund
Services, LLC serves as transfer agent and accounting services agent for the
Fund. Both companies are affiliates of FIRMCO.
The Company has entered into a Co-Administration Agreement
with B.C. Ziegler and Company and Firstar Mutual Fund Services, LLC (the "Co-
Administrators") for certain administrative services. Pursuant to the Co-
Administration Agreement with the Company, the Co-Administrators are entitled to
receive a fee, 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. For the period ended October 31, 1998, $22 of administration fees, in
thousands, were voluntarily waived for the Fund.
The Company has entered into Servicing Agreements with certain Service
Organizations, including FIRMCO affiliates, for the Series A class of shares.
The Service Organizations are entitled to receive fees from the Fund up to an
annual rate of 0.25% of the average daily net asset value of Series A Shares for
certain support and/or distribution services to customers of the Service
Organizations who are beneficial owners of Series A Shares. These services may
include assisting customers in processing purchase, exchange and redemption
requests; processing dividend and distribution payments from the Fund; and
providing information periodically to customers showing their positions in
Series A Shares. Service Organization fees, in thousands, incurred by the Fund
aggregated $11 for the period ended October 31, 1998.
Each director of the Company who is not affiliated with FIRMCO receives an
annual fee from the Company for service as a Director and is eligible to
participate in a deferred compensation plan with respect to these fees.
Participants in the plan may designate their deferred Director's fees as if
invested in any one of the Firstar Funds (with the exception of the MicroCap
Fund) or in 90-day U.S. Treasury bills. The value of each Director's deferred
compensation account will increase or decrease as if it were invested in shares
of the selected Firstar Funds or 90-day U.S. Treasury bills. The Fund maintains
its proportionate share of the Company's liability for deferred fees.
<PAGE>
(LOGO) FIRSTAR FUNDS
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF THE FIRSTAR
BALANCED INCOME FUND
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statement of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Firstar Balanced Income Fund
(one of the portfolios of Firstar Funds, Inc. (the "Fund")) at October 31, 1998,
the results of its operations, the changes in its net assets and its financial
highlights for the period from December 1, 1997 (commencement of operations)
through October 31, 1998, all in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit, which included
confirmation of securities at October 31, 1998 by correspondence with the
custodian and brokers, provides a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
December 8, 1998
<PAGE>
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<PAGE>
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<PAGE>
FIRSTAR FUNDS ARE AVAILABLE THROUGH:
- - THE FIRSTAR FUNDS CENTER,
- - INVESTMENT SPECIALISTS WHO ARE REGISTERED
REPRESENTATIVES OF FIRSTAR INVESTMENT SERVICES, INC.
A REGISTERED BROKER/DEALER, NASD AND SIPC MEMBER,
- - AND THROUGH SELECTED SHAREHOLDER ORGANIZATIONS.
This report is authorized for distribution only when preceded or
accompanied by a current prospectus.
FOR ACCOUNT BALANCES AND INVESTOR SERVICES INFORMATION
1-800-228-1024
1-414-287-3808
FIRSTAR FUNDS CENTER
615 EAST MICHIGAN STREET
P.O. BOX 3011
MILWAUKEE, WI 53201-3011
WWW.FIRSTARFUNDS.COM
(LOGO) FIRSTAR FUNDS
FORM #40-0250 12/98
