FIRSTAR FUNDS, INC.
Statement of Additional Information
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<S> <C> <C>
Short-Term Bond Market Fund Balanced Income Fund Special Growth Fund
Intermediate Bond Market Fund Balanced Growth Fund MidCap Index Fund
Bond IMMDEX(TM)Fund Growth and Income Fund Emerging Growth Fund
Tax-Exempt Intermediate Bond Fund Equity Index Fund MicroCap Fund
Growth Fund Core International Equity Fund
International Equity Fund
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March 1, 2000
As revised August 1, 2000
TABLE OF CONTENTS
PAGE
Firstar Funds, Inc.......................................................... 2
Description of the Funds and their Investments and Risks.................... 2
Investment Strategies and Risks............................................. 7
Net Asset Value............................................................. 40
Additional Purchase and Redemption Information.............................. 41
Description of Shares....................................................... 47
Additional Information Concerning Taxes..................................... 50
Management of the Company................................................... 51
Custodian, Transfer Agent and Accounting Services Agent..................... 61
Expenses.................................................................... 62
Independent Accountants and Financial Statements............................ 62
Counsel..................................................................... 62
Performance Calculations.................................................... 63
Performance History......................................................... 68
Miscellaneous............................................................... 71
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 prospectus ("Prospectus") dated March 1, 2000, for Institutional, Retail
A and Retail B Shares of the Short-Term Bond Market Fund, Intermediate Bond
Market Fund, Tax-Exempt Intermediate Bond Fund, Bond IMMDEX(TM) Fund, Balanced
Income Fund, Balanced Growth Fund, Growth and Income Fund, Equity Index Fund,
Growth Fund, Special Growth Fund, , MidCap Index Fund, Emerging Growth Fund,
MicroCap Fund, Core International Equity Fund and International Equity Fund
(collectively referred to as the "Funds") and is incorporated by reference in
its entirety into the Prospectus. Copies of the Prospectus 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. The Financial
Statements and the Independent Accountants report thereon in this SAI are
incorporated by reference from the Funds' Annual Report, which may be obtained
by writing the address above or calling the toll-free number above. No other
part of the Annual Report is incorporated herein by reference.
FIRSTAR FUNDS, INC.
Firstar Funds, Inc. (the "Company") is a Wisconsin corporation that 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 fifteen diversified portfolios, the Short-Term Bond
Market Fund, Intermediate Bond Market Fund, Tax-Exempt Intermediate Bond Fund,
Bond IMMDEX(TM) Fund, Balanced Income Fund, Balanced Growth Fund, Growth and
Income Fund, Equity Index Fund, Growth Fund, Special Growth Fund, MidCap Index
Fund, Emerging Growth Fund, MicroCap Fund, Core International Equity Fund and
International Equity Fund (collectively the "Funds"). The Short-Term Bond Market
Fund changed its name from Short-Intermediate Fixed Income Fund effective
January 1, 1993. The Growth and Income Fund changed its name from the Income and
Growth Fund effective August 16, 1993. The Growth Fund changed its name from the
MidCore Growth Fund effective May 30, 1997. The Balanced Growth Fund changed its
name from the Balanced Fund effective February 1, 1998 and commenced operations
on March 30, 1992. The Growth and Income Fund, Equity Index Fund, Short-Term
Bond Market Fund and Bond IMMDEX(TM) Fund commenced operations on December 29,
1989; the Special Growth Fund commenced operations on December 28, 1989; the
Growth Fund commenced operations on December 29, 1992; the Balanced Income Fund
commenced operations on December 1, 1997; the Intermediate Bond Market Fund
commenced operations on January 5, 1993; the Tax-Exempt Intermediate Bond Fund
commenced operations on February 8, 1993; the International Equity Fund
commenced operations on April 28, 1994; the Emerging Growth Fund commenced
operations on August 15, 1997; the MidCap Index Fund and Core International
Equity Fund commenced operations on November 4, 1999 and the MicroCap Fund
commenced operations on August 1, 1995. The Company also offers other investment
portfolios that are described in a separate statement of additional information.
For information concerning these other portfolios, contact 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 Prospectus.
PORTFOLIO TRANSACTIONS
Subject to the general supervision of the Board of Directors, the
Adviser is responsible for, makes decisions with respect to, and places orders
for all purchases and sales of portfolio securities for each Fund except the
International Equity Fund and Core International Equity Fund. Subject to the
general supervision of the Board of Directors, the Adviser is responsible for
the portfolio management of the International Equity Fund and Core International
Equity Fund. Pursuant to the terms of the Adviser's Advisory Agreements with the
Funds, the Adviser has delegated certain of its duties to Hansberger Global
Investors, Inc. ("HGI") and The Glenmede Trust Company ("Glenmede") (HGI and
Glenmede are collectively referred to as the "Sub-Advisers"). Within the
framework of the investment objectives, policies and restrictions of each Fund,
and subject to the supervision of the Adviser, HGI and Glenmede each is
responsible for, makes decisions with respect to, and places orders for all
purchases and sales of portfolio securities for the International Equity Fund
and Core International Equity Fund, respectively.
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. The expected maximum portfolio turnover rate for the Core
International Equity Fund for the current fiscal year is 75%, and the expected
maximum portfolio turnover rate for the MidCap Index Fund for the current fiscal
year is 30%.
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 that involve the payment of negotiated brokerage
commissions, transactions in foreign securities generally involve the payment of
fixed brokerage commissions that 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-Advisers will normally deal directly with
dealers who make a market in the securities involved except in those
circumstances where better prices and execution are available elsewhere or as
described below.
Fixed income securities purchased and sold by the Bond and Balanced
Funds are generally traded in the over-the-counter market on a net basis (i.e.,
without commission) through dealers, or otherwise involve transactions directly
with the issuer of an instrument. The cost of securities purchased from
underwriters includes an underwriting commission or concession, and the prices
at which securities are purchased from and sold to dealers include a dealer's
mark-up or mark-down.
The Funds may participate, if and when practicable, in bidding for the
purchase of portfolio securities directly from an issuer in order to take
advantage of the lower purchase price available to members of a bidding group.
The Funds will engage in this practice, however, only when the Adviser (or the
respective Sub-Adviser), in its sole discretion, believes such practice to be in
the Funds' interests.
For the fiscal years ended October 31, 1999, 1998 and 1997, the company paid
brokerage commissions as follows:
FUND 1999 1998 1997
---- ---- ---- ----
Short-Term Bond Market $ 0 $ 0 $ 0
Intermediate Bond Market 0 0 0
Tax-Exempt Intermediate Bond 0 0 0
Bond IMMDEXTM 0 0 0
Balanced Income 35,386 17,012 N/A
Balanced Growth 269,930 183,767 178,114
Growth and Income 944,299 521,009 403,426
Equity Index Fund 103,834 100,414 101,524
Growth 347,203 187,935 263,875
Special Growth 1,732,758 912,455 965,454
MidCap Index N/A N/A N/A
Emerging Growth 262,171 183,895 34,150
MicroCap 171,579 151,906 132,772*
Core International Equity N/A N/A N/A
International Equity 125,280 183,485 161,449
*For the fiscal period from August 15, 1997 through October 31, 1997.
None of the brokerage commissions were paid to affiliates of the Company, the
Adviser, Sub-Advisers or the Co-Administrators.
The Advisory Agreement between the Company and the Adviser, with
respect to the International Equity Fund, the Sub-Advisory Agreement among the
Company, the Adviser and HGI, and with respect to the Core International Equity
Fund, the Sub-Advisory Agreement among the Company, the Adviser and Glenmede,
provide that, in executing portfolio transactions and selecting brokers or
dealers, the Adviser and Sub-Advisers will seek to obtain the best overall terms
available. In assessing the best overall terms available for any transaction,
the Adviser (or the respective Sub-Adviser) shall consider factors it deems
relevant, including the breadth of the market in the security, the price of the
security, the financial condition and execution capability of the broker or
dealer, and the reasonableness of the commissions, if any, both for the specific
transaction and on a continuing basis. In addition, the Agreements authorize the
Adviser and Sub-Adviser to cause the Funds to pay a broker-dealer which
furnishes brokerage and research services a higher commission than that which
might be charged by another broker-dealer for effecting the same transaction,
provided that the Adviser or respective 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-Advisers
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-Advisers, 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-Advisers, 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-Advisers. 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
respective 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 respective Sub-Adviser may aggregate the securities to be sold or
purchased for a Fund with those to be sold or purchased for other investment
companies or accounts in executing transactions.
As of October 31, 1999, the Company held securities of its regular brokers or
dealers (as defined under the 1940 Act) or their parents as follows:
FUND BROKER/DEALER TOTAL HOLDINGS
---- ------------- --------------
Short-Term Bond Market Goldman Sachs $1,947,516
Lehman Brothers 4,929,414
First Chicago 2,362,444
Paine Webber 993,597
Bear Stearns 829,747
Intermediate Bond Market Goldman Sachs 4,868,790
Merrill Lynch 6,828,738
Donaldson Lufkin and Jenrette 2,927,700
Lehman Brothers 10,177,970
Salomon 1,953,249
Paine Webber 5,588,483
Prudential 4,921,624
Bear Stearns 2,217,476
Bond IMMDEX Goldman Sachs 9,737,580
Merrill Lynch 4,808,450
Lehman Brothers 15,907,006
Salomon 5,533,178
Paine Webber 6,449,671
General Motors Acceptance Corp. 2,849,856
Balanced Income Goldman Sachs 389,503
Merrill Lynch 233,742
Morgan Stanley 312,459
Donaldson Lufkin and Jenrette 195,180
Lehman Brothers 838,575
Salomon 691,795
American Express 492,600
General Electric 366,019
Balanced Growth Goldman Sachs 1,460,637
Merrill Lunch 862,712
Morgan Stanley 1,158,281
Lehman Brothers 2,303,524
Salomon 1,262,048
Paine Webber 1,038,413
General Motors Acceptance Corp. 1,003,905
Growth and Income Bank of New York 14,966,125
American Express 10,841,800
Household International 5,645,063
Equity Index Morgan Stanley 3,901,311
American Express 4,158,000
General Motors Acceptance Corp. 2,824,050
Lehman Brothers 530,550
Bear Stearns 313,294
Household International 1,325,630
Growth Fund Morgan Stanley 4,930,969
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 respective 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
International Equity Fund or Core International Equity Fund) to be of good
standing and when, in the Adviser's (and Sub-Adviser's in the case of the
International Equity Fund or 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 MicroCap Fund's investments in money market instruments under
normal market conditions are expected to represent less than 10% of the Fund's
net assets, but may increase to 30% for temporary defensive purposes during
abnormal market conditions. The International Equity Fund and 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 respective Sub-Adviser) believes changes in economic, financial or political
conditions make it advisable.
Bank obligations include bankers' acceptances, negotiable certificates
of deposit and non-negotiable time deposits, including U.S. dollar-denominated
instruments issued or supported by the credit of U.S. or foreign banks or
savings institutions. Although the Funds will invest in money market obligations
of foreign banks or foreign branches of U.S. banks only where the Adviser (and
Sub-Adviser in the case of the International Equity Fund or 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 International Equity Fund or 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 International Equity
Fund or 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
Prospectus 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 that 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 shareholder of another investment
company, the Funds would bear, along with other shareholders, 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
shareholders. 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 that 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.
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 Receipts") that are different
in some respects from those of investments in obligations of U.S. domestic
issuers. Such risks include future political and economic developments, the
possible imposition of withholding taxes on interest income, possible seizure or
nationalization of foreign deposits, the possible establishment of exchange
controls or the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal and interest of such obligations. In
addition, foreign branches of U.S. banks and foreign banks may be subject to
less stringent reserve requirements and to different accounting, auditing,
reporting and record keeping standards than those applicable to domestic
branches of U.S. banks.
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 shareholder redemptions from banks or through
reverse repurchase agreements. These strategies involve leveraging. 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
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 may decline below the price of
the securities it is obligated to repurchase and that the securities may not be
returned to the Fund.
PREFERRED STOCKS. The Balanced Income Fund, Balanced Growth Fund,
Growth and Income Fund, Growth Fund, Special Growth Fund, International Equity
Fund, Core International Equity Fund, Emerging Growth Fund MicroCap Fund,
Short-Term Bond Market Fund, Intermediate Bond Market Fund and Bond IMMDEX(TM)
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. Each of the Short-Term Bond
Market Fund, Intermediate Bond Market Fund and Bond IMMDEX(TM) Fund will limit
its investments in preferred stock to no more than 5% of its respective net
assets.
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% (except the MicroCap Fund which is
limited to 20%) 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 then the price or yield
(and therefore the value of a security) available in the market when the
securities delivery takes place.
The Funds will make commitments to purchase securities on a when-issued
basis or to purchase or sell securities on a forward commitment basis only with
the intention of completing the transaction and actually purchasing or selling
the securities. If deemed advisable as a matter of investment strategy, however,
a Fund may dispose of or renegotiate a commitment after it is entered into, and
may sell securities it has committed to purchase before those securities are
delivered to the Fund on the settlement date. In these cases the Fund may
realize a capital gain or loss.
When these Funds engage in when-issued, delayed delivery and forward
commitment transactions, they rely on the other party to consummate the trade.
Failure of such party to do so may result in a Fund incurring a loss or missing
an opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a when-issued purchase or
a forward commitment to purchase securities, and any subsequent fluctuations in
their market value, are taken into account when determining the net asset value
of a Fund starting on the day the Fund agrees to purchase the securities. The
Fund does not earn interest on the securities it has committed to purchase until
they are paid for and delivered on the settlement date. When a Fund makes a
forward commitment to sell securities it owns, the proceeds to be received upon
settlement are included in the Fund's assets. Fluctuations in the market value
of the underlying securities are not reflected in the Fund's net asset value as
long as the commitment remains in effect.
OTHER INVESTMENT CONSIDERATIONS - EMERGING GROWTH FUND AND MICROCAP FUND - SHORT
SALES.
In a short sale transaction, a Fund borrows a security from a broker and
sells it with the expectation that the market price will drop and the Fund will
be able to replace the borrowed security by repurchasing the same security at a
lower price. These transactions may result in gains if a security's price
declines, but may result in losses if a security's price does not decline.
OTHER INVESTMENT CONSIDERATIONS - BALANCED INCOME FUND, BALANCED GROWTH FUND,
GROWTH AND INCOME FUND, GROWTH FUND, SPECIAL GROWTH FUND, EMERGING GROWTH FUND,
MICROCAP FUND, INTERNATIONAL EQUITY FUND AND CORE INTERNATIONAL EQUITY FUND
The Balanced Income, Balanced Growth, Growth and Income, Growth,
Special Growth, Emerging Growth, MicroCap, International Equity and Core
International Equity Funds maintain a long-term investment horizon with respect
to investments in equity securities. However, when a company's growth in
earnings and valuation results in price appreciation that reaches a level that
meets the Fund's valuation 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 that
meet the respective Fund's investment criteria. Each Fund's investment in equity
securities may include limited partnership interests.
The increase or decrease of cash equivalents in a Fund is primarily the
residual effect of the research process. The portion of a Fund invested in cash
equivalents tends to rise when the pool of acceptable securities is limited and
tends to fall when the Fund's valuation screening process identifies a large
number of attractive securities. Short-term forecasts for the economy and
financial markets are not an important determinant of the level of cash
equivalents in a Fund. Under normal market conditions, not more than 65% of the
value of the Balanced Growth Fund's and at least 50% of the value of the Growth
Fund's, Special Growth Fund's and Emerging Growth Fund's total assets and at
least 65% of the value of the MicroCap Fund's and the International Equity
Fund's total assets will be invested in equity securities. The Funds do not
attempt to "time" the securities market.
Certain securities owned by the Special Growth Fund, Emerging Growth
Fund and MicroCap Fund may be traded only in the over-the-counter market or on a
regional securities exchange, may be listed only in the quotation service
commonly known as the "pink sheets" and may not be traded every day or in the
volume typical of trading on a national securities exchange. As a result, there
may be a greater fluctuation in the value of redemptions or for other reasons,
to sell these securities at a discount from market prices, to sell during
periods when such disposition is not desirable, or to make many small sales over
a lengthy period of time.
OTHER INVESTMENT CONSIDERATIONS - ALL FUNDS
FOREIGN EQUITIES. The Funds' investments in the securities of foreign
issuers may include both securities of foreign corporations and banks, as well
as securities of foreign governments and their political subdivisions.
Investments in foreign securities, whether made directly or through
ADRs , involve certain inherent risks and considerations not typically
associated with investing in U.S. companies, such as political or economic
instability of the issuer or the country of issue, the difficulty of predicting
international trade patterns, changes in exchange rates of foreign currencies
and the possibility of adverse changes in investment or exchange control
regulations. There may be less publicly available information about a foreign
company than about a U.S. company. Foreign companies are not subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to domestic companies. In addition, foreign banks and foreign
branches of U.S. banks are subject to less stringent reserve requirements and to
different accounting, auditing, reporting and recordkeeping standards than those
applicable to domestic branches of U.S. banks. Further, foreign stock markets
are generally not as developed or efficient as those in the U.S., and in most
foreign markets volume and liquidity are less than in the U.S. Fixed commissions
on foreign stock exchanges are generally higher than the negotiated commissions
on U.S. exchanges, and there is generally less government supervision and
regulation of foreign stock exchanges, brokers and companies than in the U.S.
With respect to certain foreign countries, there is a possibility of
expropriation or confiscatory taxation, limitations on the removal of assets or
diplomatic developments that could affect investment within those countries.
Additionally, foreign securities and dividends and interest payable on those
securities may be subject to foreign taxes, including foreign withholding taxes,
and other foreign taxes may apply with respect to securities transactions. See
"Taxes." Transactions in foreign securities may involve greater time from the
trade date until the settlement date than domestic securities transactions, and
may involve the risk of possible losses through the holding of securities in
custodians and securities depositories in foreign countries. Additional costs
associated with an investment in foreign securities may include higher
transaction costs and the cost of foreign currency conversions. Changes in
foreign exchange rates will also affect the value of securities denominated or
quoted in currencies other than the U.S. dollar. In this regard, the Funds, with
the exception of the International Equity Fund and Core International Equity
Fund, do not intend to hedge against foreign currency risk (except on unsettled
trades). Changes in currency exchange rates will affect the value of unhedged
positions and will impact a Fund's net asset value (positively or negatively)
irrespective of the performance of the portfolio securities held by the Fund.
See the section entitled "Foreign Currency Transactions" below for the
International Equity Fund and Core International Equity Fund. The Funds and
their shareholders may encounter substantial difficulties in obtaining and
enforcing judgments against non-U.S. resident individuals and companies. Because
of these and other factors, securities of foreign companies acquired by the
Funds may be subject to greater fluctuation in price than securities of domestic
companies. Furthermore, because the International Equity Fund and Core
International Equity Fund will invest substantially all (and in any event, at
least 65%) of the value of its total assets in foreign securities, the net asset
value of the International Equity Fund and Core International Equity Fund is
expected to be volatile.
OTHER INVESTMENT CONSIDERATIONS - INTERNATIONAL EQUITY FUND AND CORE
INTERNATIONAL EQUITY FUND
FOREIGN FUTURES AND OPTIONS ON FUTURES. The Adviser and Sub-Advisers
may determine that it would be in the interest of the International Equity Fund
and Core International Equity Fund to purchase or sell futures contracts,
including interest rate, index, and currency futures for the International
Equity Fund, and forward foreign currency contracts and currency futures for the
Core International Equity Fund, for the purpose of remaining fully invested and
reducing transactions costs. A stock index futures contract is a bilateral
agreement pursuant to which parties agree to take or make delivery of an amount
of cash equal to a specified dollar amount times the difference between the
index value (which assigns relative values to the securities included in the
index) at the close of the last trading day of the contract and the price at
which the futures contract is originally struck. No physical delivery of the
underlying securities in the index is made.
The International Equity Fund may also purchase put and call
options, and write covered put and call options, on futures in which it is
allowed to invest. The purchase of futures or call options thereon can serve as
a long hedge, and the sale of futures or the purchase of put options thereon can
serve as a short hedge. Writing covered call options on futures contracts can
serve as a limited short hedge, and writing covered put options on futures
contracts can serve as a limited long hedge, using a strategy similar to that
used for writing covered options in securities. The Fund's hedging may include
purchases of futures as an offset against the effect of expected increases in
securities prices or currency exchange rates and sales of futures as an offset
against the effect of expected declines in securities prices or currency
exchange rates. The Fund's futures transactions may be entered into for hedging
purposes or risk management. The Fund may also write put options on futures
contracts while at the same time purchasing call options on the same futures
contracts in order to create synthetically a long futures contract position.
Such options would have the same strike prices and expiration dates. The Fund
will engage in this strategy only when the Adviser (or the Sub-Adviser) believes
it is more advantageous to the Fund than is purchasing the futures contract.
The International Equity Fund intends to limit its transactions in
futures contracts and related options so that not more than 25% of its net
assets are at risk. The Core International Equity Fund may invest in futures
contracts for hedging purposes only. In connection with a futures transaction,
unless the transaction is covered in accordance with SEC positions, the Fund
will maintain a segregated account with its custodian or sub-custodian
consisting of cash or liquid high grade debt securities equal to the entire
amount at risk (less margin deposits) on a continuous basis.
Futures purchased or sold by the Core International Equity Fund or
International Equity Fund (and related options) will normally be traded in
foreign securities. Participation in foreign futures and foreign options
transactions involves the execution and clearing of trades on or subject to the
rules of a foreign board of trade. Neither the National Futures Association nor
any domestic exchange regulates activities of any foreign boards of trade,
including the execution, delivery and clearing of transactions, or has the power
to compel enforcement of the rules of a foreign board of trade or any applicable
foreign law. This is true even if the exchange is formally linked to a domestic
market so that a position taken on the market may be liquidated by a transaction
on another market. Moreover, such laws or regulations will vary depending on the
foreign country in which the foreign futures or foreign options transaction
occurs. For these reasons, customers who trade foreign futures of foreign
options contracts may not be afforded certain of the protective measures
provided by the Commodity Exchange Act, the Commodity Futures Trading
Commission's ("CFTC") regulations and the rules of the National Futures
Association and any domestic exchange, including the right to use reparations
proceedings before the CFTC and arbitration proceedings provided by the National
Futures Association or any domestic futures exchange. In particular, the
International Equity Fund's investments in foreign futures or foreign options
transactions may not be provided the same protections in respect of transactions
on United States futures exchanges. In addition, the price of any foreign
futures or foreign options contract and, therefore the potential profit and loss
thereon may be affected by any variance in the foreign exchange rate between the
time an order is placed and the time it is liquidated, offset or exercised. For
a further description of futures contracts and related options, including a
discussion of the limitations imposed by federal tax law, See Appendix B.
REVERSE REPURCHASE AGREEMENTS. The International Equity Fund and 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, a 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 "Borrowings and Reverse Repurchase Agreements" above.) When
required by guidelines of the SEC, a Fund will set aside permissible liquid
assets in a segregated account to secure its obligations to repurchase the
security.
FORWARD CURRENCY CONTRACTS. The International Equity Fund and Core
International Equity Fund may enter into forward currency contracts. Forward
foreign currency exchange contracts provide for the purchase of or sale of an
amount of a specified currency at a future date. This Fund may use forward
contracts to protect against a foreign currency's decline against the U.S.
dollar between the trade date and the settlement date for a securities
transaction, or to lock in the U.S. dollar value of dividends declared on
securities it holds, or generally to protect the U.S. dollar value of the
securities it holds against exchange rate fluctuations. Such transactions may
serve as long hedges (for example, if a 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 (if a Fund anticipates selling
a security denominated in a foreign currency it may sell a forward currency
contract to lock in the $US equivalent of the anticipated sales proceeds). This
Fund may also use forward contracts to protect against fluctuating exchange
rates and exchange control regulations.
The International Equity Fund and 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 the respective Sub-Adviser believes will have a
positive correlation to the values of the currency being hedged. In addition,
the Funds may use forward currency contracts to shift exposure to foreign
currency fluctuations from one country to another. For example, if a Fund owns
securities denominated in a foreign currency and the Adviser or Sub-Adviser
believes that currency will decline relative to another currency, it might enter
into a forward contract to sell an appropriate amount of the first foreign
currency, with payment to be made in the second currency. Transactions that use
two foreign currencies are sometimes referred to as "cross hedges." Use of
different foreign currency magnifies the risk that movements in the price of the
instrument will not correlate or will correlate unfavorably with the foreign
currency being hedged.
The cost to the International Equity Fund and 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 a Fund enters into
a forward currency contract, it relies on the counterparty to make or take
delivery of the underlying currency at the maturity of the contract. Failure by
the counterparty to do so would result in the loss of any expected benefit of
the transaction.
As is the case with future contracts, holders and writers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures, by selling or purchasing, respectively, an
instrument identical to the instrument held or written. Secondary markets
generally do not exist for forward currency contracts, with the result that
closing transactions generally can be made for forward currency contacts only by
negotiating directly with the counterparty. Thus, there can be no assurance that
the International Equity Fund or 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, a Fund
might be unable to close out a forward currency contract at any time prior to
maturity. In either event, the Fund would continue to be subject to market risk
with respect to the position, and would continue to be required to maintain a
position in securities denominated in the foreign currency or to maintain cash
or securities in a segregated account.
The precise matching of forward currency contract amounts and the value
of the securities involved generally will not be possible because the value of
such securities, measured in the foreign currency, will change after the foreign
currency contract has been established. Thus, the International Equity Fund and
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. Forward contracts may limit the Fund's losses due
to exchange rate fluctuation, but they will also limit any gains that the Fund
might otherwise have realized.
FOREIGN CURRENCY TRANSACTIONS. Although the International Equity Fund
and Core International Equity Fund value their respective assets daily in U.S.
dollars, the Funds are not required to convert their holdings of foreign
currencies to U.S. dollars on a daily basis. The Funds' 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 Funds could suffer a loss of some or all of the amounts
deposited. The Funds 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 these Funds enter into a forward contract or currency futures, the
Custodian will place cash, U.S. government securities, or high-grade debt
securities into segregated accounts of these Funds in an amount equal to the
value of each 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 appropriate account on a
daily basis so that the account value is at least equal to the Funds'
commitments to such contracts.
Foreign Currency Futures Contracts. The International Equity Fund and Core
International Equity Fund may also hedge their foreign exchange rate risk by
entering into foreign currency futures contracts. The forecasting of short-term
currency market movements is extremely difficult and whether short-term hedging
strategies would be successful is highly uncertain.
OTHER INVESTMENT CONSIDERATIONS - INTERNATIONAL EQUITY FUND
HIGH RISK DEBT SECURITIES ("JUNK BONDS").
As stated in the International Equity Fund's Prospectus, the Fund may
invest up to 5% of its net assets in non-investment grade debt securities. Debt
securities rated below Baa by Moody's or BBB by S&P, or of comparable quality,
are considered below investment grade. Non-investment grade debt securities
""high risk debt securities") may include (i) debt not in default but rated as
low as C by Moody's, S&P, or Fitch IBCA, Inc. ""Fitch IBC""), CC by Thomson
BankWatch ""TB"") or CCC by Duff & Phelps, Inc. ""D&""); (ii) commercial paper
rated as low as C (or D if in default) by S&P or Fitch IBCA, Not Prime by
Moody's, Duff 4 (or Duff 5 if in default) by Duff, TBW-4 by TBW; and (iii)
unrated debt securities of comparable quality. The Fund may also buy debt in
default (rated D by S&P or TBW or Fitch IBCA, DD by Duff, or of comparable
quality) and commercial paper in default (rated D by S&P or Fitch IBCA, Not
Prime by Moody's, Duff 5 by Duff, TBW-4 by TBW, or of comparable quality). Such
securities, while generally offering higher yields than investment grade
securities with similar maturities, involve greater risks, including the
possibility of (or actual) default or bankruptcy. They are regarded as
predominantly speculative with respect to the issue's capacity to pay interest
and repay principal.
The market for high risk debt securities is relatively new and its
growth has paralleled a long economic expansion. It is not clear how this market
would withstand a prolonged recession or economic downturn, which could severely
disrupt this market and adversely affect the value of such securities.
Market values of high risk debt securities tend to reflect individual
corporate developments to a greater extent, and tend to be more sensitive to
economic conditions, than do higher rated securities. As a result, high risk
debt securities generally involve more credit risks than higher rated debt.
During an economic downturn or a sustained period of rising interest rates,
highly leveraged issuers of high risk debt may experience financial stress and
may not have sufficient revenues to meet their payment obligations. An issuer's
ability to service its debt obligations may also be adversely affected by
specific corporate developments, its own inability to meet specific projected
business forecasts, or unavailability of additional financing. The risk of loss
due to default by an issuer is significantly greater for high risk debt than for
higher rated debt because the high risk debt is generally unsecured and often
subordinated.
If the issuer of high risk debt defaulted, the International Equity
Fund might incur additional expenses in seeking recovery. Periods of economic
uncertainty and changes would also generally result in increased volatility in
the market prices of these securities and thus in the Fund's net asset value.
If the Fund invested in high risk debt experiences unexpected net
redemptions in a rising interest rate market, it may be forced to liquidate a
portion of its portfolio without regard to their investment merits. Due to the
limited liquidity of high risk debt securities, the Fund may be forced to
liquidate these securities at a substantial discount. Any such liquidation would
reduce the Fund's asset base over which expenses could be allocated and could
result in a reduced rate of return for the Fund.
During periods of falling interest rates, issuers of high risk debt
securities that contain redemption, call or prepayment provisions are likely to
redeem or repay the securities and refinance with other debt at a lower interest
rate. If the Fund holds debt securities that are refinanced or otherwise
redeemed, it may have to replace the securities with a lower yielding security,
which would result in a lower return.
Credit ratings evaluate safety of principal and interest payments, but
do not evaluate the market value risk of high risk securities and, therefore,
may not fully reflect the true risks of an investment. In addition, rating
agencies may not make timely changes in a rating to reflect changes in the
economy or in the condition of the issuer that affect the market value of the
security. Consequently, credit ratings are used only as a preliminary indicator
of investment quality. Investments in high risk securities will depend more
heavily on the Sub-Adviser's credit analysis than investment-grade debt
securities. The Adviser (or the Sub-Adviser) will monitor the Fund's investments
and evaluate whether to dispose of or retain high risk securities whose credit
quality may have changed.
The Fund may have difficulty disposing of certain high risk securities
with a thin trading market. Not all dealers maintain markets in all these
securities, and for many such securities there is no established retail
secondary market. The Adviser (or the Sub-Adviser) anticipates that such
securities may be sold only to a limited number of dealers or institutional
investors. To the extent a secondary trading market does exist, it is generally
not as liquid as that for higher-rated securities; a lack of a liquid secondary
market may adversely affect the market price of a security, which may in turn
affect the Fund's net asset value and ability to dispose of particular
securities in order to meet liquidity needs or to respond to a specific economic
event, or may make it difficult for the Fund to obtain accurate market
quotations for valuation purposes. Market quotations on many high risk
securities may be available only from a limited number of dealers and may not
necessarily represent firm bids or prices for actual sales. During periods of
thin trading, the spread between bid and asked prices is likely to increase
significantly, and adverse publicity and investor perceptions (whether or not
based on fundamental analysis) may decrease the value and liquidity of a high
risk security.
Legislation has from time to time been or may be proposed that is
designed to limit the use of certain high risk debt. It is not possible to
predict the effect of such legislation on the market for high risk debt.
However, any legislation that may be proposed or enacted could have a material
adverse effect on the value of these securities, the existence of a secondary
trading market for the securities and, as a result, the Fund's net asset values.
SOVEREIGN DEBT. The International Equity Fund may invest up to 5% of
its net assets in obligations of foreign countries and political entities
("Sovereign Debt"), which may trade at a substantial discount from face value.
The Fund may hold and trade Sovereign Debt of emerging market countries in
appropriate circumstances and to participate in debt conversion programs.
Emerging country Sovereign Debt involves a high degree of risk, is generally
lower-quality debt, and is considered speculative in nature. The issuer or
governmental authorities that control Sovereign Debt repayment "Sovereign
Debtor") may be unable or unwilling to repay principal or interest when due in
accordance with the terms of the debt. A Sovereign Debtor's willingness or
ability to repay principal and interest due in a timely manner may be affected
by, among other factors, its cash flow situation, the extent of its foreign
reserves, the availability of sufficient foreign exchange on the date a payment
is due, the relative size of the debt service burden to the economy as a whole,
the Sovereign Debtor's policy towards the International Monetary Fund (the
"IMF") and the political constraints to which the Sovereign Debtor may be
subject. Sovereign Debtors may also be dependent on expected disbursements from
foreign governments, multilateral agencies and others abroad to reduce principal
and interest arrearage on their debt. The commitment of these third parties to
make such disbursements may be conditioned on the Sovereign Debtor's
implementation of economic reforms or economic performance and the timely
service of the debtor's obligations. The Sovereign Debtor's failure to meet
these conditions may cause these third parties to cancel their commitments to
provide funds to the Sovereign Debtor, which may further impair the debtor's
ability or willingness to timely service its debts. In certain instances, the
Fund may invest in Sovereign Debt that is in default as to payments of principal
or interest. The Fund holding non-performing Sovereign Debt may incur additional
expenses in connection with any restructuring of the issuer's obligations or in
otherwise enforcing its rights thereunder.
BRADY BONDS. The International Equity Fund may invest up to 5% of its net
assets in Brady Bonds as part of its investment in Sovereign Debt of countries
that have restructured or are in the process of restructuring their Sovereign
Debt pursuant to the Brady Plan.
Brady Bonds are issued under the framework of the Brady Plan, an initiative
announced by former U.S. Treasury Secretary Nicholas F. Brady in 1989 as a
mechanism for debtor nations to restructure their outstanding external
indebtedness. The Brady Plan contemplates, among other things, the debtor
nation's adoption of certain economic reforms and the exchange of commercial
bank debt for newly issued bonds. In restructuring its external debt under the
Brady Plan framework, a debtor nation negotiates with its existing bank lenders
as well as the World Bank or IMF. The World Bank or IMF supports the
restructuring by providing funds pursuant to loan agreements or other
arrangements that enable the debtor nation to collateralize the new Brady Bonds
or to replenish reserves used to reduce outstanding bank debt. Under these loan
agreements or other arrangements with the World Bank or IMF, debtor nations have
been required to agree to implement certain domestic monetary and fiscal
reforms. The Brady Plan sets forth only general guiding principles for economic
reform and debt reduction, emphasizing that solutions must be negotiated on a
case-by-case basis between debtor nations and their creditors.
Brady Bonds are recent issues and do not have a long payment history.
Agreements implemented under the Brady Plan are designed to achieve debt and
debt-service reduction through specific options negotiated by a debtor nation
with its creditors. As a result, each country offers different financial
packages. Options have included the exchange of outstanding commercial bank debt
for bonds issued at 100% of face value of such debt, bonds issued at a discount
of face value of such debt, and bonds bearing an interest rate that increases
over time and the advancement of the new money for bonds. The principal of
certain Brady Bonds has been collateralized by U.S. Treasury zero coupon bonds
with a maturity equal to the final maturity of the Brady Bonds. Collateral
purchases are financed by the IMF, World Bank and the debtor nation's reserves.
Interest payments may also be collateralized in part in various ways.
Brady Bonds are often viewed as having three or four valuation
components: (i) the collateralized repayment of principal at final maturity;
(ii) the collateralized interest payments; (iii) the uncollateralized interest
payments; and (iv) any uncollateralized principal at maturity (these
uncollateralized amounts constitute the "residual risk"). In light of the
residual risk of Brady Bonds and, among other factors, the history of defaults
with respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds, investments in Brady Bonds can be viewed as
speculative.
OTHER INVESTMENT CONSIDERATIONS - THE CORE INTERNATIONAL EQUITY FUND
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 investment in options, futures, swaps, structured securities and
other derivative instruments that 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 by 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.
EMERGING MARKET COUNTRIES. The Core International 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.
OTHER INVESTMENT CONSIDERATIONS - THE TAXABLE BOND FUNDS AND BALANCED FUNDS
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. The Funds may purchase
residential and commercial mortgage-backed as well as other asset-backed
securities (collectively called "asset-backed securities") that are secured or
backed by automobile loans, installment sale contracts, credit card receivables
or other assets and are issued by entities such as Government National Mortgage
Association "GNMA"), Federal National Mortgage Association "FNMA"), Federal Home
Loan Mortgage Corporation "FHLMC"), commercial banks, trusts, financial
companies, finance subsidiaries of industrial companies, savings and loan
associations, mortgage banks and investment banks. These securities represent
interests in pools of assets in which periodic payments of interest and/or
principal on the securities are made, thus, in effect passing through periodic
payments made by the individual borrowers on the assets that underlie the
securities, net of any fees paid to the issuer or guarantor of the securities.
The average life of these securities varies with the maturities and the
prepayment experience of the underlying instruments. The average life of a
mortgage-backed instrument may be substantially less than the original maturity
of the mortgages underlying the securities as the result of scheduled principal
payments and mortgage prepayments. The rate of such mortgage prepayments, and
hence the life of the certificates, will be a function of current market rates
and current conditions in the relevant housing and commercial markets. In
periods of falling interest rates, the rate of mortgage prepayments tends to
increase. During such periods, the reinvestment of prepayment proceeds by a Fund
will generally be at lower rates than the rates that were carried by the
obligations that have been prepaid. As a result, the relationship between
mortgage prepayments and interest rates may give some high-yielding
mortgage-related securities less potential for growth in value than non-callable
bonds with comparable maturities. In calculating the average weighted maturity
of each Fund, the maturity of asset-backed securities will be based on estimates
of average life. There can be no assurance that these estimates will be
accurate.
There are a number of important differences among the agencies and
instrumentalities of the U.S. government that issue mortgage-backed securities
and among the securities that they issue. Mortgage-backed securities guaranteed
by GNMA include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie
Maes") which are guaranteed as to the timely payment of principal and interest
by GNMA and such guarantee is backed by the full faith and credit of the United
States. GNMA is a wholly owned U.S. government corporation within the Department
of Housing and Urban Development. GNMA certificates also are supported by the
authority of GNMA to borrow funds from the U.S. Treasury to make payments under
its guarantee. Mortgage-backed securities issued by FNMA include FNMA Guaranteed
Mortgage Pass-Through Certificates (also known as "Fannie Maes") which are
solely the obligations of FNMA and are not backed by or entitled to the full
faith and credit of the United States, but are supported by the right of the
issuer to borrow from the Treasury. FNMA is a government-sponsored organization
owned entirely by private stockholders. Fannie Maes are guaranteed as to timely
payment of the principal and interest by FNMA. Mortgage-backed securities issued
by the FHLMC include FHLMC Mortgage Participation Certificates (also known as
"Freddie Macs" or "PCs"). FHLMC is a corporate instrumentality of the United
States, created pursuant to an Act of Congress. Freddie Macs are not guaranteed
by the United States or by any Federal Home Loan Bank and do not constitute a
debt or obligation of the United States or of any Federal Home Loan Bank.
Freddie Macs entitle the holder to timely payment of interest, which is
guaranteed by the FHLMC. FHLMC guarantees either ultimate collection or timely
payment of all principal payments on the underlying mortgage loans. When FHLMC
does not guarantee timely payment of principal, FHLMC may remit the amount due
on account of its guarantee of ultimate payment of principal at any time after
default on an underlying mortgage, but in no event later than one year after it
becomes payable.
As stated in the Prospectus for the Funds, mortgage-backed securities
such as collateralized mortgage obligations ("CMOs") may be purchased. There are
several types of mortgage-backed securities which provide the holder with a pro
rata interest in the underlying mortgages, and CMOs which provide the holder
with a specified interest in the cash flow of a pool of underlying mortgages or
other mortgage-backed securities. CMOs are issued in multiple classes and their
relative payment rights may be structured in many ways. In many cases, however,
payments of principal are applied to the CMO classes in order of their
respective maturities, so that no principal payments will be made on a CMO class
until all other classes having an earlier maturity date are paid in full. The
classes may include accrual certificates (also known as "Z-Bonds"), which do not
accrue interest at a specified rate until other specified classes have been
retired and are converted thereafter to interest-paying securities. They may
also include planned amortization classes ("PACs") which generally require,
within certain limits, that specified amounts of principal be applied to each
payment date, and generally exhibit less yield and market volatility than other
classes. Investments in CMO certificates can expose the Fund to greater
volatility and interest rate risk than other types of mortgage-backed
obligations. Prepayments on mortgage-backed securities generally increase with
falling interest rates and decrease with rising interest rates; furthermore,
prepayment rates are influenced by a variety of economic and social factors.
Each Taxable Bond Funds will invest less than 50% of its respective total assets
in CMOs.
The yield characteristics of asset-backed securities differ from
traditional debt securities. A major difference is that the principal amount of
the obligations may be prepaid at any time because the underlying assets (i.e.,
loans) generally may be prepaid at any time. As a result, if an asset-backed
security is purchased at a premium, a prepayment rate that is faster than
expected may reduce yield to maturity, while a prepayment rate that is slower
than expected may have the opposite effect of increasing yield to maturity.
Conversely, if an asset-backed security is purchased at a discount, faster than
expected prepayments may increase, while slower than expected prepayments may
decrease, yield to maturity. Moreover, asset-backed securities may involve
certain risks that are not presented by mortgage-backed securities arising
primarily from the nature of the underlying assets (i.e., credit card and
automobile loan receivables as opposed to real estate mortgages). For example,
credit card receivables are generally unsecured and may require the repossession
of personal property upon the default of the debtor, which may be difficult or
impracticable in some cases.
Asset-backed securities may be subject to greater risk of default
during periods of economic downturn than other instruments. Also, while the
secondary market for asset-backed securities is ordinarily quite liquid, in
times of financial stress the secondary market may not be as liquid as the
market for other types of securities, which could result in a Fund experiencing
difficulty in valuing, or liquidating such securities.
In general, the collateral supporting non-mortgage asset-backed
securities is of shorter maturity than mortgage loans. Like other fixed-income
securities, when interest rates rise the value of an asset-backed security
generally will decline; however, when interest rates decline, the value of an
asset-backed security with prepayment features may not increase as much as that
of other fixed-income securities.
Non-mortgage asset-backed securities do not have the benefit of the
same security in the collateral as mortgage-backed securities. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
have given debtors the right to reduce the balance due on the credit cards. Most
issuers of automobile receivables permit the servicers to retain possession of
the underlying obligations. If the servicer were to sell these obligations to
another party, there is the risk that the purchaser would acquire an interest
superior to that of the holders of related automobile receivables. In addition,
because of the large number of vehicles involved in a typical issuance and
technical requirements under state laws, the trustee for the holders of the
automobile receivables may not have an effective security interest in all of the
obligations backing such receivables. Therefore, there is a possibility that
payments on the receivables together with recoveries on repossessed collateral
may not, in some cases, be able to support payments on these securities.
VARIABLE RATE MEDIUM TERM NOTES. The Funds may purchase variable rate
medium term notes that provide for periodic adjustments in the interest rates.
The adjustments in interest rates reflect changes in an index (which may be the
Lehman Brothers 1-3 Year Government/Corporate Bond Index, the Lehman Brothers
Intermediate Government/Corporate Bond Index or the Lehman Brothers
Government/Corporate Bond Index).
OTHER INVESTMENT CONSIDERATIONS - TAXABLE BOND FUNDS AND BALANCED FUNDS
STRIPPED SECURITIES. Each Fund may purchase participations in trusts
that hold U.S. Treasury and agency securities (such as TIGRs and CATs) and also
may purchase Treasury receipts and other "stripped" securities that evidence
ownership in either the future interest payments or the future principal
payments of U.S. government obligations. These participations are issued at a
discount to their "face value," and may (particularly in the case of stripped
mortgage-backed securities) exhibit greater price volatility than ordinary debt
securities because of the manner in which their principal and interest are
returned to investors.
OTHER INVESTMENT CONSIDERATIONS - BALANCED FUNDS AND EMERGING GROWTH FUND
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 will consider such an event in determining
whether the Fund should continue to hold the security. The Adviser will sell
promptly any securities that are not rated investment grade by at least one
nationally recognized rating agency and that exceed 5% of the Fund's net assets.
OTHER INVESTMENT CONSIDERATIONS - TAXABLE BOND FUNDS
In order to reduce a negative deviation in return between each Fund and
its respective bond index, each Fund will normally attempt to be fully invested.
In an effort to make a Fund's duration and return comparable to those
of its respective bond index, the Adviser will monitor a Fund's portfolio and
market changes in accordance with procedures established by the Adviser under
the supervision of the Board of Directors. The calculation of the Fund's
duration and average portfolio maturity will be based on certain estimates
relating to the duration and maturity of the securities held by a Fund. There
can be no assurance that these estimates will be accurate or that the duration
or average portfolio maturity of a Fund will always remain within the maximum
limits described in the Prospectus. The value of each Fund's portfolio, as is
generally the case with each bond index, can be expected to vary inversely from
changes in prevailing interest rates.
OTHER INVESTMENT CONSIDERATIONS-- TAX-EXEMPT INTERMEDIATE BOND FUND
The Fund's cash balances may be invested in short-term municipal notes
and tax-exempt commercial paper, as well as municipal bonds with remaining
maturities of thirteen months or less and securities issued by other investment
companies which invest in high quality, short-term municipal debt securities.
The value of the Fund's portfolio can be expected to vary inversely to changes
in prevailing interest rates.
From time to time, on a temporary defensive basis due to market
conditions, the Fund may hold without any limitation uninvested cash reserves
and invest without any limitations in high quality short-term taxable money
market obligations in such proportions as in the opinion of the Adviser,
prevailing market or economic conditions warrant. Uninvested cash reserves will
not earn income. See "Investment Strategies & Risks - Money Market Instruments"
above. Taxable obligations acquired by the Fund will not exceed under normal
conditions 20% of the Fund's net assets at the time of purchase.
Municipal Obligations. Municipal obligations which may be acquired by
the Tax-Exempt Intermediate Bond Fund include debt obligations issued by
governmental entities to obtain funds for various public purposes, including the
construction of a wide range of public facilities, the refunding of outstanding
obligations, the payment of general operating expenses and the extension of
loans to public institutions and facilities.
Opinions relating to the validity of municipal obligations and to the
exemption of interest thereon from federal income tax are rendered by bond
counsel to the respective issuers at the time of issuance. Neither the Fund nor
the Adviser will review the proceedings relating to the issuance of municipal
obligations or the basis for such opinions.
Certain of the municipal obligations held by the Fund may be insured at
the time of issuance as to the timely payment of principal and interest. The
insurance policies will usually be obtained by the issuer of the municipal
obligation at the time of its original issuance. In the event that the issuer
defaults on interest or principal payment, the insurer will be notified and will
be required to make payment to the bondholders. There is, however, no guarantee
that the insurer will meet its obligations. In addition, such insurance will not
protect against market fluctuations caused by changes in interest rates and
other factors, including credit downgrades, supply and demand. The Fund may,
from time to time, invest more than 25% of its assets in municipal obligations
covered by insurance policies.
The payment of principal and interest on most securities purchased by
the Fund will depend upon the ability of the issuers to meet their obligations.
An issuer's obligations under its municipal obligations are subject to the
provisions of bankruptcy, insolvency, and other laws affecting the rights and
remedies of creditors, such as the Federal Bankruptcy Code, and laws, if any,
which may be enacted by federal or state legislatures extending the time for
payment of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations or upon the ability of municipalities to levy
taxes. The power or ability of an issuer to meet its obligations for the payment
of interest on, and principal of, its municipal obligations may be materially
adversely affected by litigation or other conditions.
Certain types of municipal obligations (private activity bonds) have
been or are issued to obtain funds to provide privately operated housing
facilities, pollution control facilities, convention or trade show facilities,
mass transit, airport, port or parking facilities and certain local facilities
for water supply, gas, electricity or sewage or solid waste disposal. Private
activity bonds are also issued on behalf of privately held or publicly owned
corporations in the financing of commercial or industrial facilities. State and
local governments are authorized in most states to issue private activity bonds
for such purposes in order to encourage corporations to locate within their
communities. The principal and interest on these obligations may be payable from
the general revenues of the users of such facilities.
Municipal obligations purchased by the Fund may be backed by letters of
credit issued by foreign and domestic banks and other financial institutions.
Such letters of credit are not necessarily subject to federal deposit insurance
and adverse developments in the banking industry could have a negative effect on
the credit quality of the Fund's portfolio securities and its ability to
maintain a stable net asset value and share price. Letters of credit issued by
foreign banks, like other obligations of foreign banks, may involve certain
risks in addition to those of domestic obligations.
The Fund may purchase put options on municipal obligations. A put gives
the Fund the right to sell a municipal obligation at a specified price at any
time before a specified date. A put will be sold, transferred or assigned only
with the related municipal obligation. The Fund will acquire puts only to
enhance liquidity, shorten the maturity of the related municipal security or
permit the Fund to invest its assets at more favorable rates. The aggregate
price of a security subject to a put may be higher than the price which
otherwise would be paid for the security without such an option, thereby
increasing the security's cost and reducing its yield.
From time to time, proposals have been introduced before Congress for
the purpose of restricting or eliminating the federal income tax exemption for
interest on municipal obligations. For example, under the Tax Reform Act of
1986, interest on certain private activity bonds must be included in an
investor's alternative minimum taxable income, and corporate investors must
include all tax-exempt interest in their federal alternative minimum taxable
income. The Company cannot, of course, predict what legislation, if any, may be
proposed in the future as regards the income tax status of interest on municipal
obligations, or which proposals, if any, might be enacted. Such proposals, while
pending or if enacted, might materially and adversely affect the availability of
municipal obligations for investment by the Fund and the liquidity and value of
the Fund's portfolio. In such an event, the Company would reevaluate the Fund's
investment objective and policies and consider possible changes in its structure
or possible dissolution.
Municipal Lease Obligations. As stated in the Prospectus, the Fund may
acquire municipal lease obligations that are issued by a state or local
government authority to acquire land and a wide variety of equipment and
facilities. These obligations typically are not fully backed by the
municipality's credit, and their interest may become taxable if the lease is
assigned. If the funds are not appropriated for the following year's lease
payments, the lease may terminate, with the possibility of default on the lease
obligation and significant loss to the Fund. Certificates of participation in
municipal lease obligations or installment sale contracts entitle the holder to
a proportionate interests in the lease-purchase payments made. The Adviser
determines and monitors the liquidity of municipal lease obligations (including
certificates of participation) under guidelines approved by the Board of
Directors requiring the Advisor to evaluate the credit quality of such
obligations and report on the nature of and the Fund's trading experience in the
municipal lease market. Under the guidelines, municipal lease obligations that
are not readily marketable and transferable are treated as illiquid. In making a
determination that a municipal lease obligation is liquid, the Adviser may
consider, among other things (i) whether the lease can be canceled; (ii) the
likelihood that the assets represented by the lease can be sold; (iii) the
strength of the lessee's general credit; (iv) the likelihood that the
municipality will discontinue appropriating funds for the leased property
because the property is no longer deemed essential to the operations of the
municipality; and (v) availability of legal recourse in the event of failure to
appropriate. The Fund will not knowingly invest more than 10% of the value of
its net assets in securities, including municipal leases, that are illiquid.
Stand-By Commitments. The Tax-Exempt Intermediate Bond Fund may acquire
"stand-by commitments" with respect to municipal obligations held in its
portfolio. Under a "stand-by commitment" a dealer agrees to buy from the Fund,
at the Fund's option, specified municipal obligations at a specified price.
"Stand-by commitment" acquired by the Fund may also be referred to in this
Statement of Additional Information as "put" options.
The amount payable to the Fund upon its exercise of a "stand-by
commitment" is normally (i) the Fund's acquisition cost of the municipal
obligations (excluding any accrued interest which the Fund paid on their
acquisition), less any amortized market premium or plus any amortized market or
original issue discount during the period the Fund owned the securities, plus
(ii) all interest accrued on the securities since the last interest payment date
during that period. A stand-by commitment may be sold, transferred or assigned
by the Fund only with the instrument involved.
The Fund expects that "stand-by commitments" will generally be
available without the payment of any direct or indirect consideration. However,
if necessary or advisable, the Fund may pay for a "stand-by commitment" either
separately in cash or by paying a higher price for the portfolio securities
which are acquired subject to the commitment (thus reducing the yield to
maturity otherwise available for the same securities). The total amount paid in
either manner for outstanding "stand-by commitments" held by the Fund will not
exceed 1/2 of 1% of the value of its total assets calculated immediately after
each "stand-by commitment" is acquired.
The Fund intends to enter into "stand-by commitments" only with
dealers, banks and broker/dealers which, in the investment adviser's opinion,
present minimal credit risks. The Fund's reliance upon the credit of these
dealers, banks and broker/dealers is secured by the value of the underlying
municipal obligations that are subject to a commitment.
The Fund would acquire "stand-by commitments" solely to facilitate
portfolio liquidity and does not intend to exercise its rights thereunder for
trading purposes. The acquisition of a "stand-by commitment" would not affect
the valuation or assumed maturity of the underlying Municipal Securities, which
would continue to be valued in accordance with the ordinary method of valuation
employed by the Fund. "Stand-by commitment" which would be acquired by the Fund
would be valued at zero in determining net asset value. Where the Fund paid any
consideration directly or indirectly for a "stand-by commitment" its cost would
be reflected as unrealized depreciation for the period during which the
commitment was held by the Fund.
Variable and Floating Rate Instruments. Municipal obligations purchased
by the Fund may include variable and floating rate instruments issued by
industrial development authorities and other governmental entities. If such
instruments are unrated, they will be determined by the Fund's Adviser (under
the supervision of the Board of Directors) to be of comparable quality at the
time of purchase to investment grade. While there may be no active secondary
market with respect to a particular variable or floating rate demand instrument
purchased by the Fund, the Fund may (at any time or during specified periods not
exceeding thirteen months, depending upon the instrument involved) demand
payment in full of the principal of the instrument and has the right to resell
the instrument to a third party. The absence of such an active secondary market,
however, could make it difficult for the Fund to dispose of a variable or
floating rate demand instrument if the issuer defaulted on its payment
obligation or during periods that the Fund is not entitled to exercise its
demand rights, and the Fund could, for these or other reasons, suffer a loss
with respect to such instruments.
With respect to the variable and floating rate instruments that may be
acquired by the Tax-Exempt Intermediate Bond Fund the Adviser will consider the
earning power, cash flows and other liquidity ratios of the issuers and
guarantors of such instruments and, if the instrument is subject to a demand
feature, will monitor their financial status to meet payment on demand. In
determining average weighted portfolio maturity, an instrument will usually be
deemed to have a maturity equal to the longer of the period remaining to the
next interest rate adjustment or the time the Fund can recover payment of
principal as specified in the instrument. Variable U.S. government obligations
held by the Fund, however, will be deemed to have maturities equal to the period
remaining until the next interest rate adjustment.
OTHER INVESTMENT CONSIDERATIONS - MICROCAP FUND
Small Cap Volatility. Companies in which the Fund primarily invests
will include those that have limited product lines, markets, or financial
resources, or are dependent on a small management group. In addition, because
these stocks are not well-known to the investing public, do not have significant
institutional ownership, and are followed by relatively few security analysts,
there will normally be less publicly available information concerning these
securities compared to what is available for the securities of larger companies.
Adverse publicity and investor perceptions, whether based on fundamental
analysis, can decrease the value and liquidity of securities held by the Fund.
Historically, small capitalization stocks have been more volatile in price than
larger capitalization stocks. Among the reasons for the greater price volatility
of these small company stocks are the less certain growth prospects of smaller
firms, the lower degree of liquidity in the markets for such stocks, the greater
sensitivity of small companies to changing economic conditions and the fewer
market makers and the wider spreads between quoted bid and asked prices which
exist in the over-the-counter market for such stocks. Besides exhibiting greater
volatility, small company stocks may, to a degree, fluctuate independently of
larger company stocks. Small company stocks may decline in price as large
company stocks rise, or rise in price as large company stocks decline. Investors
should therefore expect that the Fund will be more volatile than, and may
fluctuate independently of, broad stock market indices such as the S&P 500
Index.
EQUITY SWAPS. The Fund may enter into equity swap contracts to invest
in a market without owning or taking physical custody of securities in
circumstances in which direct investment is restricted for legal reasons or is
otherwise impracticable. Equity swaps may also be used for hedging purposes or
to seek to increase total return. The counterparty to an equity swap contract
will typically be a bank, investment banking firm or broker/dealer. Equity swaps
may be structured in different ways. For example, a counterparty may agree to
pay the Fund the amount, if any, by which the notional amount of the equity swap
contract would have increased in value had it been invested in the particular
stocks (or an index of stocks), plus the dividends that would have been received
on those stocks. In those cases, the Fund may agree to pay to the counterparty a
floating rate of interest on the notional amount of the equity swap contract
plus the amount, if any, by which that notional amount would have decreased in
value had it been invested in such stocks. Therefore, the return to the Fund on
the equity swap contract should be the gain or loss on the notional amount plus
dividends on the stocks less the interest paid by the underlying Fund on the
notional amount. In other cases, the counterparty and the Fund may each agree to
pay the other the difference between the relative investment performances that
would have been achieved if the notional amount of the equity swap contract had
been invested in different stocks (or indices of stocks).
The Fund will enter into equity swaps only on a net basis, which means that the
two payment streams are netted out, with the Fund receiving or paying, as the
case may be, only the net amount of the two payments. Payments may be made at
the conclusion of an equity swap contract or periodically during its term.
Equity swaps do not involve the delivery of securities or other underlying
assets. Accordingly, the risk of loss with respect to equity swaps is limited to
the net amount of payments that the Fund is contractually obligated to make. If
the other party to an equity swap defaults, the Fund's risk of loss consists of
the net amount of payments that such Fund is contractually entitled to receive,
if any. Inasmuch as these transactions are offset by segregated cash or liquid
assets to cover the Fund's potential exposure, the Fund and its investment
adviser believes that these transactions do not constitute senior securities
under the Act and, accordingly, will not treat them as being subject to the
Fund's borrowing restrictions.
The Fund will not enter into equity swap transactions unless the
unsecured commercial paper, senior debt or claims paying ability of the other
party thereto is considered to be investment grade by the investment adviser.
OTHER INVESTMENT CONSIDERATIONS - EQUITY INDEX FUND AND MIDCAP INDEX FUND
EQUITY INDEX FUND AND MIDCAP INDEX FUND MANAGEMENT TECHNIQUES. When
purchasing securities for these Fund portfolios, the Adviser will consider
initially the relative market capitalization weightings of the stocks included
in the S&P 500 Index for the Equity Index Fund, and of the stocks included in
the S&P MidCap 400 Index for the MidCap Index Fund. The weighted capitalization
of an issuer is determined by dividing the issuer's market capitalization by the
total market capitalizations of all issuers included in the S&P 500 Index or S&P
MidCap 400 Index, respectively.
The Adviser will then compare the industry sector diversification of
the stocks in these Funds, acquired solely on the basis of their weighted
capitalizations, with the industry sector diversification of all issuers
included in the S&P 500 Index for the Equity Index Fund, and of all issuers
included in the S&P MidCap 400 Index for the MidCap Index Fund. This comparison
is made because the Adviser believes, unless the Funds hold all stocks included
in the S&P 500 Index and S&P MidCap 400 Index, respectively, which they
currently do not, that the selection of stocks for purchase by the Funds solely
on the basis of their weighted market capitalizations would tend to place
heavier concentration (as compared to the S&P 500 Index and S&P MidCap 400
Index, respectively) in certain industry sectors that are dominated by the
larger corporations, such as communications, automobile, oil and energy. As a
result, events disproportionately affecting such industries could affect the
performance of the S&P 500 Index or the S&P MidCap 400 Index, respectively.
Conversely, if smaller companies were not purchased by the Funds, industries
included in the S&P 500 Index and S&P MidCap 400 Index, respectively, that are
dominated by smaller market-capitalized companies would be underrepresented (as
compared to the S&P 500 Index and S&P MidCap 400 Index, respectively).
If an issuer drops in ranking, or is eliminated entirely from the S&P
500 Index or 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 respective Fund. Sales
of portfolio securities may be made at times when, if the Adviser were not
required to effect purchases and sales of portfolio securities in accordance
with the S&P 500 Index or 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 500 Index or 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 these Funds by
traditional methods of financial and market analysis, the Adviser will monitor
the Funds' investment with a bias towards removing stocks of companies which may
impair for any reason the Funds' 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 these Fund
portfolios and will purchase balancing securities in these sectors until the
portfolio's sector weightings closely match that of the S&P 500 Index and S&P
MidCap 400 Index, respectively. This process continues until the portfolios are
fully invested (except for cash holdings).
These Funds may occasionally receive securities that are outside of the
S&P 500 Index or S&P MidCap 400 Index, respectively, due to corporate
reorganizations or spin-offs. These Funds will dispose of those securities in
due course consistent with the Funds' investment objectives.
If a large number of shareholders were to redeem shares, however, the
Adviser may be forced to reduce the number of issuers represented in the
portfolios. This could have an adverse effect on the accuracy with which the
Equity Index Fund and MidCap Index Fund match the performance of the S&P 500
Index and S&P MidCap 400 Index, respectively.
OTHER INVESTMENT CONSIDERATIONS - BOND IMMDEX(TM) FUND
The IMMDEX(TM) Model. The IMMDEX(TM) model has been developed and
is maintained by Capital Management Sciences "Capital Management") under
the"IMMDEX(TM) " trademark. Capital Management is neither a sponsor of the
Bond IMMDEX(TM) Fund nor affiliated in any way with the Bond IMMDEX(TM) Fund
or the Adviser. Neither is Capital Management in any way affiliated with Lehman
Brothers which claims no interest in the model or its ability to effectively or
accurately replicate the Lehman Brothers Government/Corporate Bond Index.
Further, Capital Management is not responsible for the management or results of
the Bond IMMDEX(TM) Fund's portfolio. Rather, the Adviser will use the
IMMDEX(TM) model and the other investment techniques described in the
Prospectus in choosing portfolio securities and executing transactions in an
effort to produce an annual rate of total return for the Bond IMMDEX(TM) Fund
that is comparable, before Fund expenses, to that of the Lehman Brothers
Government/Corporate Bond Index.
OTHER PORTFOLIO INFORMATION
OPTIONS TRADING. As stated in the Prospectus, the Bond Funds, Balanced
Funds and Equity Funds (other than the Core International Equity Fund) may
purchase put and (with the exception of the Tax-Exempt Intermediate Bond Fund)
call options. Option purchases by a Fund (except the International Equity Fund)
will not exceed 5% of its net assets and the International Equity Fund may
purchase put and call options without limit. Such options may relate to
particular securities or to various indices and may or may not be listed on a
national securities exchange and issued by the Options Clearing Corporation. (In
the case of the Equity Index Fund and MidCap Index Fund, such options will
relate only to stock indices.) 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.
The Tax-Exempt Intermediate Bond Fund will only purchase put options on
Municipal obligations, and will do so only to enhance liquidity, shorten the
maturity of the related municipal security or permit the Fund to invest its
assets at more favorable rates. The Taxable Bond Funds and International Equity
Fund will engage in unlisted over-the-counter options only with broker-dealers
deemed creditworthy by the Adviser (or the Sub-Adviser). Closing transactions in
certain options are usually effected directly with the same broker-dealer that
effected the original option transaction. A Fund bears the risk that the
broker-dealer will fail to meet its obligations. There is no assurance that a
liquid secondary trading market exists for closing out an unlisted option
position. Furthermore, unlisted options are not subject to the protections
afforded purchasers of listed options by the Options Clearing Corporation, which
performs the obligations of its members who fail to perform in connection with
the purchase or sale of options.
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.
Each Fund may purchase put options on portfolio securities at or about
the same time that it purchases the underlying security or at a later time. By
buying a put, a Fund limits its risk of loss from a decline in the market value
of the security until the put expires. Any appreciation in the value of and
yield otherwise available from the underlying security, however, will be
partially offset by the amount of the premium paid for the put option and any
related transaction costs. Call options may be purchased by a Fund in order to
acquire the underlying security at a later date at a price that avoids any
additional cost that would result from an increase in the market value of the
security. A call option may also be purchased to increase a Fund's return to
investors at a time when the call is expected to increase in value due to
anticipated appreciation of the underlying security. Prior to its expiration, a
purchased put or call option may be sold in a "closing sale transaction" (a sale
by a Fund, prior to the exercise of the option that it has purchased, of an
option of the same series), and profit or loss from the sale will depend on
whether the amount received is more or less than the premium paid for the option
plus the related transaction costs. In addition, each Fund (with the exception
of the Tax-Exempt Intermediate Bond Fund) may sell covered call options listed
on a national securities exchange. Such options may relate to particular
securities or to various indices. (In the case of the Equity Index Fund and
MidCap Index Fund, such options will relate only to stock indices.) A call
option on a security is covered if a Fund owns the security underlying the call
or has an absolute and immediate right to acquire that security without
additional cash consideration (or, if additional cash consideration is required,
cash or cash equivalents in such amount as required are held in a segregated
account by its custodian) upon conversion or exchange of other securities held
by it. A call option on an index is covered if a Fund maintains with its
custodian cash or cash equivalents equal to the contract value. A call option is
also covered if a Fund holds a call on the same security or index as the call
written where the exercise price of the call held is (i) equal to or less than
the exercise price of the call written, or (ii) greater than the exercise price
of the call written provided the difference is maintained by a Fund in cash or
cash equivalents in a segregated account with its custodian. The aggregate value
of the Fund's assets subject to covered options written by the Taxable Bond
Funds, Balanced Income, Balanced Growth, Growth and Income, Equity Index, MidCap
Index and MicroCap Funds will not exceed 5%, 5%, 25%, 5%, 5%, 5% and 5%,
respectively, of the value of its net assets during the current year. The
International Equity Fund may write call options on securities and on various
stock indices which will be traded on a recognized securities or futures
exchange or over the counter and during the current year the aggregate value of
the Fund's assets subject to options written by the Fund will not exceed 5% of
the value of its net assets.
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.
The International Equity Fund may also write (i.e., sell) covered put
options on securities and various securities indices. The writer of a put incurs
an obligation to buy the security underlying the option from the put's purchaser
at the exercise price at any time on or before the termination date, at the
purchaser's election (certain options the Fund writes will be exercisable by the
purchaser only on a specific date). Generally, a put is "covered" if the Fund
maintains cash, U.S. government securities or other liquid high grade debt
obligations equal to the exercise price of the option or if the Fund holds a put
on the same underlying security with a similar or higher exercise price. By
writing a covered put option on a security, the Fund receives a premium for
writing the option however, the Fund assumes the risk that the value of the
security will decline before the exercise date in which event, the Fund may
incur a loss in excess of the premium received when the put is exercised.
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 Taxable Bond Funds, Balanced Funds and
Equity Funds to purchase or sell futures contracts, or options thereon, as a
hedge against changes resulting from market conditions in the value of the
securities held by 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. The International Equity
Fund may engage in foreign futures and options (see "Other Investment
Considerations-- International Equity Fund-- Foreign Futures and Options on
Futures"). In addition, the Equity Index Fund and MidCap Index Fund will
purchase and sell futures and related options (based only on the S&P 500 Index
and S&P MidCap 400 Index, respectively) to maintain cash reserves while
simulating full investment in the stocks underlying the S&P 500 Index to keep
substantially all of its assets exposed to the market (as represented by the S&P
500 Index) and to reduce transaction costs. For example, a Fund may enter into
transactions involving a bond or stock index futures contract, which is a
bilateral agreement pursuant to which the parties agree to take or make delivery
of an amount of cash equal to a specified dollar amount times the difference
between the index value (which assigns relative values to the securities
included in the index) at the close of the last trading day of the contract and
the price at which the futures contract is originally struck. No physical
delivery of the underlying bonds or stocks in the index is made. The Adviser may
also determine that it would be in the interest of a Fund to purchase or sell
interest rate futures contracts, or options thereon, which provide for the
future delivery of specified fixed-income securities. In addition, the Equity
Index Fund and MidCap Index Fund may purchase and sell futures and related
options (based only on the S&P 500 Index and S&P MidCap 400 Index, respectively)
to maintain cash reserves while simulating full investment in the stocks
underlying the S&P 500 Index and S&P MidCap 400 Index, respectively, to keep
substantially all of its assets exposed to the market (as represented by the S&P
500 Index and S&P MidCap 400 Index, respectively), and to reduce transaction
costs. The International Equity Fund will only enter into futures contracts and
futures options which are standardized and traded on a U.S. or foreign exchange,
board of trade or similar entity, or in the case of futures options, for which
an established over-the-counter market exists. The Sub-Adviser of the
International Equity Fund anticipates engaging in transactions from time to time
in foreign stock index futures such as the ALL-ORDS (Australia), CAC-40
(France), TOPIX (Japan) and the FTSE-100 (United Kingdom).
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 (or Sub-Adviser's) ability to correctly predict movements in the
direction of the market. For example, if a Fund has hedged against the
possibility of a decline in the market adversely affecting securities held by it
and securities prices increase instead, the Fund will lose part or all of the
benefit to the increased value of its securities which it has hedged because it
will have approximately equal offsetting losses in its futures positions. In
addition, in some situations, if the Fund has insufficient cash, it may have to
sell securities to meet daily variation margin requirements. Such sales of
securities may be, but will not necessarily be, at increased prices which
reflect the rising market. The Fund may have to sell securities at a time when
it may be disadvantageous to do so.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and extremely high
degree of leverage involved in futures pricing. As a result, a relatively small
price movement in a futures contract may result in immediate and substantial
loss (as well as gain) to the investor. For example, if at the time of purchase,
10% of the value of the futures contract is deposited as margin, a subsequent
10% decrease in the value of the futures contract would result in a total loss
of the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit, before any deduction for the transaction
costs, if the contract were closed out. Thus, a purchase or sale of a futures
contract may result in losses in excess of the amount invested in the contract.
Utilization of futures transactions by a Fund involves the risk of loss
by the Fund of margin deposits in the event of bankruptcy of a broker with whom
the Fund has an open position in a futures contract of related option.
Most futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of a trading session.
Once the daily limit has been reached in a particular type of contract, no
trades may be made on that day at a price beyond that limit. The daily limit
governs only price movement during a particular trading day and therefore does
not limit potential losses, because the limit may prevent the liquidation of
unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses.
The trading of futures contracts is also subject to the risk of trading
halts, suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal trading activity, which could at times make it difficult
or impossible to liquidate existing positions or to recover excess variation
margin payments.
Each Fund's commodities transactions must constitute bona fide hedging
or other permissible transactions pursuant to regulations promulgated by the
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 Taxable Bond Funds and Growth and Income Fund intend to limit their
transactions in futures contracts and related options so that not more than 5%
of each Fund's respective net assets are at risk. The Equity Index Fund, MidCap
Index Fund and International Equity Fund intend to limit their transactions in
futures contracts so that not more than 10%, 10% and 25% of each Fund's
respective net assets are at risk. For a more detailed description of futures
contracts and futures options, including a discussion of the limitations imposed
by federal tax law, see Appendix B.
FOREIGN SECURITIES AND AMERICAN DEPOSITORY RECEIPTS ("ADRS"). In
addition to the direct investments in foreign securities that each Fund may
make, the Taxable Bond Funds, Balanced Funds, Growth and Income, Growth, Special
Growth, Emerging Growth, MicroCap, International Equity and Core International
Equity Funds may invest in sponsored ADRs. The International Equity Fund and
Core International Equity Fund may also invest in unsponsored ADRs. ADRs are
receipts issued by an American bank or trust company evidencing ownership of
underlying securities issued by a foreign issuer. ADRs may be listed on a
national securities exchange or may trade in the over-the-counter market. ADR
prices are denominated in U.S. dollars; the underlying security may be
denominated in a foreign currency. The underlying security may be subject to
foreign government taxes which would reduce the yield on such securities.
Investments in foreign securities and ADRs also involve certain inherent risks,
such as political or economic instability of the country of issue, the
difficulty of predicting international trade patterns and the possibility of
imposition of exchange controls. Such securities may also be subject to greater
fluctuations in price than securities of domestic corporations. In addition,
there may be less publicly available information about a foreign company than
about a domestic company. Foreign companies generally are not subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to domestic companies. With respect to certain foreign countries,
there is a possibility of expropriation or confiscatory taxation, or diplomatic
developments which could affect investment in those countries.
While "sponsored" and "unsponsored" ADR programs are similar, there are
differences regarding ADR holders' rights and obligations and the practices of
market participants. A depository may establish an unsponsored facility without
participation by (or acquiescence of) the underlying issuer; typically, however,
the depository requests a letter of non-objection from the underlying issuer
prior to establishing the facility. Holders of unsponsored ADRs generally bear
all the costs of the ADR facility. The depository usually charges fees upon the
deposit and withdrawal of the underlying securities, the conversion of dividends
into U.S. dollars, the disposition of non-cash distribution, and the performance
of other services. The depository of an unsponsored facility frequently is under
no obligation to distribute shareholder communications received from the
underlying issuer or to pass through voting rights to ADR holders in respect of
the underlying securities.
Sponsored ADR facilities are created in generally the same manner as
unsponsored facilities, except that sponsored ADRs are established jointly by a
depository and the underlying issuer through a deposit agreement. The deposit
agreement sets out the rights and responsibilities of the underlying issuer, the
depository and the ADR holders. With sponsored facilities, the underlying issuer
typically bears some of the costs of the ADR (such as dividend payment fees of
the depository), although ADR holders may bear costs such as deposit and
withdrawal fees. Depositories of most sponsored ADRs agree to distribute notices
of shareholder meetings, voting instructions, and other shareholder
communications and information to the ADR holders at the underlying issuer's
request.
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 shareholders. These distributions must be made from a Fund's cash assets or,
if necessary, from the proceeds of sales of portfolio securities. Additional
income producing securities may not be able to be purchased with cash used to
make such distributions and its current income ultimately may be reduced as a
result.
CONVERTIBLE SECURITIES. The Balanced Funds, Growth and Income, Growth,
Special Growth, Emerging Growth, MicroCap and International Equity Funds may
hold convertible securities. Convertible securities entitle the holder to
receive interest paid or accrued on debt or the dividend paid on preferred stock
until the securities mature or are redeemed, converted or exchanged. Prior to
conversion, convertible securities have characteristics similar to ordinary debt
securities in that they normally provide a stable stream of income with
generally higher yields than those of common stock of the same or similar
issuers. Convertible securities rank senior to common stock in a corporation's
capital structure and therefore generally entail less risk than the
corporation's common stock, although the extent to which such risk is reduced
depends in large measure upon the degree to which the convertible security sells
above its value as a fixed income security. In investing in convertibles, a Fund
is looking for the opportunity, through the conversion feature, to participate
in the capital appreciation of the common stock into which the securities are
convertible, while earning higher current income than is available from the
common stock.
During normal market conditions, no more than 5% of a Fund's net assets
will be purchased or held in convertible or other securities that (1) are not
rated at the time of purchase investment grade by S&P, Moody's or other
nationally recognized rating agencies; (2) are unrated and have not been
determined by the Adviser (or Adviser and Sub-Adviser with regard to the
International Equity Fund) to be of comparable quality to a security rated
investment grade; or (3) in the case of the International Equity Fund, have not
received the foreign equivalent of investment grade by a rating agency
recognized in the local market and determined to be of comparable quality by the
Adviser and Sub-Adviser. Securities rated below investment grade are
predominantly speculative and are commonly referred to as junk bonds. To the
extent a Fund purchases convertibles rated below investment grade or
convertibles that are not rated, a greater risk exists as to the timely
repayment of the principal of, and the timely payment of interest or dividends
on, such securities. Subsequent to its purchase by a Fund, a rated security may
cease to be rated or its rating may be reduced below a minimum rating for
purchase by the Fund. The Adviser (and Sub-Adviser for the International Equity
Fund) will consider such an event in determining whether a Fund should continue
to hold the security. The Adviser (and Sub-Adviser for the International Equity
Fund) will sell promptly any securities that are non-investment grade as a
result of these events and that exceed 5% of a Fund's net assets.
As described in the Prospectus, the Funds may invest a portion of their
assets in convertible securities that are rated below investment grade.
WARRANTS. The Balanced Growth, Balanced Income, Growth and Income,
Growth, Special Growth, Emerging Growth, MicroCap and International Equity Funds
may purchase warrants and similar rights, which are privileges issued by
corporations enabling the owners to subscribe to and purchase a specified number
of shares of the corporation at the specified price during a specified period of
time. Warrants basically are options to purchase equity securities at a specific
price valid for a specific period of time. They do not represent ownership of
the securities, but only the right to buy them. They have no voting rights, pay
no dividends and have no rights with respect to the assets of the company
issuing them. Warrants differ from call options in that warrants are issued by
the issuer of the security which may be purchased on their exercise, whereas
call options may be written or issued by anyone. The prices of warrants do not
necessarily move parallel to the prices of the underlying securities.
The purchase of warrants involves the risk that a Fund could lose the
purchase value of a warrant if the right to subscribe to additional shares is
not exercised prior to the warrant's expiration. Also, the purchase of warrants
involves the risk that the effective price paid for the warrant added to the
subscription price of the related security may exceed the value of the
subscribed security's market price such as when there is no movement in the
level of the underlying security. During normal market conditions, no more than
5% of each Fund's net assets will be invested in warrants. This 5% limit
includes warrants that are not listed on any stock exchange, and such warrants
are limited to 2% of the International Equity Fund's net assets. Warrants
acquired by the International Equity Fund in units or attached to securities are
not subject to these limits.
SHORT SALES. The MicroCap Fund may engage in short sales. If the
MicroCap Fund engages in short sales, it need not segregate Fund assets if it
"covers" the position. A position is "covered" if, at the time the Fund sells
the security or thereafter, the Fund also owns that security or holds a call
option on that security with a strike price no higher than the price at which
the security was sold. For federal tax purposes, a short sale is considered
consummated upon delivery of securities to close the short sale. The gains or
losses realized by the Fund from short sale transactions normally will be
characterized as capital gains or losses although short sales that are part of
certain hedging transactions or straddles may receive different tax treatment.
Special rules generally operate to prevent the use of short sales to convert
short-term capital gain into long-term capital gain and long-term capital loss
into short-term capital loss. As a result, these transactions may increase the
amount of short-term capital gain realized by the Fund which is taxed as
ordinary income when distributed to its shareholders and may reduce the Fund's
short-term capital loss available to reduce its ordinary income. The impact of
the tax consequences of short sale transactions engaged in by the Fund on
distributions to shareholders will be closely monitored.
GUARANTEED INVESTMENT CONTRACTS. The Taxable Bond Funds may make
limited investments in guaranteed investment contracts ("GICs") issued by highly
rated U.S. insurance companies. Pursuant to such contracts, a Fund makes cash
contributions to a separate account of the insurance company which has been
segregated from the general assets of the issuer. The insurance company then
pays to the Fund at the end of the contract an amount equal to the cash
contributions adjusted for the total return of an index. A GIC is a separate
account obligation of the issuing insurance company. A Fund will only purchase
GICs from issuers which, at the time of purchase, are rated A or higher by
Moody's or S&P, have assets of $1 billion or more and meet quality and credit
standards established by the Adviser. Generally, GICs are not assignable or
transferable without the permission of the issuing insurance companies, and an
active secondary market in GICs does not currently exist. Therefore, GICs are
considered by the Fund to be subject to the 10% limitation on illiquid
investments. Generally, a GIC allows a purchaser to buy an annuity with the
money accumulated under the contract; however, a Fund will not purchase any such
annuities.
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.
Companies in which the MicroCap and Emerging Growth Funds primarily
invest will include those that have limited product lines, markets, or financial
resources, or are dependent upon a small management group. In addition, because
these stocks are not well known to the investing public, do not have significant
institutional ownership, and are followed by relatively few securities analysts,
there will normally be less publicly available information concerning these
securities compared to what is available for the securities of larger companies.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, can decrease the value and liquidity of securities held by the Funds.
Historically small capitalization stocks have been more volatile in price than
larger capitalization stocks. Among the reasons for the greater price volatility
of these small company stocks are the less certain growth prospects of smaller
firms, the lower degree of liquidity in the markets for such stocks, the greater
sensitivity of small companies to changing economic conditions and the fewer
market makers and the wider spreads between quoted bid and asked prices which
exist in the over-the-counter market for such stocks. Besides exhibiting greater
volatility, small company stocks may, to a degree, fluctuate independently of
larger company stocks. Small company stocks may decline in price as large
company stocks rise, or rise in price as large company stocks decline. Investors
should therefore expect that the Funds will be more volatile than, and may
fluctuate independently of, broad stock market indices such as the S&P 500
Index.
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 Special Growth Fund, Emerging Growth Fund, MicroCap Fund and Core
International Equity Fund when the Adviser or Sub-Adviser, respectively,
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
shareholders. 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 International
Equity Fund or 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 (in an amount exceeding one-third of the Fund's net
assets, with respect to the MicroCap Fund), except that (a) this investment
limitation shall not apply to a Fund's transactions in futures contracts and
related options and, with respect to MicroCap Fund, short sales against the box,
and (b) a Fund may obtain short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities.
8. Purchase or sell commodity contracts, or invest in oil, gas or
mineral exploration or development programs, except that each Fund may, to the
extent appropriate to its investment objective, purchase publicly traded
securities of companies engaging in whole or in part in such activities and may
enter into futures contracts and related options.
9. Purchase securities of any one issuer (other than securities issued
or guaranteed by the U.S. government, its agencies or instrumentalities) if,
immediately after such purchase, more than 5% of the value of the Fund's total
assets would be invested in the securities of such issuer, or more than 10% of
the issuer's outstanding voting securities would be owned by the Fund or the
Company, except that up to 25% of the value of the Fund's total assets may be
invested without regard to these limitations. For purposes of this limitation, a
security is considered to be issued by the entity (or entities) whose assets and
revenues back the security. A guarantee of a security shall not be deemed to be
a security issued by the guarantor when the value of all securities issued and
guaranteed by the guarantor, and owned by the Fund, does not exceed 10% of the
value of the Fund's total assets.
10. Purchase any securities which would cause 25% or more of the value
of the Fund's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry; provided that, (a) with regard to all Funds except the
Tax-Exempt Intermediate Bond Fund, there is no limitation with respect to
instruments issued or guaranteed by the United States, its agencies or
instrumentalities and repurchase agreements secured by such instruments; (b)
with regard to the Tax-Exempt Intermediate Bond Fund, there is no limitation
with respect to instruments issued or guaranteed by the United States, any
state, territory or possession of the United States, the District of Columbia or
any of their authorities, agencies, instrumentalities or political subdivisions
and repurchase agreements secured by such instruments; (c) wholly owned finance
companies will be considered to be in the industries of their parents if their
activities are primarily related to financing the activities of the parents; and
(d) utilities will be divided according to their services, for example, gas, gas
transmission, electric and gas, electric and telephone will each be considered a
separate industry.
11. Borrow money or issue senior securities, except that each Fund may
borrow from banks and enter into reverse repurchase agreements for temporary
purposes in amounts up to 10% of the value of the total assets (one-third of the
value of the total assets, with respect to the MicroCap Fund) at the time of
such borrowing; or mortgage, pledge or hypothecate any assets, except in
connection with any such borrowing and in amounts not in excess of the lesser of
the dollar amounts borrowed or 10% of the value of the Fund's total assets
(one-third of the value of the total assets, with respect to the MicroCap Fund)
at the time of such borrowing. A Fund will not purchase securities while its
borrowings (including reverse repurchase agreements) in excess of 5% of its
total assets are outstanding. The MicroCap Fund may not enter into reverse
repurchase agreements exceeding in the aggregate one-third of its total assets.
Securities held in escrow or separate accounts in connection with the Fund's
investment practices described in this SAI or in the Prospectus are not deemed
to be pledged for purposes of this limitation.
The Funds will monitor liquidity on an ongoing basis to determine
whether an adequate level of liquidity is being maintained.
12. With respect to the Tax-Exempt Intermediate Bond Fund, invest less
than 80% of its net assets in securities the interest on which is exempt from
federal income tax except during defensive periods or during unusual market
conditions. For purposes of this fundamental policy, Municipal obligations that
are subject to federal alternative minimum tax are considered taxable.
If a percentage limitation is satisfied at the time of investment, a
later increase or decrease in such percentage resulting from a change in the
value of the Fund's portfolio securities will not constitute a violation of such
limitation.
If due to market fluctuations or other reasons, the amount of
borrowings and reverse repurchase agreements exceed the limit stated above, the
Funds (except the MicroCap Fund) will promptly reduce such amount. With respect
to the MicroCap Fund, if due to market fluctuations or other reasons, the total
assets of the Fund fall below 300% of its borrowings, the Fund will reduce its
borrowings in compliance with the 1940 Act. Except as otherwise provided in
Investment Restriction No. 10 above, for the purpose of such restriction, in
determining industry classification with respect to the International Equity
Fund and Core International Equity Fund, the Company intends to use the Morgan
Stanley Capital International classification titles.
For purposes of investment limitation no. 1, "total assets" includes
the value of the collateral for the securities loaned.
With respect to investment limitation No. 3 under "Additional
Investment Limitations" as it relates to the Tax-Exempt Intermediate Bond Fund,
real estate shall include real estate mortgages. Although the foregoing
investment limitations would permit the Tax-Exempt Intermediate Bond Fund to
invest in options, futures contracts, options on futures contracts and engage in
securities lending, the Fund, during the current fiscal year, does not intend to
trade in such instruments (except that the Fund may purchase put options on
Municipal obligations as described in the Prospectus) or lend portfolio
securities. Prior to engaging in any such transactions, the Fund will provide
its shareholders with notice and add any additional descriptions concerning the
instruments to the Prospectus and this SAI as may be required. With respect to
investment limitation No. 10 under "Additional Investment Limitations,"
asset-backed securities will be divided according to the type of assets
underlying the security. For example, automobile loans, credit card receivables
and installment sales contracts will each be considered a separate industry.
NET ASSET VALUE
The net asset value per share of each Fund is calculated separately for
the Institutional 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 Shareholder 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 International Equity Fund and 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 International Equity Fund and Core International Equity Fund, is
not calculated. The calculation of the net asset value of a Fund, including the
International Equity Fund and 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 October 31, 1999, as follows:
<TABLE>
<CAPTION>
Short-Term Bond
Market Intermediate Bond Tax-Exempt Bond
Fund Market Intermediate IMMDEX(TM)
Fund Bond Fund Fund
<S> <C> <C> <C> <C>
Net Assets (000s) $65,490 $33,779 $20,016 $95,635
Number of Shares Outstanding
(000s) 6,470 3,346 1,978 3,495
Net Asset Value Per Share 10.12 10.10 10.12 27.36
Sales Charge, 4.00% of offering
price (4.16% of net asset value
per share) 0.39 0.39 0.39 1.07
Public Offering Price 10.54 10.52 10.54 28.50
</TABLE>
<TABLE>
<CAPTION>
Balanced Balanced Growth Growth and Income Equity Index
Income Fund Fund Fund
Fund
<S> <C> <C> <C> <C>
Net Assets (000s) $13,087 $53,807 $194,089 $142,247
Number of Shares 1,197 1,790 4,214 1,549
Outstanding (000s)
Net Asset Value
Per Share 10.94 30.06 46.06 91.83
Sales Charge, 5.50%
of offering price
(5.82% of net asset 0.52 1.42 2.17 4.33
value per share)
Public Offering Price 11.58 31.81 48.74 97.17
</TABLE>
<TABLE>
<CAPTION>
MidCap Index Growth Special Growth Emerging Growth MicroCap
Fund Fund Fund Fund Fund
<S> <C> <C> <C> <C> <C>
Net Assets (000s) ___ $47,238 $95,758 $9,957 $21,988
Number of Shares ___
Outstanding (000s) 1,245 2,533 1,072 1,009
Net Asset Value ___
Per Share 37.96 37.80 9.29 21.80
Sales Charge, 5.50% ___
of offering price
(5.82% of net asset 1.79 1.78 0.44 1.03
value per share)
Public Offering Price ___ 40.17 40.00 9.83 23.07
</TABLE>
Core
International International
Equity Equity Fund
Fund
Net Assets (000s) $6,418 ____
Number of Shares ____
Outstanding (000s) 346
Net Asset Value ____
Per Share 18.53
Sales Charge, 5.50% ____
of offering price
(5.82% of net asset 0.87
value per share)
Public Offering Price 19.61 ____
Shareholder organizations or Institutions may be paid by the Funds for
advertising, distribution or shareholder services. Depending on the terms of the
particular account, shareholder 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. Shareholder 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 when
appropriate under the 1940 Act, such as to reimburse the Funds for any loss
sustained by reason of the failure of a shareholder to make full payment for
shares purchased by the shareholder or to collect any charge relating to a
transaction effected for the benefit of a shareholder which is applicable to
Fund shares as provided in the Prospectus from time to time.
REDUCING YOUR SALES CHARGE ON RETAIL A SHARES.
A. Rights of Accumulation
As stated in the Prospectus, 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 4.00% 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 Prospectus, 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, shareholders
authorize the transfer agent to act on telephonic or written exchange
instructions from any person representing himself to be the shareholder or in
some cases, the shareholder'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 shareholders.
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 shareholder 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 shareholder 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 shareholder 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.
As noted in the prospectus, shares of the Firstar Funds may be
exchanged with shares of corresponding classes of the Firstar Stellar Funds and
the Mercantile Mutual Funds, Inc. The Firstar Stellar Funds currently offers the
Treasury, Tax-Free Money Market, Ohio Tax-Free Money Market, Strategic Income,
U.S. Government Income, Insured Tax-Free Bond, Growth Equity, Relative Value,
Science and Technology, Stellar, Capital Appreciation and International Equity
Funds. The Mercantile Mutual Funds, Inc. currently offers the Treasury Money
Market, Money Market, Tax-Exempt Money Market, Conning Money Market, U.S.
Government Securities, Intermediate Corporate Bond, Bond Index, Government &
Corporate Bond, Short-Intermediate Municipal, Missouri Tax-Exempt Bond, National
Municipal Bond, Balanced, Equity Income, Equity Index, Growth & Income Equity,
Growth Equity, Small Cap Equity, Small Cap Equity Index and International Equity
Portfolios. FIRMCO, the Firstar Funds' adviser, also serves as the adviser to
Mercantile Mutual Funds, Inc. Prior to March 1, 2000, Mississippi Valley
Advisors Inc. ("MVA") served as adviser to Mercantile Mutual Funds, Inc. On
March 1, 2000, MVA merged into FIRMCO. The Firstar Stellar Funds are advised by
Firstar Bank, N.A. Firstar Bank, N.A. and FIRMCO are under the common control of
Firstar Corporation.
EXEMPTIONS FROM CDSC. Certain types of redemptions may also qualify for
an exemption from the contingent deferred sales charge. To receive exemptions
(i), (ii) or (iii) below, a shareholder 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 Shareholder 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 not 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"), due to death,
disability or the attainment of a specified age;
(ii) redemptions in connection with the death or disability of a shareholder; or
(iii) redemptions resulting from certain tax-free returns from IRAs of excess
contributions pursuant to section 408(d)(4) or (5) of the Code.
RETIREMENT PLANS: RETAIL A AND RETAIL B SHARES OF THE FUNDS
INDIVIDUAL RETIREMENT ACCOUNTS. The Company has available a plan (the
"Traditional IRA") for use by individuals with compensation for services
rendered (including earned income from self-employment) who wish to use shares
of the Funds as a funding medium for individual retirement saving. However,
except for rollover contributions, an individual who has attained, or will
attain, age 70 1/2 before the end of the taxable year may only contribute to a
Traditional IRA for his or her nonworking spouse under age 70 1/2. Distribution
of an individual's Traditional IRA assets (and earnings thereon) before the
individual attains age 59 1/2 will (with certain exceptions) result in an
additional 10% tax on the amount included in the individual's gross income.
Earnings on amounts contributed to the Traditional IRA are not subject to
federal income tax until distributed.
The Company also has available a Roth Individual Retirement Account
(the "Roth IRA") for retirement saving for use by individuals with compensation
for services rendered. A single individual with adjusted gross income of up to
$110,000 may contribute to a Roth IRA (for married couples filing jointly, the
adjusted gross income limit is $160,000), and contributions may be made even
after the Roth IRA owner has attained age 70 1/2, as long as the account owner
has earned income. Contributions to a Roth IRA are not deductible. Earnings on
amounts contributed to a Roth IRA, however, are not subject to federal income
tax when distributed if the distribution is a "qualified distribution" (i.e.,
the Roth IRA has been held for at least five years beginning with the first tax
year for which a contribution was made to the Roth IRA and the distribution is
due to the account owner's attainment of age 59 1/2, disability or death, or for
qualified first-time homebuyer expenses. A non-qualified distribution of an
individual's Roth IRA assets (and the earnings thereon) will (with certain
exceptions) result in an additional 10% tax on the amount included in the
individual's gross income.
The Company permits certain employers (including self-employed
individuals) to make contributions to employees' Traditional IRAs if the
employer establishes a Simplified Employee Pension ("SEP") plan and/or a Salary
Reduction SEP ("SARSEP"). Although SARSEPs may not be established after 1996,
employers may continue to make contributions to SARSEPs established before
January 1, 1997, under the pre-1997 federal tax law. A SEP permits an employer
to make discretionary contributions to all of its employees' Traditional IRAs
(employees who have not met certain eligibility criteria may be excluded) equal
to a uniform percentage of each employee's compensation (subject to certain
limits). If an employer (including a self-employed individual) established a
SARSEP before January 1, 1997, employees may defer a percentage of their
compensation -- pre-tax -- to Traditional IRAs (subject to certain limits). The
Code provides certain tax benefits for contributions by an employer, pursuant to
a SEP and/or SARSEP, to an employee's Traditional IRA. For example,
contributions to an employee's Traditional IRA pursuant to a SEP and/or SARSEP
are deductible (subject to certain limits) and the contributions and earnings
thereon are not taxed until distributed.
SAVINGS INCENTIVE MATCH PLAN FOR EMPLOYEES OF SMALL EMPLOYERS. The
Company also has available a simplified tax-favored retirement plan for
employees of small employers (a "SIMPLE IRA Plan"). If an employer establishes a
SIMPLE IRA Plan, contributions under the Plan are made to eligible employees'
SIMPLE individual retirement accounts ("SIMPLE IRAs"). Each eligible employee
may choose to defer a percentage of his or her pre-tax compensation to the
employee's SIMPLE IRA. The employer must generally make an annual matching
contribution to the SIMPLE IRA of each eligible employee equal to the employee's
salary reduction contributions, up to a limit of 3 percent of the employee's
compensation. Alternatively, the employer may make an annual non-discretionary
contribution to the SIMPLE IRA of each eligible employee equal to 2 percent of
each employee's compensation. As with contributions to an employee's IRA
pursuant to a SEP and/or SARSEP, the Code provides tax benefits for
contributions by an employer, pursuant to a SIMPLE IRA Plan, to an employee's
SIMPLE IRA. For example, contributions to an employee's SIMPLE IRA are
deductible (subject to certain limits) and the contributions and earnings
thereon are not taxed until distributed.
In the SIMPLE IRA Plan and in Traditional and Roth IRAs, distributions
of net investment income and capital gains will be automatically reinvested.
The foregoing brief descriptions are not complete or definitive
explanations of the SIMPLE IRA Plan, the Traditional IRA, or the Roth IRA
available for investment in the Funds. Any person who wishes to establish a
retirement plan account may do so by contacting Investor Services at
800-677-FUND. The complete Plan documents and applications will be provided to
existing or prospective shareholders upon request, without obligation. The
Company recommends that investors consult their attorneys or tax advisors to
determine if the retirement programs described herein are appropriate for their
needs.
ADDITIONAL INFORMATION REGARDING SHAREHOLDER SERVICES FOR RETAIL SHARES
The Retail A and Retail B Shares of the Funds offer a Periodic
Investment Plan whereby a shareholder may automatically make purchases of shares
of a Fund on a regular, monthly basis ($50 minimum per transaction). Under the
Periodic Investment Plan, a shareholder's designated bank or other financial
institution debits a preauthorized amount on the shareholder'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 shareholder's account or the shareholder'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 shareholders to
effect ConvertiFund(R) transactions, an automated method by which a Retail
shareholder 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 shareholders a
Systematic Withdrawal Plan, which allows a shareholder who owns shares of a Fund
worth at least $5,000 at current net asset value at the time the shareholder
initiates the Systematic Withdrawal Plan to designate that a fixed sum ($50
minimum per transaction) be distributed to the shareholder 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 1-800-677-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
6-Institutional Special Growth 500 Million
6-A 500 Million
6-B 500 Million
7-Institutional Bond IMMDEX(TM) 500 Million
7-A 500 Million
7-B 500 Million
8-Institutional Equity Index 500 Million
8-A 500 Million
8-B 500 Million
9-Institutional Growth and Income 500 Million
9-A 500 Million
9-B 500 Million
10-Institutional Short-Term Bond Market 500 Million
10-A 500 Million
10-B 500 Million
11-Institutional Balanced Growth 500 Million
11-A 500 Million
11-B 500 Million
12-Institutional Growth 500 Million
12-A 500 Million
12-B 500 Million
13-Institutional Intermediate Bond Market 500 Million
13-A 500 Million
13-B 500 Million
14-Institutional Tax-Exempt Intermediate Bond 500 Million
14-A 500 Million
14-B 500 Million
15-Institutional International Equity 500 Million
15-A 500 Million
15-B 500 Million
16-Institutional MicroCap 50 Million
16-A 50 Million
16-B 50 Million
17-Institutional Balanced Income 100 Million
17-A 100 Million
17-B 100 Million
18-Institutional Emerging Growth 100 Million
18-A 100 Million
18-B 100 Million
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 5 common stock representing interests in five other separate investment
portfolios which are described in a separate statement 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, shareholders 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' Prospectus,
shareholders 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 shareholder.
Shareholders of each class of the Funds are entitled to one vote for
each full share held and proportionate fractional votes for fractional shares
held. Shareholders 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 shareholders 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 shareholders 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
shareholders of the Company voting together in the aggregate without regard to
particular portfolios. Similarly, on any matter submitted to the vote of
shareholders 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' Prospectus 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 shareholders 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
shareholder 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 shareholders 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.
The Tax Exempt Intermediate Bond Fund intends to invest all or
substantially all, of its assets in debt obligations, the interest on which is
exempt for federal income tax purposes. For the Fund to pay tax-exempt dividends
for any taxable year, at least 50% of the aggregate value of the Fund's assets
at the close of each quarter of the Fund's taxable year must consist of
exempt-interest obligations. The Tax-Exempt Intermediate Bond Fund is designed
to provide investors with current tax-exempt interest income. The Fund is not
intended to constitute a balanced investment program and is not designed for
investors seeking capital appreciation or maximum tax-exempt income irrespective
of fluctuations in principal. Shares of the Fund may not be suitable for
tax-exempt institutions, or for retirement plans qualified under Section 401 of
the Internal Revenue Code of 1986 (the "Code"), H.R. 10 plans and individual
retirement accounts because such plans and accounts are generally tax-exempt
and, therefore, not only would not gain any additional benefit from the Fund's
dividends being tax-exempt, but such dividends ultimately would be taxable to
the beneficiaries when distributed to them. In addition, the Fund may not be an
appropriate investment for entities which are "substantial users" of facilities
financed by private activity bonds or "related persons" thereof. "Substantial
user" is defined under U.S. Treasury Regulations to include a non-exempt person
who regularly uses a part of such facilities in his trade or business and whose
gross revenues derived with respect to the facilities financed by the issuance
of bonds are more than 5% of the total revenues derived by all users of such
facilities, who occupies more than 5% of the usable area of such facilities, or
for whom such facilities, or a part thereof were specifically constructed,
reconstructed or acquired. "Related persons" include certain related natural
persons, affiliated corporations, a partnership and its partners and an S
Corporation and its shareholders.
The tax principles applicable to transactions in financial instruments
and futures contracts and options that may be engaged in by the Core
International Equity Fund and the International Equity Fund, and investments in
passive foreign investment companies ("PFICs"), are complex and, in some cases,
uncertain. Such transactions and investments may cause the Core International
Equity Fund and the International Equity 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.
In addition, in the case of any shares of a PFIC in which the Core
International Equity Fund or the International Equity Fund invests, the Fund may
be liable for corporate-level tax on any ultimate gain or distributions on the
shares if the Fund fails to make an election to recognize income annually during
the period of its ownership of the shares.
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 shareholders.
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:
<TABLE>
<CAPTION>
Position(s) held with Principal Occupations During Past 5 Years and Other
Name, Address & Age the Company Affiliations
------------------------------------ ------------------------ -------------------------------------------------------
<S> <C> <C>
James M. Wade Chairman of the Board Vice President and Chief Financial Officer, Johnson
2802 Wind Bluff Circle Controls, Inc. (a controls manufacturing company),
Wilmington, NC 28409 January 1987-May 1991.
Age: 56
Glen R. Bomberger Director Executive Vice President, Chief Financial Officer and
One Park Plaza Director, A.O. Smith Corporation (a diversified
11270 West Park Place manufacturing company) since January 1987; Director
Milwaukee, WI 53224-3690 of companies affiliated with A.O. Smith Corporation;
Age: 62 Director, Smith Investment Company; Director of
companies affiliated with Smith Investment Company.
Jerry G. Remmel Director Vice President, Treasurer and Chief Financial Officer
16650A Lake Circle of Wisconsin Energy Corporation 1994-1996; Treasurer
Brookfield, WI 53005 of Wisconsin Electric Power Company 1973-1996;
Age: 68 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 Officer of Weirton
400 Three Springs Drive Steel since 1995; Director of Weirton Steel since
Weirton, WV 26062-4989 1993; Executive Vice President and Chief Financial
Age: 55 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; Trustee of
Carnegie Mellon University since 1997.
Charles R. Roy Director Vice President - Finance, Chief Financial Officer and
14245 Heatherwood Court Secretary, Rexnord Corporation (an equipment
Elm Grove, WI 53122 manufacturing company), 1988 - 1992; Vice President -
Age: 69 Finance and Administration, Rexnord Inc., 1982 -
1988; Officer and Director of several Rexnord
subsidiaries until 1992.
Bruce Laning Director, President President and CEO, FIRMCO since 2000; Director,
777 E. Wisconsin Avenue and Treasurer FIRMCO since 2000; Senior Vice President, FIRMCO
Suite 800 since 1999; Vice President, FIRMCO since 1994.
Milwaukee, WI 53202
Age: 40
W. Bruce McConnel, III Secretary Partner of the law firm of Drinker Biddle & Reath
One Logan Square LLP.
18th & Cherry Streets
Philadelphia, PA 19103
Age: 56
Laura J. Rauman Vice President Vice President of Operations, FIRMCO since 1995;
777 E. Wisconsin Avenue, Senior Auditor, Price Waterhouse, LLP, prior
Suite 800 thereto.
Milwaukee, WI 53202
Age: 31
Joseph C. Neuberger Assistant Treasurer Senior Vice President, Firstar Mutual Fund
615 E. Michigan Street Services, LLC since 1994; Manager, Arthur Andersen
Milwaukee, WI 53202 LLP, prior thereto.
Age: 38
Bronson J. Haase* Director President and CEO of Wisconsin Gas Company, WICOR
626 E. Wisconsin Avenue Energy, FieldTech and Vice President of WICOR, Inc.
Milwaukee, WI 53202 since 1998; President and CEO of Ameritech -
Age: 55 Wisconsin (formerly Wisconsin Bell) 1993-1998;
President of Wisconsin Bell Communications
1988-1993; Board of Directors, The Marcus
Corporation; Trustee of Roundy Foods; Chairman of
the Wisconsin Utilities Association.
</TABLE>
* Mr. Haase and Mr. Laning 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, 1999 of the Company's Directors.
<TABLE>
<CAPTION>
TOTAL COMPENSATION
PENSION OR FROM
RETIREMENT COMPANY
AGGREGATE BENEFITS ACCRUED ESTIMATED AND FUND
NAME OF COMPENSATION FROM AS PART OF FUND ANNUAL BENEFITS COMPLEX* PAID TO
PERSON/POSITION THE COMPANY EXPENSES UPON RETIREMENT DIRECTORS
------------------ ------------------- ---------------- ---------------- --------------------
<S> <C> <C> <C> <C>
James M. Wade $18,500 $0 $0 $18,500
Chairman of the Board
Glen R. Bomberger $15,000+ $0 $0 $15,000
Director
Jerry G. Remmel $15,000 $0 $0 $15,000
Director
Richard K. Riederer $15,000 $0 $0 $15,000
Director
Charles R. Roy $15,000 $0 $0 $15,000
Director
Bronson J. Haase $15,000 $0 $0 $3,500
Director
</TABLE>
*The "Fund Complex" includes only the Company. The Company is comprised
of 20 separate portfolios. +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, 1999, the
Directors and Officers received aggregate fees and reimbursed expenses of
$88,492. Mr. Laning, 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 Mr. Laning 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 Senior 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 became the investment adviser to the Short-Term Bond Market
Fund, Special Growth Fund, Bond IMMDEX(TM) Fund and Equity Index Fund as of
February 3, 1992 and became the investment adviser to the Growth and Income Fund
effective June 17, 1993. Prior thereto, investment advisory services were
provided by Firstar Trust Company, an affiliate of FIRMCO. FIRMCO is also the
investment adviser to the Growth Fund, Intermediate Bond Market Fund, Balanced
Income Fund, Balanced Growth Fund, Tax-Exempt Intermediate Bond Fund, Emerging
Growth Fund, MicroCap Fund, MidCap Index Fund, International Equity Fund and
Core International Equity Fund. In its Investment Advisory Agreement, the
Adviser has agreed to pay all expenses incurred by it in connection with its
advisory activities, other than the cost of securities and other investments,
including brokerage commissions and other transaction charges, if any, purchased
or sold for the Funds.
In addition to the compensation stated in the Prospectus, the Adviser
is entitled to 4/10ths of the gross income earned by each Fund on each loan of
its securities, excluding capital gains or losses, if any. Pursuant to current
policy of the SEC, the Adviser does not intend to receive compensation for such
securities lending activity. The Adviser may voluntarily waive advisory fees
otherwise payable by the Funds.
For the services provided and expenses assumed by the Adviser under its
Investment Advisory Agreement in effect for the fiscal years ended October 31,
1999, 1998 and1997, the Adviser was paid and waived advisory fees as follows:
<TABLE>
<CAPTION>
NET ADVISORY FEES PAID (ADVISORY FEES WAIVED)
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Short-Term Bond Market Fund $675,262 (542,291) $550,921 (528,964) $669,603 (605,038)
Special Growth Fund 4,187,456 (31,109) 5,243,173 (24) 5,168,254 (0)
Bond IMMDEX(TM) Fund 1,577,620 (800) 1,551,355 (0) 1,294,766 (0)
Equity Index Fund 1,248,658 (394,242) 1,076,720 (179,779) 815,050 (0)
Intermediate Bond Market Fund 1,165,094 (421,858) 1,080,528 (410,430) 778,669 (345,403)
Growth Fund 2,378,404 (3,010) 1,663,048 (72) 1,470,245 (2,052)
Balanced Growth Fund 1,796,430 (156,173) 1,345,543 (403,169) 1,056,380 (334,926)
Growth and Income Fund 5,581,009 (5,771) 4,513,188 (0) 3,086,069 (45)
Tax-Exempt Intermediate Bond Fund 319,104 (164,330) 217,113 (207,408) 109,101 (176,855)
International Equity Fund 558,117 (142,472) 641,868 (219,464) 422,050 (370,710)
Emerging Growth Fund 938,829 (25,818) 365,419 (135,525) 46,258 (28,226)1
Balanced Income Fund 230,911 (147,908) 60,206 (177,189)2
MicroCap Fund 1,941,648 (928) 1,685,137 (2,576) 1,318,931 (33)
</TABLE>
----------------
1 From inception (August 15, 1997) to October 31,1997.
2 From inception (December 1,1997) to October 1,1998.
Under its Investment Advisory Agreement, the Adviser is not liable for
any error of judgment or mistake of law or for any loss suffered by the Funds in
connection with the performance of such Agreement, except a loss resulting from
a breach of fiduciary duty with respect to the receipt of compensation for
services or a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of the Adviser in the performance of its duties or from
its reckless disregard of its duties and obligations under the Agreement.
With regard to the International Equity Fund and Core International
Equity Fund, under the Investment Advisory Agreements, the Adviser is authorized
to delegate its responsibilities to another adviser. The Adviser has appointed
Hansberger Global Investors, Inc. as Sub-Adviser to the International Equity
Fund and The Glenmede Trust Company as Sub-Adviser to the Core International
Equity Fund. The Sub-Adviser determines the securities to be purchased, retained
or sold by the respective Fund. See "Sub-Advisers" below.
SUB-ADVISERS. The International Equity Fund receives sub-advisory
services from Hansberger Global Investors, Inc. ("HGI"). Under the terms of the
Sub-Advisory Agreement between the Adviser and HGI, HGI furnishes investment
advisory and portfolio management services to the International Equity Fund with
respect to its investments. HGI is responsible for decisions to buy and sell the
International Equity Fund's investments and all other transactions related to
investment therein. HGI negotiates brokerage commissions and places orders of
purchases and sales of the International Equity Fund's portfolio securities.
During the term of the Sub-Advisory Agreement, HGI will bear all expenses
incurred by it in connection with its services under such agreement.
The Core International Equity Fund receives sub-advisory services from
The Glenmede Trust Company ("Glenmede"). Under the terms of the Sub-Advisory
Agreement between the Adviser and Glenmede, Glenmede furnishes investment
advisory and portfolio management services to the Core International Equity Fund
with respect to its investments. Glenmede is responsible for decisions to buy
and sell the Core International Equity Fund's investments and all other
transactions related to investment therein. Glenmede 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, Glenmede will bear all expenses incurred by it in connection with its
services under such agreement.
Pursuant to the Sub-Advisory Agreements, in the absence of willful
misfeasance, bad faith or gross negligence on the part of the Sub-Adviser or
reckless disregard of its obligations and duties thereunder, or loss resulting
from a breach of fiduciary duty with respect to the receipt of compensation for
services, the Sub-Adviser will not be subject to any liability to the Adviser,
the International Equity Fund, Core International Equity Fund or the Company, or
to any shareholder of the International Equity Fund, 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 Agreements. See "Banking Laws
and Regulations" below for information regarding certain banking laws and
regulations and their applicability to the Sub-Adviser and services under the
Sub-Advisory agreements.
Prior to September 2, 1997, State Street Bank and Trust Company served
as sub-adviser to the International Equity Fund. For the services provided under
the sub-advisory agreements in effect for the fiscal years ended October 31,
1999, 1998 and 1997, HGI and State Street Bank and Trust Company were paid and
waived sub-advisory fees as follows:
<TABLE>
<CAPTION>
Net Sub-Advisory Fees Paid (Sub-Advisory Fees Waived)
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
International Equity Fund $318,983 (0) $381,819 (0) $227,372 (0)
</TABLE>
REGULATORY MATTERS. Conflict of interest restrictions may apply to the
receipt of compensation paid pursuant to a Servicing Agreement by a Fund to a
financial intermediary in connection with the investment of fiduciary funds in a
Funds' 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, should consult legal counsel before entering into Servicing
Agreements.
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 serves as administrator (the
"Administrator") to the Funds. Under the Fund Administration Servicing
Agreement, the Administrator has agreed to maintain office facilities, furnish
clerical services, stationery and office supplies; monitor the company's
arrangements with respect to services provided by Shareholder Organizations and
Institutions; and generally assist in the Funds' operations. The following
administrative services are also 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 Shareholders; 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
shareholders and Registration Statements for the Funds; monitor the Funds'
expense accruals and cause all appropriate expenses to be paid on proper
authorization from the Funds; monitor each Fund's status as a regulated
investment company under Subchapter M of the Code; maintain the Funds' fidelity
bond as required by the 1940 Act; and monitor compliance with the policies and
limitations of the Funds as set forth in the Prospectus and SAI.
The Administrator is entitled to receive a fee for its 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
Administrator may voluntarily waive all or a portion of its administrative fee
from time to time. This waiver may be terminated at any time at the
Administrator's discretion.
Under the Fund Administration Servicing Agreement, the Administrator 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 the Agreement, except a loss
resulting from willful misconduct, bad faith or negligence on the part of the
Administrator in the performance of its duties.
The Distributor, located at 615 East Michigan Street, Milwaukee,
Wisconsin 53202, provides distribution services for the Funds as described in
the Funds' Prospectus pursuant to a Distribution Agreement with the Funds under
which the Distributor, as agent, sells shares of the Funds on a continuous
basis. The Distributor has agreed to use its best efforts to solicit orders for
the sale of shares, although it is not obliged to sell any particular amount of
shares. The Distributor causes expenses to be paid for the cost of printing and
distributing prospectuses to persons who are not shareholders of the Funds
(excluding preparation and printing expenses necessary for the continued
registration of the Funds' shares) and of printing and distributing all sales
literature. On January 1, 1995 and until August 1, 2000, B.C. Ziegler and
Company ("Ziegler") served as distributor. For the fiscal year ended October 31,
1999, 1998 and 1997, the distributor received no fees for its distribution
services.
Firstar Trust Company became a Co-Administrator to the Funds on
September 1, 1994, and assigned its rights and obligations to the Administrator
on October 1, 1998. On January 1, 1995 and until August 1, 2000, Ziegler served
as co-administrator to the Funds (together, the "Co-Administrators").
For its administrative services for the fiscal years ended October 31,
1999, 1998 and 1997, the Co-Administrators were paid and waived the following
administrative fees:
<TABLE>
<CAPTION>
NET ADMINISTRATION FEES PAID (ADMINISTRATION FEES WAIVED)
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Short-Term Bond Market Fund $196,764 (24,546) $69,432 (126,882) $86,550 (149,862)
Special Growth Fund 528,380 (78,076) 269,375 (492,978) 245,929 (521,369)
Bond IMMDEX(TM) Fund 495,763 (70,052) 200,288 (364,601) 167,223 (318,234)
Equity Index Fund 633,693 (72,866) 195,703 (353,692) 134,156 (229,162)
Intermediate Bond Market Fund 304,583 (39,645) 115,423 (210,207) 79,413 (171,118)
Growth Fund 312,797 (31,157) 85,845 (156,347) 71,750 (146,715)
Balanced Income Fund 49,835 (5,686) 12,498 (22,106)2
Balanced Growth Fund 250,967 (31,982) 90,542 (164,087) 73,298 (133,271)
Growth and Income Fund 724,594 (87,590) 233,865 (423,689) 171,898 (286,778)
Tax-Exempt Intermediate Bond Fund 93,040 (12,419) 32,957 (59,803) 22,619 (41,122)
International Equity Fund 48,844 (6,041) 24,861 (44,829) 20,840 (38,741)
MicroCap Fund 127,042 (12,611) 43,380 (79,285) 29,709 (68,284)
Emerging Growth Fund 129,042 (9,235) 26,045 (46,986) 3,488 (7,567)1
</TABLE>
1 From inception (August 15, 1997) to October 31, 1997.
2 From inception (December 1,1997) to October 31, 1998.
SHAREHOLDER ORGANIZATIONS
Retail A Shares
As stated in the Funds' Prospectus the Funds intend to enter into
agreements from time to time with Shareholder Organizations providing for
support and/or distribution services to customers of the Shareholder
Organizations who are the beneficial owners of Retail A Shares of the Fund.
Under the agreements, the Funds may pay Shareholder 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 Shareholder
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 shareholder 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, Shareholder
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 Shareholder 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 Shareholder Organizations will benefit each Fund and the
holders of Retail A or Retail B Shares as a way of allowing Shareholder
Organizations to participate with the Funds in the provision of support and
distribution services to customers of the Shareholder Organization who own
Retail A or Retail B Shares. Any material amendment to the arrangements with
Shareholder 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.
The Funds paid fees to Shareholder Organizations, none of which were
affiliated with the Adviser, pursuant to the Service Plan for Retail A Shares
for the fiscal year ended October 31, 1999 as follows:
Fees Paid to Non-Affiliated
Shareholder Organizations
Short-Term Bond Market Fund $123,961
Special Growth Fund 171,223
Bond IMMDEX(TM)Fund 159,669
Equity Index Fund 227,087
Intermediate Bond Market Fund 38,438
Growth Fund 78,778
Balanced Income Fund 23,721
Balanced Growth Fund 98,055
Growth and Income Fund 346,521
Tax-Exempt Intermediate Bond Fund 52,199
International Equity Fund 10,779
MicroCap Fund 22,921
Emerging Growth Fund 21,083
The Funds paid fees to Shareholder Organizations, all of which were
affiliated with the Adviser, pursuant to the Service Plan for Retail A Shares
for the fiscal year ended October 31, 1999 as follows:
Fees Paid to Affiliated
Shareholder Organizations
Short-Term Bond Market Fund $59,847
Special Growth Fund 123,426
Bond IMMDEX(TM)Fund 86,123
Equity Index Fund 101,716
Intermediate Bond Market Fund 40,088
Balanced Income Fund 8,337
Growth Fund 35,331
Balanced Growth Fund 49,362
Growth and Income Fund 154,698
Tax-Exempt Intermediate Bond Fund 24,755
International Equity Fund 4,602
MicroCap Fund 18,767
Emerging Growth Fund 9,971
Under the terms of their agreement with Firstar, Shareholder
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
Shareholder Organizations with respect to the availability of shareholder
services and the particular Shareholder Organization's procedures for purchasing
and redeeming shares. It is the responsibility of Shareholder 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 Shareholder Organization, the transfer agent's charge of
$12.00 for each payment made by wire of redemption proceeds may be billed
directly to the Shareholder Organization..
The Funds paid fees to Shareholder Organizations, none of which were
affiliated with the Adviser, pursuant to the 12b-1 Plan for Retail B shares for
the fiscal year ended October 31, 1999 as follows:
Fees Paid to Non-Affiliated
Shareholder Organizations
Short-Term Bond Market Fund 1,628
Special Growth Fund 462
Bond IMMDEXTM Fund 5,589
Equity Index Fund 11,170
Intermediate Bond Market Fund 610
Balanced Income Fund 3,177
Growth Fund 2,238
Balanced Growth Fund 1,711
Growth and Income Fund 4,617
Tax-Exempt Intermediate Fund 153
International Equity Fund 92
MicroCap Fund 224
Emerging Growth Fund 247
CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES AGENT
Firstar Bank, N.A. serves as custodian of all the Funds' assets. Under
the Custody Agreement, Firstar Bank, 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 shareholders, security brokers and others relating to its
duties and (v) make periodic reports to the Company concerning each Fund's
operations. Firstar Bank, 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, 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, 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, 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
International Equity Fund and 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 Shareholder 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
shareholders of the Funds, (iii) respond to correspondence by Fund shareholders
and others relating to its duties, (iv) maintain shareholder 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 shareholder account with an annual minimum of
$24,000 per Fund, plus a 0.01% asset - based fee, and 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; Balanced
Income Fund and Balanced Growth Fund -- $49,500 on the first $100 million,
0.0225% on the next $200 million, and 0.015% on the balance, plus out of pocket
expenses, including pricing expenses; Growth and Income Fund, Equity Index Fund,
Growth Fund, MidCap Index Fund, Special Growth Fund, Emerging Growth Fund,
MicroCap Fund -- $45,000 on the first $100 million, 0.01875% on the next $200
million, 0.01125% on the balance, plus out-of-pocket expenses, including pricing
expenses; and Short-Term Bond Market Fund, Intermediate Bond Market Fund,
Tax-Exempt Intermediate Bond Fund, Bond IMMDEX(TM) Fund, International Equity
Fund and Core International Equity Fund -- $58,500 on the first $100 million,
0.03% on the next $200 million, 0.015% 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, Shareholder 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 shareholders, costs
of shareholder 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. The Company's Annual Report to Shareholders with respect to the Funds
for the fiscal year ended October 31, 1999 has been filed with the SEC. The
financial statements, notes thereto, and Report of Independent Accountants in
such Annual Report (the "Financial Statements") are incorporated by reference
into this Statement of Additional Information. The Financial Statements in such
Annual Report have been incorporated herein by reference in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
COUNSEL
Drinker Biddle & Reath LLP (of which Mr. McConnel, Secretary of the
Company, is a partner), One Logan Square, 18th and Cherry Streets, Philadelphia,
PA 19103-6996, serve as counsel to the Company and will pass upon the legality
of the shares offered by the Funds' Prospectus.
PERFORMANCE CALCULATIONS
From time to time, the total return of the Retail A Shares, Retail B
Shares and Institutional Shares of each Fund and the yields of such shares of
the Short-Term Bond Market Fund, Intermediate Bond Market Fund, Tax-Exempt
Intermediate Bond Fund and Bond IMMDEX(TM) Fund (each, a "Bond Fund") may be
quoted in advertisements, shareholder reports or other communications to
shareholders. Performance information is generally available by calling the
Firstar Funds Center at 1-800-677-FUND.
YIELD CALCULATIONS
Yield is computed based on the net income of a series of shares of a
Bond Fund during a 30-day (or one-month) period, which will be identified in
connection with the particular yield quotation, more specifically, the yield of
a series of shares is calculated by dividing the net investment income per share
for that series (as described below) earned during a 30-day (or one-month)
period by the net asset value per share for that series (including the maximum
front end sales charge of 4.00% for the Retail A Shares of the Bond Funds) on
the last day of the period and annualizing the result on a semiannual basis by
adding one to the quotient, raising the sum to the power of six, subtracting one
from the result and then doubling the difference. Net investment income per
share earned during the period attributable to that series is based on the
average daily number of shares of the series outstanding during the period
entitled to receive dividends and includes dividends and interest earned during
the period attributable to that series minus expenses accrued for the period,
attributable to that series net of reimbursements.
This calculation can be expressed as follows:
a-b
Yield = 2 [(----- + 1)6 - 1]
c x d
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares
outstanding during the period that
were entitled to receive dividends.
d = Maximum offering price per share on the last day of the period.
For the purpose of determining net investment income earned during the
period (variable "a" in the formula), dividend income on equity securities held
by a Fund is recognized by accruing 1/360 of the stated dividend rate of the
security each day that the security is in the portfolio. A Fund calculates
interest earned on any debt obligations held in its portfolio by computing the
yield to maturity of each obligation held by it based on the market value of the
obligation (including actual accrued interest) at the close of business on the
last business day of each month, or, with respect to obligations purchased
during the month, the purchase price (plus actual accrued interest) and dividing
the result by 360 and multiplying the quotient by the market value of the
obligation (including actual accrued interest) in order to determine the
interest income on the obligation for each day of the subsequent month that the
obligation is in the portfolio. For purposes of this calculation, it is assumed
that each month contains 30 days. The maturity of an obligation with a call
provision is the next call date on which the obligation reasonably may be
expected to be called or, if none, the maturity date. With respect to debt
obligations purchased at a discount or premium, the formula generally calls for
amortization of the discount or premium. The amortization schedule will be
adjusted monthly to reflect changes in the market values of such debt
obligations.
Interest earned on tax-exempt obligations of the Tax-Exempt
Intermediate Bond Fund that are issued without original issue discount and have
a current market discount is calculated by using the coupon rate of interest
instead of the yield to maturity. In the case of tax-exempt obligations that are
issued with original issue discount but which have discounts based on current
market value that exceed the then-remaining portion of the original issue
discount (market discount), the yield to maturity is the imputed rate based on
the original issue discount calculation. On the other hand, in the case of
tax-exempt obligations that are issued with original issue discount but which
have the discounts based on current market value that are less than the
then-remaining portion of the original issue discount (market premium), the
yield to maturity is based on the market value.
With respect to mortgage or other receivables-backed obligations which
are expected to be subject to monthly payments of principal and interest ("pay
downs"), (a) gain or loss attributable to actual monthly pay downs are accounted
for as an increase or decrease to interest income during the period; and (b) a
Fund may elect either (i) to amortize the discount and premium on the remaining
security, based on the cost of the security, to the weighted average maturity
date, if such information is available, or to the remaining term of the
security, if any, if the weighted average maturity date is not available, or
(ii) not to amortize discount or premium on the remaining security.
Undeclared earned income may be subtracted from the net asset value per
share (variable "d" in the formula). Undeclared earned income is the net
investment income which, at the end of the 30-day base period, has not been
declared as a dividend, but is reasonably expected to be and is declared as a
dividend shortly thereafter.
In addition, the Tax-Exempt Intermediate Bond Fund may advertise a
"tax-equivalent yield" which shows the level of taxable yield needed to produce
an after-tax equivalent to the tax-free yield of the Fund. This is done by
increasing the yield of the series of shares (calculated as stated above) by the
amount necessary to reflect the payment of federal income taxes at a stated
rate. This is computed by: (a) dividing the portion of the Fund's yield for a
particular series (as calculated above) that is exempt from federal income tax
by one minus a stated federal income tax rate; and (b) adding the figure
resulting from (a) above to that portion, if any, of the Fund's yield that is
not exempt from federal income tax. The "tax-equivalent" yield will always be
higher than the "yield of the Fund.
The Fund currently calculates 30-day yields for its Bond Portfolios but
not for its Equity Portfolios. For the 30-day period ended October 31, 1999, the
yields on the Bond Portfolios were as follows:
PORTFOLIO 30-DAY YIELD
Short-Term Bond Market Fund
Institutional Shares 5.98%
Retail A - No Load 5.73%
Retail A - Load Adjusted 5.50%
Retail B 4.98%
Intermediate Bond Market Fund
Institutional Shares 6.37%
Retail A - No Load 6.11%
Retail A - Load Adjusted 5.87%
Retail B 5.36%
Bond IMMDEX(TM) Fund
Institutional Shares 6.68%
Retail A - No Load 6.43%
Retail A - Load Adjusted 6.17%
Retail B 5.67%
Tax-Exempt Intermediate Bond Fund
Institutional Shares 4.19%
Retail A - No Load 3.94%
Retail A - Load Adjusted 3.78%
Retail B 3.19%
Without fees waived by the Advisor, the 30-day yields for the period
ended October 31, 1999, would have been:
PORTFOLIO 30-DAY YIELD
Short-Term Bond Market Fund
Institutional Shares 5.70%
Retail A - No Load 5.45%
Retail A - Load Adjusted 5.22%
Retail B 4.70%
Intermediate Bond Market Fund
Institutional Shares 6.23%
Retail A - No Load 5.97%
Retail A - Load Adjusted 5.73%
Retail B 5.22%
Bond IMMDEX(TM) Fund
Institutional Shares 6.68%
Retail A - No Load 6.43%
Retail A - Load Adjusted 6.17%
Retail B 5.67%
Tax-Exempt Intermediate Bond Fund
Institutional Shares 4.00%
Retail A - No Load 3.75%
Retail A - Load Adjusted 3.59%
Retail B 3.00%
For the 30-day period ended October 31, 1999, the tax-equivalent yield
(assuming a tax rate of 39.6%) for the Tax-Exempt Intermediate Bond Fund was:
30-DAY TAX-
PORTFOLIO Equivalent Yield
Tax-Exempt Intermediate Bond Fund
Institutional Shares 6.94%
Retail A - No Load 6.52%
Retail A - Load Adjusted 6.26%
Retail B 5.28%
Without fees waived by the Adviser, the 30-day, tax-equivalent yield
(assuming a tax rate of 39.6%) for the Tax-Exempt Intermediate Bond Fund at
October 31, 1999 would have been:
30-DAY TAX-
PORTFOLIO Equivalent Yield
Tax-Exempt Intermediate Bond Fund
Institutional Shares 6.62%
Retail A - No Load 6.21%
Retail A - Load Adjusted 5.94%
Retail B 4.97%
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:
P(1 + T)n = 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 5.50% maximum front-end sales charge for equity funds and 4.00% maximum
front end sales charge for fixed income funds 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, bond 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. The total return of a bond or balanced Fund's shares
may be compared to the Lehman Brothers 1-3 Year Government/Corporate Bond Index;
the Merrill Lynch 1-2.99 U.S. Treasury Bond Index; the Lehman Brothers
Intermediate Government/Corporate Bond Index; the Lehman Brothers 5-Year General
Obligation Bond Index; the Lehman Brothers Government/Corporate Bond Index; and
the Consumer Price Index. In addition, the total return of an equity Fund's
shares may be compared to the S&P 500 Index; the S&P MidCap 400 Index, the S&P
SmallCap 600 Index, the NASDAQ Composite Index, an index of unmanaged groups of
common stocks of domestic companies that are quoted on the National Association
of Securities Quotation System; the Dow Jones Industrial Average, a recognized
unmanaged index of common stocks of 30 industrial companies listed on the New
York Stock Exchange; the Wilshire Top 750 Index, an index of all domestic equity
issues which are traded over the national exchanges; the Russell 2000 Index; the
Value Line Composite Index, an unmanaged index of nearly 1,700 stocks reviewed
in RATINGS & REPORTS; the Russell MidCap; the Wilshire Next 1750 Index; the
Wilshire MidCap 750 Index; and the Consumer Price Index. In addition, the total
return of a series of shares of the International Equity Fund will be compared
to the GDP EAFE Index and may be compared to the Salomon-Russell Indices,
Russell Universe Indices, Lipper International Indices, and the domestic indices
listed above. Total return and yield data as reported in national financial
publications, such as MONEY MAGAZINE, FORBES, BARRON'S, MORNINGSTAR MUTUAL
FUNDS, MUTUAL FUNDS MAGAZINE, KIPLINGER'S PERSONAL FINANCE MAGAZINE, THE WALL
STREET JOURNAL and THE NEW YORK TIMES, or in publications of a local or regional
nature, may also be used in comparing the performance of the Funds.
Performance quotations represent past performance, and should not
be considered as representative of future results. Performance assumes the
reinvestment of all net investment income and capital gains and reflects fee
waivers. In the absence of fee waivers, performance would be reduced. The
investment return and principal value of an investment in a Fund's series of
shares will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost. Since performance will fluctuate,
performance data for a Fund cannot necessarily be used to compare an investment
in a Fund's series of shares with bank deposits, savings accounts and similar
investment alternatives which often provide an agreed or guaranteed fixed yield
for a stated period of time. Investors should remember that performance is
generally a function of the kind and quality of the investments held in a
portfolio, portfolio maturity, operating expenses and market conditions. Any
fees charged by Institutions directly to their customer accounts in connection
with investments in a Fund will not be included in the Fund's calculations of
yield and total return and will reduce the yield and total return received by
the accounts.
In addition, a non-Money Market Fund's average annual total return and aggregate
total return quotations reflect the deduction of the maximum front-end sales
charge in connection with the purchase of Retail A Shares and the deduction of
any applicable contingent deferred sales charge with respect to Retail B Shares.
Performance History
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN*
INSTITUTIONAL SHARES
1 Year 5 Years 10 Years Since inception
(inception date)
<S> <C> <C> <C> <C>
SHORT-TERM BOND MARKET 3.36% 6.38% 6.68%
INTERMEDIATE BOND MARKET 1.00% 7.00% -- 5.90% (Jan 5,1993)
TAX-EXEMPT INTERMEDIATE BOND 0.31% 5.15% -- 4.41% (Feb. 8, 1993)
BOND IMMDEX(TM) -1.36% 7.75% 7.80% --
BALANCED INCOME 1.40% -- -- 9.67% (Dec. 1,1997)
BALANCED GROWTH 4.28% 15.25% -- 11.51% (Mar. 30, 1992)
GROWTH AND INCOME 3.01% 23.26% 14.59% --
EQUITY INDEX 20.41% 28.11% 17.72% --
GROWTH 14.29% 22.99% -- 16.66% (Dec. 29,1992)
SPECIAL GROWTH 2.53% 14.29% 13.44%
EMERGING GROWTH 4.40% -- -- 6.08% (Aug. 15,1997)
MICROCAP 137.79% -- -- 43.73% (Aug. 1, 1995)
INTERNATIONAL EQUITY 30.07% 2.94% -- 1.80% (Apr. 28,1994)
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
RETAIL A SHARES
1 Year 5 Years 10 Years Since inception
(inception date)
<S> <C> <C> <C> <C>
SHORT-TERM BOND MARKET -1.03% 5.26% 6.12% --
INTERMEDIATE BOND MARKET -3.32% 5.87% 5.09% (Jan 5,1993)
TAX-EXEMPT INTERMEDIATE BOND -3.88% 4.03% 3.60% (Feb. 8, 1993)
BOND IMMDEX(TM) -5.58% 6.61% 7.23% --
BALANCED INCOME -4.44% 6.43% (Dec. 1,1997)
BALANCED GROWTH -1.71% 13.67% 10.52% (Mar. 30, 1992)
GROWTH AND INCOME -2.91% 21.59% 13.82% --
EQUITY INDEX 13.49% 26.35% 16.90% --
GROWTH 7.77% 21.33% 15.53% (Dec. 29,1992)
SPECIAL GROWTH -3.35% 12.74% 12.67% --
EMERGING GROWTH -1.47% 3.40% (Aug. 15,1997)
MICROCAP 123.31% 41.39% (Aug. 1, 1995)
INTERNATIONAL EQUITY 22.57% 1.54% 0.58% (Apr. 28,1994)
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
RETAIL B SHARES
Since inception
(inception date)
SHORT-TERM BOND MARKET 2.46% (March 1,1999)
INTERMEDIATE BOND MARKET 0.84% (March 1, 1999)
TAX-EXEMPT INTERMEDIATE BOND -1.26% (March 1, 1999)
BOND IMMDEX(TM) -0.57% (March 1, 1999)
BALANCED INCOME 3.03% (March 1, 1999)
BALANCED GROWTH 8.67% (March 1, 1999)
GROWTH AND INCOME 5.64% (March 1, 1999)
EQUITY INDEX 18.33% (March 1, 1999)
GROWTH 14.66% (March 1, 1999)
MIDCAP INDEX 8.56% (Nov 4, 1999)
SPECIAL GROWTH 15.63% (March 1, 1999)
EMERGING GROWTH 18.08% (March 1, 1999)
MICROCAP 150.95% (March 1, 1999)
CORE INTERNATIONAL 7.90% (Nov 4, 1999)
INTERNATIONAL EQUITY 33.18% (March 1, 1999)
The performance of the Balanced Income Fund for the period prior to
December 1, 1997 is represented by the performance of a collective investment
fund which operated prior to the effectiveness of the registration statement of
the Balanced Income Fund. At the time of Balanced Income Fund's inception, the
collective investment fund was operated using materially equivalent investment
objectives, policies, guidelines and restrictions as its corresponding Firstar
fund. In connection with the Balance Income Fund's commencement of operations,
on December 1, 1997, the collective investment fund transferred its assets to
its Firstar Fund equivalent.
The collective investment fund was not registered under the 1940 Act
and was and is not subject to certain restrictions that are imposed by the 1940
Act and the Internal Revenue Code. If the collective investment fund had been
registered under the 1940 Act, performance may have been adversely affected.
Performance of the collective investment fund has been restated to reflect the
Firstar Balanced Income Fund's actual expenses during the Fund's first fiscal
year. Performance quotations of the collective investment fund present past
performance of the FIRMCO managed collective fund, which is separate and
distinct from Firstar Balanced Income Fund, do not represent past performance of
this Fund and should not be considered as representative of future results of
this Fund.
Prior to January 10, 1995, the Funds offered to retail and
institutional investors one series of shares with neither a sales charge nor a
0.25% service organization fee. Retail Share performance reflects the deduction
of the current maximum sales charge of 4.50% for equity funds and 3.75% for
fixed income funds, but for periods prior to January 10, 1995, Retail Share
performance does not reflect service organization fees. If service organization
fees had been reflected, performance would be reduced.
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 shareholders may summarize the substance of
information contained in shareholder reports (including the investment
composition of a Fund), as well as the views of the Adviser or Sub-Advisers 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
shareholder 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' Prospectus, 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 January 31, 2000, 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 Bank, N.A., 425 Walnut Street, Cincinnati, Ohio
45202, 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:
FUND PERCENTAGE OWNED
---- ----------------
Money Market 1.0%
Institutional Money Market 96.0%
Tax-Exempt Money Market 70.0%
U.S. Treasury Money Market 58.0%
U.S. Government Money Market 67.0%
Growth and Income 68.0%
Short-Term Bond Market 64.0%
Intermediate Bond Market 70.0%
Bond IMMDEXTM 70.0%
Tax-Exempt Intermediate Bond 69.0%
Balanced Income 76.0%
Balanced Growth 75.0%
Growth and Income 68.0%
Equity Index 74.0%
Growth 84.0%
Special Growth 74.0%
MidCap Index 55.0%
Emerging Growth 93.0%
MicroCap 83.0%
Core International Equity 100.0%
International Equity 90.0%
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 Equity Index Fund and MidCap Index Fund are 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 Equity Index Fund, MidCap Index Fund or any
member of the public regarding the advisability of investing in securities
generally or in the Equity Index Fund or MidCap Index Fund particularly or the
ability of the S&P 500 Index or 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, the S&P 500 Index and the S&P MidCap
400 Index which is determined, composed and calculated by S&P without regard to
the Company, the Equity Index Fund or the MidCap Index Fund. S&P has no
obligation to take the needs of the Company or shareholders of the Equity Index
Fund or MidCap Index Fund into consideration in determining, composing or
calculating the S&P 500 Index and 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 Equity Index Fund or the MidCap Index Fund or the timing of the issuance or
sale of the Equity Index Fund or MidCap Index Fund or in the determination or
calculation of the equation by which the Equity Index Fund and 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 Equity Index Fund or MidCap
Index Fund.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P
500 INDEX, 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 500 INDEX,
S&P MIDCAP 400 INDEX OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR
IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTIBILITY OR
FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 INDEX, 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.
"c" - The 'c' subscript is used to provide additional
information to investors that the bank may terminate its obligation to purchase
tendered bonds if the long-term credit rating of the issuer is below an
investment-grade level and/or the issuer's bonds are deemed taxable.
"p" - The letter 'p' indicates that the rating is provisional.
A provisional rating assumes the successful completion of the project financed
by the debt being rated and indicates that payment of debt service requirements
is largely or entirely dependent upon the successful, timely completion of the
project. This rating, however, while addressing credit quality subsequent to
completion of the project, makes no comment on the likelihood of or the risk of
default upon failure of such completion. The investor should exercise his own
judgment with respect to such likelihood and risk.
* Continuance of the ratings is contingent upon Standard &
Poor's receipt of an executed copy of the escrow agreement or closing
documentation confirming investments and cash flows.
"r" - The 'r' highlights derivative, hybrid, and certain other
obligations that Standard & Poor's believes may experience high volatility or
high variability in expected returns as a result of noncredit risks. Examples of
such obligations are securities with principal or interest return indexed to
equities, commodities, or currencies; certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an 'r'
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
N.R. Not rated. Debt obligations of issuers outside the United
States and its territories are rated on the same basis as domestic corporate and
municipal issues. The ratings measure the creditworthiness of the obligor but do
not take into account currency exchange and related uncertainties.
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. This is the
lowest investment grade category.
"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. This is the lowest
investment grade category.
"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.
`NR' indicates the Fitch IBCA does not rate the issuer or
issue in question.
`Withdrawn': A rating is withdrawn when Fitch IBCA deems the
amount of information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
RatingAlert: Ratings are placed on RatingAlert to notify
investors that there is a reasonable probability of a rating change and the
likely direction of such change. These are designated as "Positive", indicating
a potential upgrade, "Negative", for a potential downgrade, or "Evolving", if
ratings may be raised, lowered or maintained. RatingAlert is typically resolved
over a relatively short period.
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 Prospectus, 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
Prospectus. 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 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 that 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 that 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 that 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 that
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 that the Fund intends to purchase. Similarly, if the value
of the securities held by a Fund is expected to decline as a result of an
increase in interest rates, the Fund might purchase put options or write call
options on futures contracts rather than sell futures contracts.
Investments in futures options involve some of the same
considerations that are involved in connection with investments in futures
contracts (for example, the existence of a liquid secondary market). In
addition, the purchase or sale of an option also entails the risk that changes
in the value of the underlying futures contract will not be fully reflected in
the value of the option purchased. Depending on the pricing of the option
compared to either the futures contract upon which it is based, or upon the
price of the securities being hedged, an option may or may not be less risky
than ownership of the futures contract or such securities. In general, the
market prices of options can be expected to be more volatile than the market
prices on the underlying futures contract. Compared to the purchase or sale of
futures contracts, however, the purchase of call or put options on futures
contracts may frequently involve less potential risk to a Fund because the
maximum amount at risk is the premium paid for the options (plus transaction
costs). Although permitted by their fundamental investment policies, the Funds
do not currently intend to write futures options, and will not do so in the
future absent any necessary regulatory approvals.
VII. ACCOUNTING AND TAX TREATMENT.
Accounting for futures contracts and options will be in accordance
with generally accepted accounting principles.
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.
FIRSTAR FUNDS, INC.
Statement of Additional Information
Money Market Fund
Institutional Money Market Fund
U.S. Treasury Money Market Fund
U.S. Government Money Market Fund
Tax-Exempt Money Market Fund
March 1, 2000
As revised August 1, 2000
TABLE OF CONTENTS
PAGE
Firstar Funds, Inc.......................................................... 2
Descriptions of the Funds and their Investments and Risks................... 2
Investment Strategies and Risks............................................. 4
Net Asset Value............................................................. 15
Additional Purchase and Redemption Information.............................. 16
Additional Information Regarding Shareholder Services....................... 16
Description of Shares....................................................... 21
Additional Information Concerning Taxes..................................... 23
Management of the Company................................................... 23
Custodian, Transfer Agent, Disbursing Agent and Accounting Services Agent... 31
Expenses.................................................................... 32
Independent Accountants and Financial Statements............................ 32
Counsel..................................................................... 32
Yield and Other Performance Information..................................... 32
Miscellaneous............................................................... 34
Appendix A..................................................................A-1
This Statement of Additional Information ("SAI"), which is not a
prospectus, supplements and should be read in conjunction with Firstar Funds,
Inc.'s prospectus ("Prospectus") dated March 1, 2000, for Money Market Fund,
Institutional Money Market Fund, U.S. Treasury Money Market Fund, U.S.
Government Money Market Fund and Tax-Exempt Money Market Fund (collectively
referred to as the "Funds") and is incorporated by reference in its entirety
into the Prospectus. Copies of the Prospectus 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. The Financial Statements
and the Independent Accountants report thereon in this SAI are incorporated by
reference from the Funds' Annual Report, which may be obtained by writing the
address above or calling the toll-free number above. No other part of the Annual
Report is incorporated herein by reference.
FIRSTAR FUNDS, INC.
Firstar Funds, Inc. (the "Company") is a Wisconsin corporation that was
incorporated on February 15, 1988 as a management investment company. The
Company, formerly known as Portico Funds, Inc., changed its name effective
February 1, 1998. The Company is authorized to issue separate classes of shares
of Common Stock representing interests in separate investment portfolios. This
SAI pertains to five diversified portfolios, the Money Market Fund,
Institutional Money Market Fund, U.S. Treasury Money Market Fund, U.S.
Government Money Market Fund and Tax-Exempt Money Market Fund. The Money Market
Fund, Institutional Money Market Fund, U.S. Treasury Money Market Fund, U.S.
Government Money Market Fund and Tax-Exempt Money Market Fund commenced
operations on March 16, 1988, April 26, 1991, April 29, 1991, August 1, 1988 and
June 27, 1988, respectively. The Company also offers other investment portfolios
that are described in a separate statement of additional information. For
information concerning these other portfolios, contact 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.
DESCRIPTIONS OF THE FUNDS AND THEIR INVESTMENTS AND RISKS
The Company is a diversified, open-end management company. The
following policies supplement the Funds' respective investment objectives and
policies as set forth in the Prospectus.
PORTFOLIO TRANSACTIONS
Subject to the general supervision of the Board of Directors, the
Adviser is responsible for, makes decisions with respect to, and places orders
for all purchases and sales of portfolio securities for each Fund.
Securities purchased and sold by each Fund are generally traded in the
over-the-counter market on a net basis (i.e., without commission) through
dealers, or otherwise involve transactions directly with the issuer of an
instrument. The cost of securities purchased from underwriters includes an
underwriting commission or concession, and the prices at which securities are
purchased from and sold to dealers include a dealer's mark-up or mark-down. With
respect to over-the-counter transactions, the Adviser will normally deal
directly with dealers who make a market in the instruments involved except in
those circumstances where more favorable prices and execution are available
elsewhere.
The Funds may participate, if and when practicable, in bidding for the
purchase of portfolio securities directly from an issuer in order to take
advantage of the lower purchase price available to members of a bidding group.
The Funds will engage in this practice, however, only when the Adviser, in its
sole discretion, believes such practice to be in the Funds' interests.
The Funds do not intend to seek profits from short-term trading.
Because the Funds will invest only in short-term debt instruments, their annual
portfolio turnover rates will be relatively high, but brokerage commissions are
normally not paid on money market instruments, and portfolio turnover is not
expected to have a material effect on the Funds' net investment income. For
regulatory purposes, the Fund's annual portfolio turnover rates are expected to
be zero.
The Advisory Agreement between the Company and the Adviser provides
that, in executing portfolio transactions and selecting brokers or dealers, the
Adviser will seek to obtain the best overall terms available. In assessing the
best overall terms available for any transaction, the Adviser shall consider
factors it deems relevant, including the breadth of the market in the security,
the price of the security, the financial condition and execution capability of
the broker or dealer, and the reasonableness of the commission, if any, both for
the specific transaction and on a continuing basis. In addition, the Agreement
authorizes the Adviser to cause the Funds to pay a broker-dealer which furnishes
brokerage and research services a higher commission than that which might be
charged by another broker-dealer for effecting the same transaction, provided
that the Adviser determines in good faith that such commission is reasonable in
relation to the value of the brokerage and research services provided by such
broker-dealer, viewed in terms of either the particular transaction or the
overall responsibilities of the Adviser to the Funds. Such brokerage and
research services might consist of reports and statistics relating to specific
companies or industries, general summaries of groups of stocks or bonds and
their comparative earnings and yields, or broad overviews of the stock, bond and
government securities markets and the economy.
Supplementary research information so received is in addition to, and
not in lieu of, services required to be performed by the Adviser and does not
reduce the advisory fees payable to it by the Funds. The Directors will
periodically review the commissions paid by the Funds to consider whether the
commissions paid over representative periods of time appear to be reasonable in
relation to the benefits inuring to the Funds. It is possible that certain of
the supplementary research or other services received will primarily benefit one
or more other investment companies or other accounts for which investment
discretion is exercised. Conversely, a Fund may be the primary beneficiary of
the research or services received as a result of portfolio transactions effected
for such other account or investment company.
Portfolio securities will not be purchased from or sold to (and savings
deposits will not be made in and repurchase and reverse repurchase agreements
will not be entered into with) the Adviser, the Distributor or an affiliated
person of either of them (as such term is defined in the 1940 Act) acting as
principal. In addition, the Funds will not purchase securities during the
existence of any underwriting or selling group relating thereto of which the
Distributor or the Adviser, or an affiliated person of either of them, is a
member, except to the extent permitted by the Securities and Exchange Commission
("SEC").
Investment decisions for the Funds are made independently from those
for other investment companies and accounts advised or managed by the Adviser.
Such other investment companies and accounts may also invest in the same
securities as the Funds. When a purchase or sale of the same security is made at
substantially the same time on behalf of a Fund and another investment company
or account, the transaction will be averaged as to price and available
investments allocated as to amount, in a manner which the Adviser believes to be
equitable to the Fund and such other investment company or account. In some
instances, this investment procedure may adversely affect the price paid or
received by a Fund or the size of the position obtained or sold by the Fund. To
the extent permitted by law, the Adviser may aggregate the securities to be sold
or purchased for a Fund with those to be sold or purchased for other investment
companies or accounts in executing transactions.
As of October 31, 1999, the Company held securities of its regular
brokers or dealers (as defined under the 1940 Act) or their parents as follows:
the Money Market Fund held securities of Goldman Sachs totaling $13,901,315; the
Money Market and Institutional Money Market Funds held securities of Merrill
Lynch totaling $12,914,761 and $134,840,721, respectively; the Money Market and
Institutional Money Market Funds held securities of Morgan Stanley totaling
$13,820,551 and $88,831,144, respectively; and the Money Market and
Institutional Money Market Funds held securities of Prudential Funding totaling
$12,893,254 and $94,094,239, respectively. The Institutional Money Market Fund
also held securities of Household International, American General and General
Electric totaling $84,171,314, $79,887,089 and $36,000,000, respectively.
INVESTMENT STRATEGIES AND RISKS
RATINGS. Subsequent to its purchase by a Fund, a rated security may
cease to be rated or its rating may be reduced below the minimum rating required
for purchase by a Fund. The Board of Directors or the Adviser, pursuant to
guidelines adopted by the Board, will, in accordance with Rule 2a-7 under the
1940 Act, consider such an event in determining whether the Fund involved should
continue to hold the security.
The Money Market Fund and Institutional Money Market Fund will purchase
only "First Tier Eligible Securities" (as defined by the SEC) that present
minimal credit risks as determined by the Adviser pursuant to guidelines
approved by the Board of Directors of the Company. First Tier Eligible
Securities include, generally, (1) securities that either (a) have short-term
debt ratings at the time of purchase in the highest rating category by at least
two unaffiliated nationally recognized statistical rating organizations
("NRSROs") (or one NRSRO if the security was rated by only one NRSRO), or (b)
are issued or guaranteed by persons with such ratings, and (2) certain
securities that are unrated (including securities of issuers that have long-term
but not short-term ratings) but are of comparable quality as determined in
accordance with guidelines approved by the Board of Directors. The Appendix to
this Statement of Additional Information includes a description of applicable
NRSRO ratings. The following descriptions illustrate the types of instruments in
which the Funds invest.
VARIABLE AND FLOATING RATE INSTRUMENTS. The Money Market Fund and
Institutional Money Market Fund may purchase variable and floating rate
instruments, which may have a stated maturity in excess of thirteen months but
will permit a Fund to demand payment of the instrument at least once every
thirteen months upon not more than thirty days' notice (unless the instrument is
guaranteed by the U.S. Government or an agency or instrumentality thereof). Such
instruments may include variable amount master demand notes, which are unsecured
instruments that permit the indebtedness thereunder to vary in addition to
providing for periodic adjustments in the interest rate. Unrated variable and
floating rate instruments will be determined by the Adviser (under the
supervision of the Board of Directors) to be of comparable quality at the time
of purchase to First Tier Eligible Securities. An active secondary market may
not exist, however, with respect to particular variable and floating rate
instruments, and usually will not exist with respect to variable amount master
demand notes. The absence of a secondary market could make it difficult for a
Fund to dispose of a variable or floating rate instrument if the issuer
defaulted on its payment obligation or during periods that the Fund could not
exercise its demand rights, and a Fund could, for these or other reasons, suffer
a loss with respect to such instruments. With respect to the variable and
floating rate instruments that may be acquired by the Money Market, Tax-Exempt
Money Market and Institutional Money Market Funds, the Adviser will consider the
earning power, cash flows and other liquidity ratios of the issuers and
guarantors of such instruments and, if the instrument is subject to a demand
feature, will monitor their financial status to meet payment on demand. In
determining average weighted portfolio maturity, an instrument will usually be
deemed to have a maturity equal to the longer of the period remaining to the
next interest rate adjustment or the time the Fund involved can recover payment
of principal as specified in the instrument. Variable U.S. Government
obligations held by a Fund, however, will be deemed to have maturities equal to
the period remaining until the next interest rate adjustment.
The variable and floating rate demand instruments that the Tax-Exempt
Money Market Fund may purchase include participations in municipal obligations
purchased from and owned by financial institutions, primarily banks.
Participation interests provide the Fund with a specified undivided interest (up
to 100%) in the underlying obligation and the right to demand payment of the
unpaid principal balance plus accrued interest on the participation interest
from the institution upon a specified number of days' notice, not to exceed
thirty days. Each participation interest is backed by an irrevocable letter of
credit or guarantee of a bank that the Adviser has determined meets the
prescribed quality standards for the Fund. The bank typically retains fees out
of the interest paid on the obligation for servicing the obligation, providing
the letter of credit and issuing the repurchase commitment.
BANK OBLIGATIONS. The Money Market Fund may purchase bank obligations,
such as certificates of deposit, bankers' acceptances and time deposits,
including U.S. dollar-denominated instruments issued or supported by the credit
of U.S. or foreign banks or savings institutions having total assets at the time
of purchase in excess of $1 billion. Investments by the Fund in the obligations
of foreign banks and foreign branches of U.S. banks will not exceed 25% of the
value of the Fund's total assets at the time of investment. The Fund may also
make interest-bearing savings deposits in commercial and savings banks in
amounts not in excess of 5% of its total assets.
The Money Market Fund may acquire certain types of bank instruments
issued or supported by the credit of foreign banks or foreign branches of
domestic banks where the Adviser deems the instrument to present minimal credit
risks. Such instruments nevertheless entail risks that are different from those
of investments in domestic obligations of U.S. banks. Such risks include future
political and economic developments, the possible imposition of foreign
withholding taxes on interest income payable on such instruments, the possible
seizure or nationalization of foreign deposits or the adoption of other foreign
government restrictions which might adversely affect the payment of principal
and interest on such instruments. 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. Because the Fund invests in
securities backed by banks and other financial institutions, changes in the
credit quality of these institutions could cause losses to the Fund and affect
its share price.
U.S. GOVERNMENT OBLIGATIONS. The Funds may invest in a variety of U.S.
Treasury obligations including bonds, notes and bills that 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. and Tennessee
Valley Authority.
Obligations of certain agencies and instrumentalities of the U.S.
government, such as those of the Governmental National Mortgage Association, are
supported by the full faith and credit of the U.S. Treasury; others, such the
Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. government to purchase the agency's obligations; still others, are
supported by only by the credit of the agency or instrumentality issuing the
obligation. No assurance can be given that the U.S. government would provide
financial support to U.S. government-sponsored agencies or instrumentalities if
it is not obligated to do so by law.
Although substantially all of the instruments acquired by the U.S. Treasury
Money Market Fund and U.S. Government Money Market Fund will be U.S. government
obligations (or repurchase agreements collateralized by such obligations),
shares of the U.S. Treasury Money Market Fund and U.S. Government Money Market
Fund are not themselves issued or guaranteed by any government agency. U.S.
government obligations that have maturities in excess of thirteen months but
have variable or floating interest rates may be acquired by the Funds in
accordance with SEC rules.
STRIPPED U.S. GOVERNMENT OBLIGATIONS AND GOVERNMENT-BACKED TRUSTS. The
Money Market Fund, U.S. Government Money Market Fund and Institutional Money
Market Fund may acquire U.S. government obligations and their unmatured interest
coupons which have been separated ("stripped") by their holder, typically a
custodian bank or investment brokerage firm. Having separated the interest
coupons from the underlying principal of the U.S. government obligations, the
holder will resell the stripped securities in custodial receipt programs with a
number of different names, including Treasury Income Growth Receipts ("TIGRs")
and Certificate of Accrual on Treasury Securities ("CATs"). The stripped coupons
are sold separately from the underlying principal, which is sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. Purchasers of stripped securities acquire, in effect, discount
obligations that are economically identical to the zero coupon securities that
the Treasury Department sells itself. The underlying U.S. Treasury bonds and
notes themselves are held in book-entry form at the Federal Reserve Bank or, in
the case of bearer securities (i.e., unregistered securities which are owned
ostensibly by the bearer or holder), in trust on behalf of the owners. Counsel
to the underwriters of these certificates or other evidences of ownership of the
U.S. Treasury securities have stated that, in their opinion, purchasers of the
stripped securities, such as the Funds, most likely will be deemed the
beneficial holders of the underlying U.S. government obligations for federal tax
and security purposes. The SEC staff believes that participations in CATs and
TIGRs and other similar trusts are not U.S. government securities.
The Treasury Department has also facilitated transfers of ownership of
zero coupon securities by accounting separately for the beneficial ownership of
particular interest coupon and principal payments on Treasury securities through
the Federal Reserve book-entry record-keeping system. The Federal Reserve
program as established by the Treasury Department is known as "STRIPS" or
"Separate Trading of Registered Interest and Principal of Securities." Under the
STRIPS program, a Fund will be able to have its beneficial ownership of zero
coupon securities recorded directly in the book-entry record-keeping system in
lieu of having to hold certificates or other evidences of ownership of the
underlying U.S. Treasury securities.
The Money Market Fund, U.S. Government Money Market Fund and
Institutional Money Market Fund may also invest in certificates issued by
government-backed trusts (such as TIGRs and CATs). Such certificates represent
an undivided fractional interest in the respective government-backed trust's
assets. The SEC staff believes that participation in CATs and TIGRs and other
similar trusts are not U.S. government securities. These participations are
issued at a discount to their "face value," and may exhibit greater price
volatility than ordinary debt securities because of the manner in which their
principal and interest are returned to investors. The U.S. Government Money
Market Fund may also invest in government-backed trusts that hold obligations of
foreign governments that are guaranteed or backed by the full faith and credit
of the United States. The assets of each government-backed trust consist of (i)
a promissory note issued by a foreign government (the "Note"), (ii) a guaranty
by the U.S. Government, acting through the Defense Security Assistance Agency of
the Department of Defense, of the due and punctual payment of 90% of all
principal and interest due on such Note and (iii) a beneficial interest in a
government securities trust holding U.S. Treasury bills, notes and other direct
obligations of the U.S. Treasury sufficient to provide the Trust with funds in
an amount equal to at least 10% of all principal and interest payments due on
the Note. No more than 35% of the value of a Fund's total assets will be
invested in stripped securities not purchased through the Federal Reserve's
STRIPS program and government-backed trusts.
INVESTMENT COMPANIES. The Funds may invest from time to time in
securities issued by other investment companies that 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
shareholder of another investment company, the Funds would bear, along with
other shareholders, 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 shareholders. These expenses would be in addition
to the advisory and other expenses that the Funds bear directly in connection
with their own operations.
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.
FUNDING AGREEMENTS. The Money Market Fund and Institutional Money
Market Fund each may invest in short-term funding agreements. A funding
agreement is a contract between an issuer and a purchaser that obligates the
issuer to pay a guaranteed rate of interest on a principal sum deposited by the
purchaser. Funding agreements will also guarantee the return of principal and
may guarantee a stream of payments over time. A funding agreement has a fixed
maturity and may have either a fixed rate or variable interest rate that is
based on an index and guaranteed for a set time period. Because there is no
secondary market for these investments, any such funding agreement purchased by
the Money Market Fund or Institutional Money Market Fund will be regarded as
illiquid.
REPURCHASE AGREEMENTS. Each Fund (except the Tax-Exempt Money Market
Fund) may agree to purchase securities from financial institutions subject to
the seller's agreement to repurchase them at an agreed upon time and price
("repurchase agreements"). During the term of the agreement, the Adviser will
continue to monitor the creditworthiness of the seller and will require the
seller to maintain the value of the securities subject to the agreement at not
less than 102% of the repurchase price. Default or bankruptcy of the seller
would, however, expose the Fund to possible loss because of adverse market
action or delay in connection with the disposition of the underlying securities.
The securities held subject to a repurchase agreement may have stated maturities
exceeding thirteen months, provided the repurchase agreement itself matures in
less than one year.
The repurchase price under the repurchase agreements described in the
Prospectus 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.
RESTRICTED SECURITIES. The Funds may invest up to 10% 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
144A Securities. It is possible that unregistered securities purchased by a Fund
in reliance upon Rule 144A under the Securities Act of 1933 could have the
effect of increasing the level of the Fund's illiquidity to the extent that
qualified institutional buyers become, for a period, uninterested in purchasing
these securities. 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.
REVERSE REPURCHASE AGREEMENTS. Reverse repurchase agreements are
considered to be borrowings under the 1940 Act. At the time a Fund enters into a
reverse repurchase agreement (an agreement under which a Fund sells portfolio
securities and agrees to repurchase them at an agreed-upon date and price), it
will place in a segregated custodial account U.S. government securities or other
liquid high-grade debt securities having a value equal to or greater than the
repurchase price (including accrued interest), and will subsequently monitor the
account to insure that such value is maintained. Reverse repurchase agreements
involve risks that the interest income earned by a 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 a Fund may decline below the price of
the securities it is obligated to repurchase, and that the securities may not be
returned to such Fund.
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 of the Fund, or any combination thereof. Such loans will not be made,
if, as a result, the aggregate of all outstanding loans of the Fund exceeds 30%
of the value of its total assets (including the value of the collateral for
securities loaned). There may be risks of delay in receiving additional
collateral or in recovering the securities loaned or even a loss of rights in
the collateral should the borrower of the securities fail financially. However,
loans will be made only to borrowers deemed by the Adviser to be of good
standing and when, in the Adviser's judgment, the income to be earned from the
loan justifies the attendant risks. When a Fund lends its securities, it
continues to receive interest or dividends on the securities loaned and may
simultaneously earn interest on the investment of the cash collateral which will
be invested in readily marketable, high-quality, short-term obligations.
Although voting rights, or rights to consent, attendant to securities on loan
pass to the borrower, such loans may be called at any time and will be called so
that the securities may be voted by a Fund if a material event affecting the
investment is to occur.
Securities lending arrangements with broker/dealers require that the
loans be secured by collateral equal in value to at least the market value of
the securities loaned. During the term of such arrangements, a Fund will
maintain such value by the daily marking-to-market of the collateral.
OTHER INVESTMENT CONSIDERATIONS - TAX-EXEMPT MONEY MARKET FUND.
MUNICIPAL OBLIGATIONS which may be acquired by the Tax-Exempt Money
Market Fund include debt obligations issued by governmental entities to obtain
funds for various public purposes, including the construction of a wide range of
public facilities, the refunding of outstanding obligations, the payment of
general operating expenses and the extension of loans to public institutions and
facilities.
Opinions relating to the validity of municipal obligations and to the
exemption of interest thereon from federal income tax are rendered by bond
counsel to the respective issue at the time of issuance. Neither the Fund nor
the Adviser will review the proceedings relating to the issuance of municipal
obligations or the basis for such opinions.
The two principal classifications of municipal obligations which may be
held by the Tax-Exempt Money Market Fund are General Obligation securities and
Revenue securities. The Fund may also acquire Moral Obligation securities.
"Moral Obligation" securities are normally issued by special purpose
authorities. If the issuer of Moral Obligation securities is unable to meet its
debt service obligations from current revenues, it may draw on a reserve fund,
the restoration of which is a moral commitment but not a legal obligation of the
state or municipality that created the issue.
There are, of course, variations in the quality of municipal
obligations both within a particular classification and between classifications,
and the yields on municipal obligations depend upon a variety of factors,
including general money market conditions, the financial condition of the
issuer, general conditions of the municipal bond market, the size of a
particular offering, the maturity of the obligation and the rating of the issue.
The ratings of NRSROs represent their opinions as to the quality of municipal
obligations. It should be emphasized, however, that ratings are general and are
not absolute standards of quality, and municipal obligations with the same
maturity, interest rate and rating may have different yields while municipal
obligations of the same maturity and interest rate with different ratings may
have the same yield.
The payment of principal and interest on most securities purchased by
the Tax-Exempt Money Market Fund will depend upon the ability of the issuers to
meet their obligations. An issuer's obligations under its municipal obligations
are subject to the provisions of bankruptcy, insolvency, and other laws
affecting the rights and remedies of creditors, such as the Federal Bankruptcy
Code, and laws, if any, which may be enacted by federal or state legislatures
extending the time for payment of principal or interest, or both, or imposing
other constraints upon enforcement of such obligations or upon the ability of
municipalities to levy taxes. The power or ability of an issuer to meet its
obligations for the payment of interest on, and principal of, its municipal
obligations may be materially adversely affected by litigation or other
conditions.
Certain of the municipal obligations held by the Tax-Exempt Money
Market Fund may be insured at the time of issuance as to the timely payment of
principal and interest. The insurance policies will usually be obtained by the
issuer of the municipal obligation at the time of its original issuance. In the
event that the issuer defaults on interest or principal payment, the insurer
will be notified and will be required to make payment to the bondholders. There
is, however, no guarantee that the insurer will meet its obligations. In
addition, such insurance will not protect against market fluctuations caused by
changes in interest rates and other factors. The Tax-Exempt Money Market Fund
may, from time to time, invest more than 25% of its assets in municipal
obligations covered by insurance policies.
Municipal obligations acquired by the Tax-Exempt Money Market Fund may
include short-term General Obligation Notes, Tax Anticipation Notes, Bond
Anticipation Notes, Revenue Anticipation Notes, Tax-Exempt Commercial Paper,
Construction Loan Notes and other forms of short-term tax-exempt loans. Such
instruments are issued with a short-term maturity in anticipation of the receipt
of tax funds, the proceeds of bond placements or other revenues. In addition,
the Fund may invest in bonds and other types of tax-exempt instruments provided
they have remaining maturities of thirteen months or less at the time of
purchase.
Private activity bonds (e.g., bonds issued by industrial development
authorities) that are issued by or on behalf of public authorities to finance
various privately operated facilities are included within the term "municipal
obligations" if the interest paid thereon is exempt (subject to federal
alternative minimum tax) from federal income tax. (The Fund, however, does not
currently intend to acquire private activity bonds that are subject to the
federal alternative minimum tax.) Private activity bonds are in most cases
Revenue securities and are not payable from the unrestricted revenues of the
issuer. The credit quality of such bonds is usually directly related to the
credit standing of the corporate user of the facility involved. Private activity
bonds may be issued to obtain funds to provide privately operated housing
facilities, pollution control facilities, convention or trade show facilities,
mass transit, airport, port or parking facilities and certain local facilities
for water supply, gas, electricity or sewage or solid waste disposal. Private
activity bonds are also issued on behalf of privately held or publicly owned
corporations in the financing of commercial or industrial facilities. State and
local governments are authorized in most states to issue private activity bonds
for such purposes in order to encourage corporations to locate within their
communities. The principal and interest on these obligations may be payable from
the general revenues of the users of such facilities.
From time to time, proposals have been introduced before Congress for
the purpose of restricting or eliminating the federal income tax exemption for
interest on municipal obligations. For example, under the Tax Reform Act of
1986, interest on certain private activity bonds must be included in an
investor's alternative minimum taxable income, and corporate investors must
include all tax-exempt interest in their federal alternative minimum taxable
income. The Company cannot, of course, predict what legislation, if any, may be
proposed in the future as regards the income tax status of interest on municipal
obligations, or which proposals, if any, might be enacted. Such proposals, while
pending or if enacted, might materially and adversely affect the availability of
municipal obligations for investment by the Tax-Exempt Money Market Fund and the
liquidity and value of the Fund's portfolio. In such an event, the Company would
reevaluate the Fund's investment objective and policies and consider possible
changes in its structure or possible dissolution.
Municipal obligations purchased by the Fund may be backed by letters of
credit issued by foreign and domestic banks and other financial institutions.
Such letters of credit are not necessarily subject to federal deposit insurance
and adverse developments in the banking industry could have a negative effect on
the credit quality of the Fund's portfolio securities and its ability to
maintain a stable net asset value and share price. Letters of credit issued by
foreign banks, like other obligations of foreign banks, may involve certain
risks in addition to those of domestic obligations. Because the Fund invests in
securities backed by banks and other financial institutions, changes in the
credit facility of these institutions could cause losses to the Fund and affect
its share price.
Municipal obligations purchased by the Fund may include variable and
floating rate instruments issued by industrial development authorities and other
governmental entities. If such instruments are unrated, they will be determined
by the Fund's Adviser (under the supervision of the Board of Directors) to be of
comparable quality at the time of purchase to First Tier Eligible Securities.
While there may be no active secondary market with respect to a particular
variable or floating rate demand instrument purchased by the Fund, the Fund may
(at any time or during specified periods not exceeding thirteen months,
depending upon the instrument involved) demand payment in full of the principal
of the instrument and may re-sell the instrument to a third party. The absence
of such an active secondary market, however, could make it difficult for the
Fund to dispose of a variable or floating rate demand instrument if the issuer
defaulted on its payment obligation or during periods that the Fund is not
entitled to exercise its demand rights, and the Fund could, for these or other
reasons, suffer a loss with respect to such instruments.
Although the Tax-Exempt Money Market Fund does not presently intend to
do so on a regular basis, it may invest more than 25% of its total assets in
municipal obligations, the issuers of which are located in the same state or the
interest on which is paid solely from revenues of similar projects if such
investment is deemed necessary or appropriate by the Adviser. To the extent that
the Fund's assets are concentrated in municipal obligations payable from
revenues on similar projects or issued by issuers in the same state, the Fund
will be subject to the peculiar economic, political and business risks
represented by the laws and economic conditions relating to such states and
projects to a greater extent than it would be if the Fund's assets were not so
concentrated. Furthermore, payment of municipal obligations of certain projects
may be secured by mortgages or deeds of trust. In the event of a default,
enforcement of the mortgages or deeds of trust will be subject to statutory
enforcement procedures and limitations, including rights of redemption and
limitations on obtaining deficiency judgements. In the event of a foreclosure,
collection of the proceeds of the foreclosure may be delayed and the amount of
proceeds from the foreclosure may not be sufficient to pay the principal of and
accrued interest on the defaulted municipal obligations.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. The Tax-Exempt Money
Market Fund may purchase securities on a "when-issued" or "forward commitment"
basis. These transactions, which involve a commitment by the Fund to purchase
particular securities with payment and delivery taking place beyond the normal
settlement date, permit the Fund to lock in a price or yield on a security it
intends to purchase, regardless of future changes in interest rates. When-issued
and forward commitment transactions involve the risk, however, that the price or
yield obtained in a transaction (and therefore the value of the security) may be
less favorable than the price or yield (and therefore the value of the security)
available in the market when the securities delivery takes place. The Fund
expects that its when- issued purchases and forward commitments will not exceed
25% of the value of its assets absent unusual market conditions, and that a
forward commitment or commitment to purchase when-issued securities will not
exceed forty-five days. The Fund does not intend to engage in when-issued
purchases and forward commitments for speculative purposes but only in
furtherance of its investment objective. When the Tax-Exempt Money Market Fund
agrees to purchase securities on a when-issued or forward commitment basis, the
custodian will set aside cash or liquid high-grade debt securities equal to the
amount of the commitment in a segregated account. Normally, the custodian will
set aside portfolio securities to satisfy a purchase commitment, and in such a
case the Fund may be required subsequently to place additional assets in the
separate account in order to ensure that the value of the account remains equal
to the amount of the Fund's commitments. It may be expected that the market
value of the Fund's net assets will fluctuate to a greater degree when it sets
aside portfolio securities to cover such purchase commitments than when it sets
aside cash. Because the Fund will set aside cash or liquid assets to satisfy its
purchase commitments in the manner described, the Fund's liquidity and ability
to manage its portfolio might be affected in the event its forward commitments
and commitments to purchase when-issued securities ever exceeded 25% of the
value of its assets.
The Tax-Exempt Money Market Fund will purchase securities on a
when-issued or forward commitment basis only with the intention of completing
the transaction and actually purchasing the securities. If deemed advisable as a
matter of investment strategy, however, the Fund may dispose of or renegotiate a
commitment after it is entered into, and may sell securities it has committed to
purchase before those securities are delivered to the Fund on the settlement
date. In these cases the Fund may realize a taxable capital gain or loss.
When the Tax-Exempt Money Market Fund engages in when-issued and
forward commitment transactions, it relies on the other party to consummate the
trade. Failure of such party to do so may result in the Fund's incurring a loss
or missing an opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a when-issued purchase or
a forward commitment to purchase securities, and any subsequent fluctuations in
their market value, are taken into account when determining the market value of
the Tax-Exempt Money Market Fund starting on the day the Fund agrees to purchase
the securities. The Fund does not earn interest on the securities it has
committed to purchase until they are paid for and delivered on the settlement
date.
STAND-BY COMMITMENTS. The Tax-Exempt Money Market Fund may acquire
"stand-by commitments" with respect to municipal obligations held in its
portfolio. Under a stand-by commitment, a dealer or bank agrees to purchase at
the Fund's option specified municipal obligations at a specified price. Stand-by
commitments may be exercisable by the Fund at any time before the maturity of
the underlying municipal obligations and may be sold, transferred or assigned
only with the instruments involved.
The amount payable to the Fund upon its exercise of a stand-by
commitment is normally (i) the Fund's acquisition cost of the municipal
obligations (excluding any accrued interest which the Fund paid on their
acquisition), less any amortized market premium or plus any amortized market or
original issue discount during the period the Fund owned the securities, plus
(ii) all interest accrued on the securities since the last interest payment date
during that period. A "stand-by commitment" may be sold, transferred or assigned
by the Fund only with the instrument involved.
The Fund expects that stand-by commitments will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, the Fund may pay for a stand-by commitment either
separately in cash or by paying a higher price for portfolio securities that are
acquired subject to the commitment (thus reducing the yield to maturity
otherwise available for the same securities). Where the Fund has paid any
consideration directly or indirectly for a stand-by commitment, its cost would
be reflected as unrealized loss for the period during which the commitment was
held by the Fund and will be reflected in realized gain or loss when the
commitment is exercised or expires. The total amount paid in either manner for
outstanding stand-by commitments held by the Fund will not exceed 1/2 of 1% of
the value of its total assets calculated immediately after each stand-by
commitment is acquired.
The Fund intends to enter into stand-by commitments only with dealers,
banks and broker-dealers that, in the Adviser's opinion, present minimal credit
risks. The Fund's reliances upon the credit of those dealers, banks and
broker/dealers is secured by the value of the underlying Municipal Obligations
that are subject to a commitment.
The Fund would acquire stand-by commitments solely to facilitate
portfolio liquidity and does not intend to exercise its rights thereunder for
trading purposes. The acquisition of a stand-by commitment will not affect the
valuation or assumed maturity of the underlying municipal obligations that will
continue to be valued in accordance with the ordinary method of valuation
employed by the Fund. Stand-by commitments acquired by the Fund would be valued
at zero in determining net asset value where the Fund paid any consideration
directly or indirectly for a stand-by commitment; its cost would be reflected as
unrealized depreciation for the period in which the commitment was held by the
Fund.
During the current fiscal year, the Adviser expects that not more than
5% of the net assets of the Tax-Exempt Money Market Fund will be invested at any
time in a particular class of taxable obligations described in the Prospectus.
INVESTMENT LIMITATIONS
Each Fund is subject to the investment limitations enumerated in this
subsection which may be changed with respect to a particular Fund only by a vote
of the holders of a majority of such Fund's outstanding shares (as defined under
"Miscellaneous" below).
No Fund may:
1. Make loans, except that a Fund may purchase and hold debt instruments and
enter into repurchase agreements in accordance with its investment objective and
policies and may lend portfolio securities in an amount not exceeding 30% of its
total assets.
2. Purchase securities of companies for the purpose of exercising control.
3. Purchase or sell real estate, except that each Fund may purchase securities
of issuers that deal in real estate and may purchase securities that are secured
by interests in real estate.
4. Acquire any other investment company or investment company security except in
connection with a merger, consolidation, reorganization or acquisition of assets
or where otherwise permitted by the 1940 Act.
5. Act as an underwriter of securities within the meaning of the Securities Act
of 1933 except insofar as a Fund might be deemed to be an underwriter upon the
disposition of portfolio securities acquired within the limitation on purchases
of restricted securities and except to the extent that the purchase of
obligations directly from the issuer thereof in accordance with the Fund's
investment objective, policies and limitations may be deemed to be underwriting.
6. Write or sell put options, call options, straddles, spreads, or any
combination thereof, except for transactions in options on securities, indices
of securities, futures contracts and options on futures contracts.
7. Borrow money or issue senior securities, except that each Fund may borrow
from banks and enter into reverse repurchase agreements for temporary purposes
in amounts up to 10% of the value of its total assets at the time of such
borrowing; or mortgage, pledge or hypothecate any assets, except in connection
with any such borrowing and in amounts not in excess of the lesser of the dollar
amounts borrowed or 10% of the value of a Fund's total assets at the time of
such borrowing. No Fund will purchase securities while its borrowings (including
reverse repurchase agreements) in excess of 5% of its total assets are
outstanding. Securities held in escrow or separate accounts in connection with a
Fund's investment practices described in this SAI or in its Prospectus are not
deemed to be pledged for purposes of this limitation.
8. Purchase securities on margin, make short sales of securities or maintain a
short position, except that (a) this investment limitation shall not apply to a
Fund's transactions in futures contracts and related options, and (b) a Fund may
obtain short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities.
9. Purchase or sell commodity contracts, or invest in oil, gas or mineral
exploration or development programs, except that each Fund may, to the extent
appropriate to its investment objective, purchase publicly traded securities of
companies engaging in whole or in part in such activities and may enter into
futures contracts and related options.
In addition, no Fund may:
10. Purchase securities of any one issuer (other than securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities ("U.S.
government securities")) if, immediately after such purchase, more than 5% of
the value of the Fund's total assets would be invested in the securities of such
issuer, or more than 10% of the issuer's outstanding voting securities would be
owned by the Fund or the Company, except that up to 25% of the value of the
Fund's total assets may be invested without regard to these limitations. For
purposes of this limitation, a security is considered to be issued by the entity
(or entities) whose assets and revenues back the security. A guarantee of a
security shall not be deemed to be a security issued by the guarantor when the
value of all securities issued and guaranteed by the guarantor, and owned by the
Fund, does not exceed 10% of the value of the Fund's total assets.
In accordance with current SEC regulations, the Money Market Fund and
Institutional Money Market Fund intend (as a matter of nonfundamental policy) to
limit investments in the securities of any single issuer (other than U.S.
government securities, certain fully collateralized repurchase agreements,
securities with certain guarantees and, under certain circumstances, securities
of certain money market funds) to not more than 5% of the Fund's total assets,
provided that the Fund may invest up to 25% of its total assets in the
securities of any one issuer for a period of up to three business days.
Compliance with the diversification requirements of SEC Rule 2a-7 will be deemed
to be compliance with the fundamental diversification restriction above.
11. Purchase any securities which would cause 25% or more of the value of the
Fund's total assets at the time of purchase to be invested in the securities of
one or more issuers conducting their principal business activities in the same
industry; provided that, (a) there is no limitation with respect to (i)
instruments issued or guaranteed by the United States, any state, territory or
possession of the United States, the District of Columbia or any of their
authorities, agencies, instrumentalities or political subdivisions; (ii)
instruments issued by domestic branches of U.S. banks; and (iii) repurchase
agreements secured by the instruments described in clauses (i) and (ii); (b)
wholly owned finance companies will be considered to be in the industries of
their parents if their activities are primarily related to financing the
activities of the parents; and (c) utilities will be divided according to their
services, for example, gas, gas transmission, electric and gas, electric and
telephone will each be considered a separate industry.
In addition, the Tax-Exempt Money Market Fund may not:
12. Invest less than 80% of its net assets in securities the interest on which
is exempt from federal income tax, except during defensive periods or during
periods of unusual market conditions. For purposes of this fundamental policy,
Municipal Obligations that are subject to federal alternative minimum income tax
are considered taxable.
If a percentage limitation is satisfied at the time of investment, a
later increase or decrease in such percentage resulting from a change in the
value of a Fund's portfolio securities will not constitute a violation of such
limitation. Each Fund will monitor liquidity on an ongoing basis to determine
whether an adequate level of liquidity is being maintained. If due to market
fluctuations or other reasons, the amount of borrowings exceed the limit stated
above, a Fund will promptly reduce such amount.
Although the foregoing investment limitations would permit the Funds to
invest in options, futures contracts and options on future contracts, the Funds,
during the current fiscal year, do not intend to trade in such instruments.
Prior to making any such investments, the Funds would notify their shareholders
and add appropriate descriptions concerning the instruments to the Prospectus
and this SAI. For purposes of limitation no. 1, "total assets" includes the
value of the collateral for the securities loaned.
NET ASSET VALUE
The net asset value per share of each Fund described in this SAI is
calculated separately by adding the value of all portfolio securities and other
assets belonging to the particular Fund, subtracting the liabilities charged to
the Fund, and dividing the result by the number of outstanding shares of that
Fund. Assets belonging to a Fund consist of the consideration received upon the
issuance of shares of the particular Fund together with all net investment
income, realized gains/losses and proceeds derived from the investment thereof,
including any proceeds from the sale of such investments, any funds or payments
derived from any reinvestment of such proceeds, and a portion of any general
assets of the Company not belonging to a particular investment portfolio. Assets
belonging to a particular Fund are charged with the direct liabilities of that
Fund and with a share of the general liabilities of the Company which are
normally allocated in proportion to the relative net asset values of all of the
Company's investment portfolios at the time of allocation. Subject to the
provisions of the Articles of Incorporation, determinations by the Board of
Directors as to the direct and allocable liabilities, and the allocable portion
of any general assets, with respect to a particular Fund are conclusive.
The Company uses the amortized cost method of valuation to value each
Fund's portfolio securities, pursuant to which an instrument is valued at its
cost initially and thereafter a constant amortization to maturity of any
discount or premium is assumed, regardless of the impact of fluctuating interest
rates on the market value of the instrument. This method may result in periods
during which value, as determined by amortized cost, is higher or lower than the
price a Fund would receive if it sold the instrument. The market value of
portfolio securities held by a Fund can be expected to vary inversely with
changes in prevailing interest rates.
Each Fund attempts to maintain a dollar-weighted average portfolio
maturity appropriate to its objective of maintaining a stable net asset value
per share. In this regard, except for securities subject to repurchase
agreements, each Fund will neither purchase a security deemed to have a
remaining maturity of more than thirteen months within the meaning of the 1940
Act nor maintain a dollar-weighted average maturity which exceeds 90 days. The
Board of Directors has also established procedures that are intended to
stabilize the net asset value per share of each Fund for purposes of sales and
redemptions at $1.00. These procedures include the determination, at such
intervals as the Directors deem appropriate, of the extent, if any, to which the
net asset value per share of each Fund calculated by using available market
quotations deviates from $1.00 per share. In the event such deviation exceeds
one-half of one percent, the Board will promptly consider what action, if any,
should be initiated. If the Board believes that the extent of any deviation from
a $1.00 amortized cost price per share may result in material dilution or other
unfair results to new or existing investors, it has agreed to take such steps as
it considers appropriate to eliminate or reduce to the extent reasonably
practicable any such dilution or unfair results. These steps may include selling
portfolio instruments prior to maturity; shortening the average portfolio
maturity; withholding or reducing dividends; redeeming shares in kind; reducing
the number of outstanding shares without monetary consideration; or utilizing a
net asset value per share determined by using available market quotations.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of each Fund described in this SAI are sold without a sales
charge imposed by the Company, although Shareholder Organizations may be paid by
the Company for advertising, distribution, or shareholder services. Depending on
the terms of the particular account, Shareholder Organizations 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.
Shareholder Organizations are responsible for providing information concerning
these services and any charges to any customer who must authorize the purchase
of Fund shares prior to such purchase.
Investors redeeming shares by check generally will be subject to the
same rules and regulations that the transfer agent applies to checking accounts,
although the election of this privilege creates only a shareholder-transfer
agent relationship with the transfer agent. Because dividends on each Fund
accrue daily, checks may not be used to close an account, as a small balance is
likely to result.
Under the 1940 Act, the Funds may suspend the right of redemption or
postpone the date of payment for shares during any period when (a) trading on
the Exchange is restricted by applicable rules and regulations of the SEC; (b)
the Exchange is closed for other than customary weekend and holiday closings;
(c) the SEC has by order permitted such suspension; or (d) an emergency exists
as determined by the SEC. (The Funds may also suspend or postpone the recording
of the transfer of their shares upon the occurrence of any of the foregoing
conditions.)
The Company's Articles of Incorporation permit a Fund to redeem an
account involuntarily, upon sixty days' notice, if redemptions cause the
account's net asset value to remain at less than $1000.
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" and in the SAI under "Net Asset Value," the Company may
redeem shares involuntarily when appropriate under the 1940 Act, such as to
reimburse the Funds for any loss sustained by reason of the failure of a
shareholder to make full payment for shares purchased by the shareholder or to
collect any charge relating to a transaction effected for the benefit of a
shareholder which is applicable to Fund shares as provided in the Prospectus
from time to time.
EXCHANGE PRIVILEGE
By use of the exchange privilege, shareholders of the Funds authorize
the transfer agent to act on telephonic or written exchange instructions from
any person representing himself to be the shareholder or in some cases, the
shareholder'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 shareholders.
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. Shares of any Money Market Fund may be exchanged for shares of
another Money Market Fund. 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 shareholder 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.
Shares in a fund from which the shareholder 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 shareholder is investing will be
purchased at the net asset value per share next determined (plus any applicable
sales charge) after acceptance of the request by the Company in accordance with
the Company's customary policies for accepting investments. Exchanges of shares
will be available only in states where they may legally be made.
For federal income tax purposes, share exchanges are treated as sales on
which the shareholder may realize a gain or loss, depending upon whether the
value of the shares to be given up in exchange is more or less than the basis in
such shares at the time of the exchange. Investors exercising the exchange
privilege should request and review the prospectus for the shares to be acquired
in the exchange prior to making an exchange.
As noted in the prospectus, shares of the Firstar Funds may be
exchanged with shares of corresponding classes of the Firstar Stellar Funds and
the Mercantile Mutual Funds, Inc. The Firstar Stellar Funds currently offers the
Treasury, Tax-Free Money Market, Ohio Tax-Free Money Market, Strategic Income,
U.S. Government Income, Insured Tax-Free Bond, Growth Equity, Relative Value,
Science and Technology, Stellar, Capital Appreciation and International Equity
Funds. The Mercantile Mutual Funds, Inc. currently offers the Treasury Money
Market, Money Market, Tax-Exempt Money Market, Conning Money Market, U.S.
Government Securities, Intermediate Corporate Bond, Bond Index, Government &
Corporate Bond, Short-Intermediate Municipal, Missouri Tax-Exempt Bond, National
Municipal Bond, Balanced, Equity Income, Equity Index, Growth & Income Equity,
Growth Equity, Small Cap Equity, Small Cap Equity Index and International Equity
Portfolios. FIRMCO, the Firstar Funds' adviser, also serves as the adviser to
Mercantile Mutual Funds, Inc. Prior to March 1, 2000, Mississippi Valley
Advisors Inc. ("MVA") served as adviser to Mercantile Mutual Funds, Inc. On
March 1, 2000, MVA merged into FIRMCO. The Firstar Stellar Funds are advised by
Firstar Bank, N.A. Firstar Bank, N.A. and FIRMCO are under the common control of
Firstar Corporation.
SPECIAL PROCEDURES FOR IN-KIND PAYMENTS
Payment for shares of a Fund may, in the discretion of the Fund, be
made in the form of securities that are permissible investments for the Fund as
described in the Prospectus. For further information about this form of payment,
contact the Firstar Funds Center at1-800-677-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 receives satisfactory assurances that it will have good
and marketable title to the securities received by it; that the securities be in
proper form for transfer to the Fund; that adequate information be provided to
the Fund concerning the basis and other tax matters relating to the securities;
and that the amount of the purchase be at least $1,000,000.
RETIREMENT PLANS
INDIVIDUAL RETIREMENT ACCOUNTS. The Company has available a plan (the
"Traditional IRA") for use by individuals with compensation for services
rendered (including earned income from self-employment) who wish to use shares
of the Funds as a funding medium for individual retirement saving. However,
except for rollover contributions, an individual who has attained, or will
attain, age 70 1/2 before the end of the taxable year may only contribute to a
Traditional IRA for his or her nonworking spouse under age 70 1/2. Distribution
of an individual's Traditional IRA assets (and earnings thereon) before the
individual attains age 59 1/2 will (with certain exceptions) result in an
additional 10% tax on the amount included in the individual's gross income.
Earnings on amounts contributed to the Traditional IRA are not subject to
federal income tax until distributed.
The Company also has available a Roth Individual Retirement Account
(the "Roth IRA") for retirement saving for use by individuals with compensation
for services rendered. A single individual with adjusted gross income of up to
$110,000 may contribute to a Roth IRA (for married couples filing jointly, the
adjusted gross income limit is $160,000), and contributions may be made even
after the Roth IRA owner has attained age 70 1/2, as long as the account owner
has earned income. Contributions to a Roth IRA are not deductible. Earnings on
amounts contributed to a Roth IRA, however, are not subject to federal income
tax when distributed if the distribution is a "qualified distribution" (i.e.,
the Roth IRA has been held for at least five years beginning with the first tax
year for which a contribution was made to the Roth IRA and the distribution is
due to the account owner's attainment of age 59 1/2, disability or death, or for
qualified first-time homebuyer expenses. A non-qualified distribution of an
individual's Roth IRA assets (and the earnings thereon) will (with certain
exceptions) result in an additional 10% tax on the amount included in the
individual's gross income.
The Company permits certain employers (including self-employed
individuals) to make contributions to employees' Traditional IRAs if the
employer establishes a Simplified Employee Pension ("SEP") plan and/or a Salary
Reduction SEP ("SARSEP"). Although SARSEPs may not be established after 1996,
employers may continue to make contributions to SARSEPs established before
January 1, 1997, under the pre-1997 federal tax law. A SEP permits an employer
to make discretionary contributions to all of its employees' Traditional IRAs
(employees who have not met certain eligibility criteria may be excluded) equal
to a uniform percentage of each employee's compensation (subject to certain
limits). If an employer (including a self-employed individual) established a
SARSEP before January 1, 1997, employees may defer a percentage of their
compensation -- pre-tax -- to Traditional IRAs (subject to certain limits). The
Code provides certain tax benefits for contributions by an employer, pursuant to
a SEP and/or SARSEP, to an employee's Traditional IRA. For example,
contributions to an employee's Traditional IRA pursuant to a SEP and/or SARSEP
are deductible (subject to certain limits) and the contributions and earnings
thereon are not taxed until distributed.
SAVINGS INCENTIVE MATCH PLAN FOR EMPLOYEES OF SMALL EMPLOYERS. The
Company also has available a simplified tax-favored retirement plan for
employees of small employers (a "SIMPLE IRA Plan"). If an employer establishes a
SIMPLE IRA Plan, contributions under the Plan are made to eligible employees'
SIMPLE individual retirement accounts ("SIMPLE IRAs"). Each eligible employee
may choose to defer a percentage of his or her pre-tax compensation to the
employee's SIMPLE IRA. The employer must generally make an annual matching
contribution to the SIMPLE IRA of each eligible employee equal to the employee's
salary reduction contributions, up to a limit of 3 percent of the employee's
compensation. Alternatively, the employer may make an annual non-discretionary
contribution to the SIMPLE IRA of each eligible employee equal to 2 percent of
each employee's compensation. As with contributions to an employee's IRA
pursuant to a SEP and/or SARSEP, the Code provides tax benefits for
contributions by an employer, pursuant to a SIMPLE IRA Plan, to an employee's
SIMPLE IRA. For example, contributions to an employee's SIMPLE IRA are
deductible (subject to certain limits) and the contributions and earnings
thereon are not taxed until distributed.
In the SIMPLE IRA Plan and in Traditional and Roth IRAs, distributions
of net investment income and capital gains will be automatically reinvested.
The foregoing brief descriptions are not complete or definitive
explanations of the SIMPLE IRA Plan, the Traditional IRA, or the Roth IRA
available for investment in the Funds. Any person who wishes to establish a
retirement plan account may do so by contacting Investor Services at
800-677-FUND. The complete Plan documents and applications will be provided to
existing or prospective shareholders upon request, without obligation. The
Company recommends that investors consult their attorneys or tax advisors to
determine if the retirement programs described herein are appropriate for their
needs.
ADDITIONAL INFORMATION REGARDING SHAREHOLDER SERVICES
PERIODIC INVESTMENT PLAN
The Funds offer a Periodic Investment Plan whereby a shareholder may
automatically make purchases of shares of a Fund on a regular, monthly basis
($50 minimum per transaction). Under the Periodic Investment Plan, a
shareholder's designated bank or other financial institution debits a
preauthorized amount on the shareholder's account each month and applies the
amount to the purchase of Fund shares. The Periodic Investment Plan must be
implemented with a financial institution that is a member of the Automated
Clearing House. No service fee is currently charged by a Fund for participation
in the Periodic Investment Plan. A $20 fee will be imposed by the transfer agent
if sufficient funds are not available in the shareholder's account or the
shareholder's account has been closed at the time of the automatic transaction.
CONVERTIFUND(R) TRANSACTIONS
The Funds permit shareholders to effect ConvertiFund(R)
transactions, an automated method by which a shareholder may invest proceeds
from one account to another account of the Firstar family of funds. Such
proceeds include dividend distributions, capital gain distributions and
systematic withdrawals. 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. Investments in the non-money market funds will be subject to
the applicable sales charges.
SYSTEMATIC WITHDRAWAL PLAN
The Funds offer shareholders a Systematic Withdrawal Plan, which allows
a shareholder who owns shares of a Fund worth at least $5,000 at current net
asset value at the time the shareholder initiates the Systematic Withdrawal Plan
to designate that a fixed sum ($50 minimum per transaction) be distributed to
the shareholder or as otherwise directed at regular intervals.
DESCRIPTION OF SHARES
The Company's Articles of Incorporation authorize the Board of
Directors to issue up to 150 billion full and fractional shares of common stock,
$.0001 par value per share that shall be divided into thirty classes (each a
designated "class" or "fund"). Each class of the Money Market Funds is further
divided into two series designated as Institutional Shares and Retail A Shares
(each, a "Series") and, with respect to the Funds, consists of shares set forth
next to its name in the table below:
Class-Series Fund in Which Stock Number of Authorized Shares
of Common Stock Represents Interest in Each Initial Series
1-Institutional Money Market 5 billion
1-A 5 billion
2-Institutional Tax-Exempt Money Market 5 billion
2-A 5 billion
3-Institutional U.S. Government Money Market 5 billion
3-A 5 billion
4-Institutional Institutional Money Market 5 billion
4-A 5 billion
5-Institutional U.S. Treasury Money Market 5 billion
5-A 5 billion
Currently, only Series A Shares of the Money Market Fund,
Tax-Exempt Money Market Fund, U.S. Government Money Market Fund, and U.S.
Treasury Money Market Fund, and Institutional Shares of the Institutional Money
Market Fund have been offered by the Company. The Board of Directors has also
authorized the issuance of classes 6 through 20 common stock representing
interests in fifteen other separate investment portfolios which are described in
a separate statement of additional information. The remaining authorized shares
have been classified by the Board 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, shareholders of a particular Fund would be entitled to receive
the assets available for distribution belonging to such Fund, and a
proportionate distribution, based upon the relative assets of the Company's
respective investment portfolios, of any general assets not belonging to any
particular portfolio which are available for distribution. Subject to the
allocation of certain costs, expenses, charges and reserves attributable to the
operation of a particular series, shareholders 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 shareholder.
Shareholders of each class of the Funds are entitled to one vote for
each full share held and proportionate fractional votes for fractional shares
held. Shareholders 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 shareholders of a particular class or a
particular series within a class. Rule 18f-2 under the 1940 Act provides that
any matter required to be submitted to the holders of the outstanding voting
securities of an investment company such as the Company shall not be deemed to
have been effectively acted upon unless approved by the holders of a majority of
the outstanding shares of each portfolio affected by the matter. A portfolio is
affected by a matter unless it is clear that the interests of each portfolio in
the matter are substantially identical or that the matter does not affect any
interest of the portfolio. Under the Rule, the approval of an investment
advisory agreement or any change in a fundamental investment policy would be
effectively acted upon with respect to a portfolio only if approved by a
majority of the outstanding shares of such portfolio. However, the Rule also
provides that the ratification of the appointment of independent accountants,
the approval of principal underwriting contracts and the election of Directors
may be effectively acted upon by shareholders of the Company voting together in
the aggregate without regard to particular portfolios. Similarly, on any matter
submitted to the vote of shareholders 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' Prospectus 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 shareholders 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
shareholder 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 shareholders 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 each 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.
The Tax-Exempt Money Market Fund intends to invest all or substantially
all of its assets in debt obligations the interest on which is exempt for
Federal income tax purposes. For the Tax-Exempt Money Market Fund to pay
tax-exempt dividends for any taxable year, at least 50% of the aggregate value
of the Fund's assets at the close of each quarter of the Fund's taxable year
must consist of exempt-interest obligations.
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 shareholders.
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:
<TABLE>
<CAPTION>
Position(s) held with Principal Occupations During Past 5 Years and Other
Name, Address & Age the Company Affiliations
------------------------------------ ------------------------ -------------------------------------------------------
<S> <C> <C>
James M. Wade Chairman of the Board Vice President and Chief Financial Officer, Johnson
2802 Wind Bluff Circle Controls, Inc. (a controls manufacturing company),
Wilmington, NC 28409 January 1987-May 1991.
Age: 56
Glen R. Bomberger Director Executive Vice President, Chief Financial Officer and
One Park Plaza Director, A.O. Smith Corporation (a diversified
11270 West Park Place manufacturing company) since January 1987; Director
Milwaukee, WI 53224-3690 of companies affiliated with A.O. Smith Corporation;
Age: 62 Director, Smith Investment
Company; Director of companies affiliated
with Smith Investment Company.
Jerry G. Remmel Director Vice President, Treasurer and Chief Financial Officer
16650A Lake Circle of Wisconsin Energy Corporation 1994-1996; Treasurer
Brookfield, WI 53005 of Wisconsin Electric Power Company 1973-1996;
Age: 68 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 Officer of Weirton
400 Three Springs Drive Steel since 1995; Director of Weirton Steel since
Weirton, WV 26062-4989 1993; Executive Vice President and Chief Financial
Age: 55 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; Trustee of
Carnegie Mellon University since 1997.
Charles R. Roy Director Vice President - Finance, Chief Financial Officer and
14245 Heatherwood Court Secretary, Rexnord Corporation (an equipment
Elm Grove, WI 53122 manufacturing company), 1988 - 1992; Vice President -
Age: 69 Finance and Administration, Rexnord Inc., 1982 -
1988; Officer and Director of several Rexnord
subsidiaries until 1992.
Bruce Laning Director, President President and CEO, FIRMCO since 2000; Director,
777 E. Wisconsin Avenue and Treasurer FIRMCO since 2000; Senior Vice President,
FIRMCO Suite 800 since 1999; Vice President, FIRMCO since 1994.
Milwaukee, WI n 53202
Age: 40
W. Bruce McConnel, III Secretary Partner of the law firm of Drinker Biddle & Reath
One Logan Square LLP.
18th & Cherry Streets
Philadelphia, PA 19103
Age: 56
Laura J. Rauman Vice President Vice President of Operations, FIRMCO since 1995;
777 E. Wisconsin Avenue, Senior Auditor, Price Waterhouse, LLP, prior
Suite 800 thereto.
Milwaukee, WI 53202
Age: 31
Joseph C. Neuberger Assistant Treasurer Senior Vice President, Firstar Mutual Fund
615 E. Michigan Street Services, LLC since 1994; Manager, Arthur Andersen
Milwaukee, WI 53202 LLP, prior thereto.
Age: 38
Bronson J. Haase* Director President and CEO of Wisconsin Gas Company, WICOR
626 E. Wisconsin Avenue Energy, FieldTech and Vice President of WICOR, Inc.
Milwaukee, WI 53202 since 1998; President and CEO of Ameritech -
Age: 55 Wisconsin (formerly Wisconsin Bell) 1993-1998;
President of Wisconsin Bell Communications
1988-1993; Board of Directors, The Marcus
Corporation; Trustee of Roundy Foods; Chairman of
the Wisconsin Utilities Association.
</TABLE>
* Messrs. Haase and Laning 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, 1999 of the Company's Directors.
<TABLE>
<CAPTION>
TOTAL COMPENSATION
PENSION OR FROM
RETIREMENT ESTIMATED COMPANY
AGGREGATE BENEFITS ACCRUED ANNUAL BENEFITS AND FUND
NAME OF COMPENSATION FROM AS PART OF FUND UPON RETIREMENT COMPLEX* PAID TO
PERSON/POSITION THE COMPANY EXPENSES DIRECTORS
--------------- ----------------- ---------------- --------------- -------------------
<S> <C> <C> <C> <C>
James M. Wade $18,500 $0 $0 $18,500
Chairman of the Board
Glen R. Bomberger $15,000+ $0 $0 $15,000
Director
Jerry G. Remmel $15,000 $0 $0 $15,000
Director
Richard K. Riederer $15,000 $0 $0 $15,000
Director
Charles R. Roy $15,000 $0 $0 $15,000
Director
Bronson J. Haase $15,000 $0 $0 $3,500
Director
</TABLE>
*The "Fund Complex" includes only the Company. The Company is comprised
of 20 separate portfolios. +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, 1999, the
Directors and Officers received aggregate fees and reimbursed expenses of
$88,492. Mr. Laning, 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 Mr. Laning and Ms.
Rauman and 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 Senior 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 (the "Adviser") became the investment adviser to the Funds
as of February 3, 1992. Prior thereto, investment advisory services were
provided by Firstar Trust Company ("Firstar Trust"), an affiliate of the
Adviser. 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 Prospectus, the
Adviser is entitled to 4/10ths of the gross income earned by each Fund on each
loan of its securities, excluding capital gains or losses, if any. Pursuant to
current policy of the SEC, the Adviser does not intend to receive compensation
for such securities lending activity. The Adviser may voluntarily waive
additional advisory fees otherwise payable by the Funds.
For the services provided and expenses assumed by the Adviser
under its Investment Advisory Agreement for the fiscal years ended October 31,
1999, 1998 and 1997, the Adviser was paid and waived advisory fees as follows:
<TABLE>
<CAPTION>
Net Advisory Fees Paid (Advisory Fees Waived)
1999 1998 1997
<S> <C> <C> <C>
Money Market Fund $1,086,867 (335,701) $809,190 (493,088) $770,065 (401,147)
U.S. Treasury Money Market Fund 519,416 (15,375) 313,106 (74,162) 264,236 (69,017)
U.S. Government Money Market Fund 1,248,897 (6,821) 904,397 (81,346) 933,618 (50,816)
Tax-Exempt Money Market Fund 678,369 (14,071) 454,275 (88,110) 384,622 (72,448)
Institutional Money Market Fund 6,285,747 (4,398,932) 3,552,582 (2,555,949) 2,758,246 (2,045,957)
</TABLE>
Under its Investment Advisory Agreement, the Adviser is not
liable for any error of judgment or mistake of law or for any loss suffered by
the Company in connection with the performance of such Agreement, except a loss
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on the part of the Adviser in the performance of its
duties or from its reckless disregard of its duties and obligations under the
Agreement.
REGULATORY MATTERS. Conflict of interest restrictions may apply to the
receipt of compensation paid pursuant to a Servicing Agreement by a Fund to a
financial intermediary in connection with the investment of fiduciary funds in a
Fund's 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, should consult legal counsel before entering into Servicing
Agreements.
Shares of the Funds are not bank deposits, are not insured by the FDIC
or any other governmental agency, are not endorsed, insured or guaranteed by
Firstar Bank, N.A. or FIRMCO and are not obligations of or otherwise supported
by Firstar Bank, N.A. or FIRMCO.
ADMINISTRATION AND DISTRIBUTION SERVICES
Firstar Mutual Fund Services, LLC serves as administrator (the
"Administrator") to the Funds. Under the Fund Administration Servicing
Agreement, the Administrator has agreed to maintain office facilities, furnish
clerical services, stationery and office supplies; monitor the company's
arrangements with respect to services provided by Shareholder Organizations and
Institutions; and generally assist in the Funds' operations. The following
administrative services are also 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 Shareholders; 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
shareholders and Registration Statements for the Funds; monitor the Funds'
expense accruals and cause all appropriate expenses to be paid on proper
authorization from the Funds; monitor each Fund's status as a regulated
investment company under Subchapter M of the Code; maintain the Funds' fidelity
bond as required by the 1940 Act; and monitor compliance with the policies and
limitations of the Funds as set forth in the Prospectus and SAI.
The Administrator is entitled to receive a fee for its 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
Administrator may voluntarily waive all or a portion of its administrative fee
from time to time. This waiver may be terminated at any time at the
Administrator's discretion.
Under the Fund Administration Servicing Agreement, the Administrator 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 the Agreement, except a loss
resulting from willful misconduct, bad faith or negligence on the part of the
Administrator in the performance of its duties.
The Distributor, located at 615 East Michigan Street, Milwaukee,
Wisconsin 53202, provides distribution services for the Funds as described in
the Funds' Prospectus pursuant to a Distribution Agreement with the Funds under
which the Distributor, as agent, sells shares of the Funds on a continuous
basis. The Distributor has agreed to use its best efforts to solicit orders for
the sale of shares, although it is not obliged to sell any particular amount of
shares. The Distributor causes expenses to be paid for the cost of printing and
distributing prospectuses to persons who are not shareholders of the Funds
(excluding preparation and printing expenses necessary for the continued
registration of the Funds' shares) and of printing and distributing all sales
literature. On January 1, 1995 and until August 1, 2000, B.C. Ziegler and
Company ("Ziegler") served as distributor. For the fiscal year ended October 31,
1999, 1998 and 1997, the distributor received no fees for its distribution
services.
Firstar Trust Company became a Co-Administrator to the Funds on
September 1, 1994, and assigned its rights and obligations to the Administrator
on October 1, 1998. On January 1, 1995 and until August 1, 2000, Ziegler served
as co-administrator to the Funds (together, the "Co-Administrators").
For the fiscal years ended October 31, 1999, 1998 and 1997 , the
following administrative fees were paid and waived:
<TABLE>
<CAPTION>
NET ADMINISTRATION FEES PAID (ADMINISTRATION FEES WAIVED)
---------------------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Money Market Fund $271,041 (34,831) $99,437 (184,778) $92,516 (158,431)
U.S. Treasury Money Market Fund 102,983 (12,042) 29,747 (54,772) 25,971 (48,185)
U. S. Government Money Market Fund 239,801 (30,215) 75,209 (139,922) 77,457 (141,599)
Tax-Exempt Money Market Fund 133,293 (15,624) 41,065 (77,310) 35,787 (65,920)
Institutional Money Market Fund 1,382,842 (973,726) 286,889 (1,046,264) 199,081 (869,952)
</TABLE>
SHAREHOLDER ORGANIZATIONS
As stated in the Funds' Prospectus, the Funds intend to enter into
agreements from time to time with shareholder organizations providing for
support and/or distribution services to customers of the shareholder
organizations who are the beneficial owners of Fund shares. Under the
agreements, the Funds may pay shareholder organizations up to 0.25% (on an
annualized basis) of the average daily net asset value of the shares
beneficially owned by their customers. Support services provided by shareholder
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 shareholder communications; (vii) assisting in processing share
purchase, exchange and redemption requests from customers; (viii) assisting
customers in changing dividend options, account designations and addresses; and
(ix) other similar services requested by the Funds. In addition, under the
Distribution and Service Plan (not available for the Institutional Money Market
Fund), Shareholder Organizations may provide assistance (such as the forwarding
of sales literature and advertising to their customers) in connection with the
distribution of Fund shares.
The Funds' arrangements with Shareholder Organizations under the
agreements are governed by a Service Plan and, for Funds other than the
Institutional Money Market Fund, a separate Distribution and Service Plan, which
have been adopted by the Board of Directors. Because the Distribution and
Service Plan contemplates the provision of services related to the distribution
of Fund shares (in addition to support services), that Plan has been adopted in
accordance with Rule 12b-1 under the 1940 Act. In accordance with the Plans, the
Board of Directors reviews, at least quarterly, a written report of the amounts
expended in connection with the Funds' arrangements 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 shareholder organizations have benefited each Fund and
its shareholders as a way of allowing shareholders organizations to participate
with the Funds in the provision of support and distribution services to
customers of the shareholder organizations who own Fund shares. Any material
amendment to the arrangements with shareholder organizations under the
agreements must be approved by a majority of the Board of Directors (including a
majority of the Disinterested Directors), and any amendment to increase
materially the costs under the Distribution and Service Plan with respect to a
Fund must be approved by the holders of a majority of the outstanding shares of
the Fund involved. So long as the Distribution and Service Plan is in effect,
the selection and nomination of the members of the Board of Directors who are
not "interested persons" (as defined in the 1940 Act) of the Funds will be
committed to the discretion of such Disinterested Directors.
Shareholder organizations, which are affiliated with the Adviser,
pursuant to the Service Plan received no fees for the fiscal years ended October
31, 1999, 1998 and 1997.
The Funds paid fees to shareholder organizations, none of which
were affiliated with the Adviser, pursuant to the Distribution and Service Plan
for the fiscal years ended October 31, 1999, 1998 and 1997 as follows:
<TABLE>
<CAPTION>
FEES PAID TO NON-AFFILIATED SHAREHOLDER ORGANIZATIONS
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Money Market Fund $74,046 $63,411 $60,667
U.S. Government Money Market Fund 1,060 889 809
Tax-Exempt Money Market Fund 104 335 123
</TABLE>
The Funds paid fees to shareholder organizations, none of which were affiliated
with the Adviser, pursuant to the Service Plan for the fiscal years ended
October 31, 1999, 1998, and 1997 as follows:
<TABLE>
<CAPTION>
FEES PAID TO NON-AFFILIATED SHAREHOLDER ORGANIZATIONS
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Money Market Fund $20,808 $17,364 $5,944
U.S. Government Money Market Fund 278 391 218
Tax-Exempt Money Market Fund 544 873 366
Institutional Money Market Fund 0 0 0
U.S. Treasury Money Market Fund 0 0 0
</TABLE>
CUSTODIAN, TRANSFER AGENT, DISBURSING AGENT AND ACCOUNTING SERVICES AGENT
Firstar Bank, N.A. serves as custodian of the Funds' assets. Under the
Custody Agreement, Firstar Bank, 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 shareholders, security brokers and others relating to its
duties and (v) make periodic reports to the Company concerning each Fund's
operations. Firstar Bank, 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, 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, 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, N.A., as custodian, is entitled to
certain charges for securities transactions and reimbursement for expenses.
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 Shareholder 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
shareholders of the Funds, (iii) respond to correspondence by Fund shareholders
and others relating to its duties, (iv) maintain shareholder 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 $20.00 per shareholder account with an annual minimum of
$12,000 per Fund, and .01% of the Fund's net assets, plus certain other
transaction charges and reimbursement for expenses.
In addition, 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: Money Market,
Institutional Money Market, U.S. Treasury Money Market, and U.S. Government
Money Market Funds--$39,000 on the first $100 million, 0.01% on the next $200
million, and 0.005% on the balance, plus out-of-pocket expenses, including
pricing expenses; and Tax-Exempt Money Market Fund--$39,000 on the first $100
million, 0.02% on the next $200 million, and 0.01% 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
qualification fees, advisory fees, administrative fees, Shareholder Organization
fees, charges of the custodian and transfer agent, dividend disbursing agent and
accounting services agent, certain insurance premiums, auditing and legal
expenses, costs of preparing and printing prospectuses for regulatory purposes
and for distribution to shareholders, membership fees in the Investment Company
Institute, costs of shareholder reports and meetings and any extraordinary
expenses. The Funds also pay any brokerage fees, commissions and other
transaction charges (if any) incurred in connection with the purchase and sale
of portfolio securities.
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS
PricewaterhouseCoopers LLP, independent accountants, serve as
auditors for the Company. The Company's Annual Report to Shareholders with
respect to the Funds for the fiscal year ended October 31, 1999 has been filed
with the SEC. The financial statements, notes thereto, and Report of Independent
Accountants in such Annual Report (the "Financial Statements") are incorporated
by reference into this Statement of Additional Information. The Financial
Statements in such Annual Report have been incorporated herein by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
COUNSEL
Drinker Biddle & Reath LLP (of which Mr. McConnel, Secretary of
the Company, is a partner), One Logan Square, 18th and Cherry Streets,
Philadelphia, PA 19103-6996, serve as counsel to the Company and will pass upon
the legality of the shares offered by the Funds' Prospectus.
YIELD AND OTHER PERFORMANCE INFORMATION
From time to time each Fund may quote its "yield" and "effective
yield," and the Tax-Exempt Money Market Fund may also quote its "tax-equivalent
yield," in advertisements or in communications to shareholders. Each yield
figure is based on historical earnings and is not intended to indicate future
performance. The "yield" of a Fund refers to the income generated by an
investment in the Fund over a seven-day period identified in the advertisement.
This income is then "annualized." That is, the amount of income generated by the
investment during that week is assumed to be generated each week over a 52-week
period and is shown as a percentage of the investment. The "effective yield" is
calculated similarly but, when annualized, the income earned by an investment in
the Fund is assumed to be reinvested. The "effective yield" will be slightly
higher than the "yield" because of the compounding effect of this assumed
reinvestment. The "yield" and "effective yield" of each Fund are calculated
according to formulas prescribed by the SEC. The standardized seven-day yield
for each Fund is computed separately by determining the net change, exclusive of
capital changes and income other than investment income, in the value of a
hypothetical pre-existing account in the particular Fund involved having a
balance of one share at the beginning of the period, dividing the net change in
account value by the value of the account at the beginning of the base period to
obtain the base period return, and multiplying the base period return by
(365/7). The net change in the value of an account in a Fund includes the value
of additional shares purchased with dividends from the original share, and
dividends declared on both the original share and any such additional shares and
all fees, other than nonrecurring account sales charges, that are charged to all
shareholder accounts in proportion to the length of the base period and the
Fund's average account size. The capital changes to be excluded from the
calculation of the net change in account value are realized gains and losses
from the sale of securities and unrealized appreciation and depreciation. The
effective annualized yield for each Fund is computed by compounding a particular
Fund's unannualized base period return (calculated as above) by adding 1 to the
base period return, raising the sum to a power equal to 365 divided by 7, and
subtracting one from the result. The fees which may be imposed by financial
intermediaries directly on their customers for cash management services are not
reflected in the Company's calculations of yields for the Funds.
The "tax-equivalent yield" of the Tax-Exempt Money Market Fund
shows the level of taxable yield needed to produce an after-tax equivalent to
the Fund's tax-free yield. This is done by increasing the Fund's yield
(calculated as above) by the amount necessary to reflect the payment of federal
income tax at a stated tax rate. The Fund's standardized "tax-equivalent yield"
is computed by: (a) dividing the portion of the Fund's yield (as calculated
above) that is exempt from federal income tax by one minus a stated federal
income tax rate; and (b) adding the figure resulting from (a) above to that
portion, if any, of the Fund's yield that is not exempt from federal income tax.
The "tax-equivalent yield" will always be higher than the "yield" of the
Tax-Exempt Money Market Fund.
Each Fund may compute "average annual total return." Average
annual total return reflects the average annual percentage change in value of an
investment in shares of a series over the measuring period. Each Fund may
compute aggregate total return, which reflects the total percentage change in
value over the measuring period.
Additionally, the total returns and yields of the Funds may
be compared in publications to those of other mutual funds with similar
investment objectives and to other relevant indices, 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 yields of the
Money Market Fund and the Institutional Money Market Fund may be compared to the
Donoghue's Money Fund Average, the yields of the U.S. Treasury Money Market Fund
and the U.S. Government Money Market Fund may be compared to the Donoghue's
Government Money Fund Average, and the yields of the Tax-Exempt Money Market
Fund may be compared to the Donoghue's Tax-Free Money Fund Average, which are
averages compiled by IBC/Donoghue's Money Fund Report, a widely recognized
independent publication that monitors the performance of money market funds. In
addition, the yields of the Money Market, Institutional Money Market, U.S.
Treasury Money Market and the U.S. Government Money Market Funds may be compared
to the average yields reported by the BANK RATE MONITOR for money market deposit
accounts offered by the 50 leading banks and thrift institutions in the top five
standard metropolitan statistical areas.
Yield data and total return as reported in national financial
publications including MONEY MAGAZINE, FORBES, BARRON'S, MORNINGSTAR
MUTUAL FUNDS, THE WALL STREET JOURNAL, MUTUAL FUNDS MAGAZINE, KIPLINGERS
PERSONAL FINANCE and THE NEW YORK TIMES, or in publications of a local or
regional nature, may also be used in comparing the yields of the Funds.
Since performance fluctuates, performance data cannot
necessarily be used to compare an investment in a Fund's shares with bank
deposits, savings accounts and similar investment alternatives which often
provide an agreed or guaranteed fixed yield for a stated period of time.
Investors should remember that performance and yield are generally functions of
the kind and quality of the instruments held in a portfolio, portfolio maturity,
operating expenses, and market conditions. Any fees charged by Shareholder
Organizations directly to their customer accounts in connection with investments
in shares of the Funds will not be included in the Funds' calculations of yield
and total return.
The current yield for each of the Funds may be obtained by
calling Firstar Mutual Fund Services, LLC at 1-800-677-FUND. For the seven-day
period ended October 31, 1999, the annualized yields of the Money Market Fund,
Institutional Money Market Fund, U.S. Treasury Money Market Fund, U.S.
Government Money Market Fund and Tax-Exempt Money Market Fund were 4.82%, 5.25%,
4.12%, 4.60% and 2.66%, respectively. Without fees waived by the Adviser and
Co-Administrators during such period, the annualized yields of such Funds would
have been 4.70%, 5.00%, 4.11%, 4.60% and 2.66%, respectively. For the seven-day
period ended October 31, 1999, the effective yields of the Money Market Fund,
Institutional Money Market Fund, U.S. Treasury Money Market Fund, U.S.
Government Money Market Fund and Tax-Exempt Money Market Fund were 4.93%, 5.39%,
4.21%, 4.71% and 2.70%, respectively. Without fees waived by the Adviser and
Co-Administrators during such period, the effective yields of such Funds would
have been 4.81%, 5.14%, 4.20%, 4.71% and 2.70%, respectively. For the seven-day
period ended October 31, 1999, the tax-equivalent yield of the Tax-Exempt Money
Market Fund was 4.38% (assuming a federal income tax rate of 31%).
MISCELLANEOUS
As used in this SAI and in the Funds' Prospectus, a "majority
of the outstanding shares" of a Fund or portfolio means, with respect to the
approval of an investment advisory agreement or change in a fundamental
investment policy, the lesser of (1) 67% of the shares of the particular Fund or
portfolio represented at a meeting at which the holders of more than 50% of the
outstanding shares of such Fund or portfolio are present in person or by proxy,
or (2) more than 50% of the outstanding shares of such Fund or portfolio.
As of January 31, 2000, 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 Bank, N.A., 425 Walnut Street,
Cincinnati, Ohio 45202, 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: 96%; Tax-Exempt Money Market Fund: 70%; U.S. Treasury Money Market Fund:
58%; U.S. Government Money Market Fund: 67%; Growth and Income Fund:
68%; Short-Term Bond Market Fund: 64%; Special Growth Fund: 74%; Bond IMMDEX(TM)
Fund: 70%; Equity Index Fund: 74%; Balanced Income Fund: 84%, Balanced Growth
Fund: 75%; Intermediate Bond Market Fund: 70%; Growth Fund: 84%; Tax-Exempt
Intermediate Bond Fund: 69%; International Equity Fund: 90%; MicroCap Fund: 83%,
Emerging Growth Fund: 93%, MidCap Index Fund: 55%, and Core International Equity
Fund: 100%. At such date, no other person was known by the Company to hold of
record or beneficially 5% or more of the outstanding shares of any investment
portfolio of the Company.
APPENDIX A
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current
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.
"c" - The 'c' subscript is used to provide additional
information to investors that the bank may terminate its obligation to purchase
tendered bonds if the long-term credit rating of the issuer is below an
investment-grade level and/or the issuer's bonds are deemed taxable.
"p" - The letter 'p' indicates that the rating is provisional.
A provisional rating assumes the successful completion of the project financed
by the debt being rated and indicates that payment of debt service requirements
is largely or entirely dependent upon the successful, timely completion of the
project. This rating, however, while addressing credit quality subsequent to
completion of the project, makes no comment on the likelihood of or the risk of
default upon failure of such completion. The investor should exercise his own
judgment with respect to such likelihood and risk.
* Continuance of the ratings is contingent upon Standard &
Poor's receipt of an executed copy of the escrow agreement or closing
documentation confirming investments and cash flows.
"r" - The 'r' highlights derivative, hybrid, and certain other
obligations that Standard & Poor's believes may experience high volatility or
high variability in expected returns as a result of noncredit risks. Examples of
such obligations are securities with principal or interest return indexed to
equities, commodities, or currencies; certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an 'r'
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
N.R. Not rated. Debt obligations of issuers outside the United
States and its territories are rated on the same basis as domestic corporate and
municipal issues. The ratings measure the creditworthiness of the obligor but do
not take into account currency exchange and related uncertainties.
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. This is the
lowest investment grade category.
"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. This is the lowest
investment grade category.
"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.
`NR' indicates the Fitch IBCA does not rate the issuer or
issue in question.
`Withdrawn': A rating is withdrawn when Fitch IBCA deems the
amount of information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
RatingAlert: Ratings are placed on RatingAlert to notify
investors that there is a reasonable probability of a rating change and the
likely direction of such change. These are designated as "Positive", indicating
a potential upgrade, "Negative", for a potential downgrade, or "Evolving", if
ratings may be raised, lowered or maintained. RatingAlert is typically resolved
over a relatively short period.
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.
